Barry Ritholtz's Masters in Business: Bethany McLean Interview

of Enron. And you may be familiar with her if you're a little older, maybe you were a traitor in the late nineties early two thousand's Bethany was. Her background is really fascinating. She graduates with a degree in both English and mathematics, ends up at Goldman sachs Uh as an m and a analyst, before she decides that's not what her future is going to be and she becomes

a journalist. She's writing a fortune and in two thousand one publishes a article that at the time Enron was a skyrocket, a moon, a moonshot, really questions the valuation of Enron. She never alleges fraud. She points out how challenging it is to actually find out anything about about the company. Itself and really just raises a lot of questions as to how can this company that's essentially positioning itself as a utility be such a fast grower and

yet not reveal much to the investing public. And and really that's where you start pulling the string on the sweater and eventually the entire Enron house of cards collapses. Uh. Obviously that's a hell of a way for a journalist to make a name for herself bring down Enron. She is rather humble about this. She said it would have collapsed eventually. Anyway. You can't have that my fraud and get away with it forever. But her book is really

well regarded. She's subsequently written a number of books, one with Jonah Sarah about uh, Fannie May and Freddy Mack, which is really quite fascinating. She wrote another book on the financial crisis. UM. I find her to be tremendously insightful and really just a pleasure to chat. Without a delightful time talking with her about all these things. And I think you'll hear that in the interview. I wish

we had more more time. The hour flew by really quickly, So without any further ado, here is my Conversation with Bethany McClain. This is Masters in Business with Barry Ridholds on Bloomberg Radio. My special guest today is Bethany McClain. She is currently a contributing editor at Vanity Fair, but she is also the author of a number of fascinating books. I would say she's probably best known for Smartest Guys in the Room, The Amazing Rise and Scandalous Fall of

and Ron No. Not only was it a award winning book, but it also became a documentary that was nominated for the Academy Awards in two thousand and six. She graduated Williams College and was a double major in math and English. Spent three years at Goldman Sachs as an investment banking m and a analyst before joining Fortune Uh, where she pens a very famous article called is in Run over Priced that ultimately pre sage the collapse of that company

and a huge scandal. She's also the author of Shaky Ground, The Strange Saga of US Mortgage Giants, and All the Devils Are Here, The Hidden History of the Financial Crisis. Bethany McClain, Welcome to Bloomberg. Thanks for having me. So so that's quite a fast, sedating background, and there's so many places to go. I have to start with double major English and math, which a lot of people are either word people or number of people. You're both sign

of a confused mind. But no, seriously, I don't think you should be one or the other. Somebody asked me recently random question, what what influenced me more being an English major being a math major? And I actually think my math major influences my writing in some ways more because math, particularly theoretical upper level math where it's proofs,

is very logical. And I was thinking, I don't have a very aggressive personality, but what makes me aggress But what makes me aggressive is when a doesn't lead to be, doesn't lead to see, And I think that's my training as a math major. And then I can't stand it because I'm looking for the proof right or I'm looking for the logic the logic, and when the logic doesn't add up, that's what will make me dig in and and ask aggressive questions in a way that perhaps isn't

isn't my natural personality. I suffer from the same condition. It is a confused state of mind. Because people are usually left the right brain and if you're English and math, it means you're a little of both, and it certainly is confusing. So let's talk a little bit about that takes you to Goldman Sachs in the early nineties, a really tough place to break in. How do you go

straight from college to Goldman Sachs's banking division. Well, at that time, Goldman Sachs had an analyst program where they hired people right out of college into their two year analyst program, So there was a pretty established track for for doing that. I don't think I was a natural candidate to be on that track. I think that's true.

I didn't I didn't know what investment banking was. Quite frankly, I think I got a job because I was a female math major, and that was rare enough in one of those days that they thought, oh, she must be suitable. It's still relatively rare today, and less so than it was. Um I think I was not very suitable. I think Goldman was a tough place, and I think I made

it tougher on myself. I came unprepared. I would say, you knew when you were going in that you were going to work a hundred hour weeks and that the environment was going to be tough. But I don't think I expected it to be quite as as as tough as it was. Um. And you you subsequently called something from that era of the Goldman Sachs post traumatic stress

disorder condition? Is that a function of how difficult and challenging a place which I got roundly and perhaps rightly criticized by veterans for for appropriating a term military military veterans, not not not Goldman veterans. But it was. It was. It was. It was a tough environment, yes, but but look I learned a lot. I'm grateful to the place In some ways. I think I grew up quickly there.

I can imagine. So you're there for all of three years and you say, hey, this is interesting, but I'm going to give this writing thing a shot, and you end up at Fortune. I actually said, I was out on my way to business school. I was in I had a roommate UM, and I thought, you know, I'm going to graduate from business school with a lot of debt, and I'm going to be right back where I started because I'm gonna need to get a high paying job

in order to pay off the deck. So if there's if I want to do something else, now's the time. And I didn't grow up in a family that necessarily encouraged artsy things like journalism. But I thought, now is my time to give it a try, and if I don't like it, I'll go to business school. So I took a huge pay cut and got a job at

Fortune as a fact checker. And they were willing to hire me back in those days of well funded, glossy magazines with lots of time to fact check stories before they went out the door, because I had my experience at Goldman, and they thought, well, she may not be able to write, and she may not even be smart, but she at least understands what we're writing about. And this was really little bit pre inter internet, not quite the same cost squeeze that we see today. It was

the last golden age of journalism. And so you're there for five or so years. When did you before this story comes out, when did they move you to say, all right, kid, let's see if you can write sort of slowly, but I still definitely I did writing for the Personal Finance section, which at that time was sort of a backwater where nobody wanted to write right for so you could get in the door writing wise if

you were willing to do it. And I did this column called Companies to Watch, where I was supposed to pick two stocks every three stocks every two weeks, which is unfortune was published that We're gonna double or triple or quadruple and value. But it was It was easy because of all the people who come by and pitch you right, the analysts and the portfolio managers and the and the company executives, and you can write up these really charming little stories that are great and then you

watch the stock goes in the opposite direction. So I began to realize that there was this whole Wall Street by machine that I was inadvertently becoming part of, and I didn't want to be part of it. So in the last minute we have in this segment, you put out the piece is and run over priced. And you've worked with very famous short seller Jim Chanos, a previous guest on the show. How how did he approach you to say, hey, you're probably hearing a lot of positive stuff.

Use a story that might not be quite as savory as the others. So I met a guy named Doug Millette, who has since passed away, who worked for Jim Um and I hounded Doug mercilessly to talk to me and help me come up with ideas, and um, finally Doug said, Hey, you know, we're looking at this company called Enron. If you can tell us how it makes money, what would love to hear it? And so that was that was actually how it came about. I'm Barry Ridhults. You're listening

to Masters in Business on Bloomberg Radio. My special guest today is Bethanie McClean. She is a journalist and author of Smartest Guys in the Room, Amazing Rise and Scandalous Fall of Enron. And we were talking um earlier about when the book came out. It kind of came out in two way dot com implosion void And despite how well regarded the book is today, not a lot of people really saluted when that came out. No, the book

came out into a weird vacuum. I would say people were really interest didn't end round when it went bankrupt, right, and it was all over the front page of every paper. Fastest Bankruptcy in American His Your Biggest Bankruptcy, just all sorts of it on the front page of the paper for a year. Everybody was covering by the by the time our book came out in the fall of two thousand and three, I think people had end round fatigue,

and I think she had scandal fatigue. And I think we were all in that awful period after the dot com implosion where the last thing you wanted was more

bad news. Plus you had the world com collapse, and you had the analyst scandal, and there was all these other things, and people might have been really like right, So the book barely cracked the best seller list and then it it sort of disappeared, but it continued to sell over the years, and actually, because it sold so well over the years, it ended up doing really well. But it was a slow thing, not a not an immediate explosion of interest. It ultimately ended up on a

number of either college or business school reading lists. So it's a regular, literally required reading for certain students, I hope. So so, so let's talk a little bit about the initial article. Was it a function when you were reading it of overvaluation or did you think fraud? I was too naive to think fraud, I think, but if you if you try to put yourself back at that point in time. We hadn't had fraud in a major American

business for such a long time. The idea that a company could be fraudulent, that the accountants and lawyers could have signed off on things, I just I wouldn't have believed it. I remember reading through the description of the transactions that the CFO, Andy Fasta, was doing with with the company and thinking, Yeah, but the accountants and lawyers signed off on this, I must I must just not

get it. So these weird disclosures about these transactions that ended up being very central to the end Roun story, I didn't even write about in my story. I instead focused on end Roun's price and it's pe ratio relative to the fact that people didn't understand its business, didn't understand how it made money, and that although the company said it wasn't a trading business because Jeff Skilling, the then CEO, wanted it to have a higher stock price,

it was very much a trading business. So I focused on that fraud. I think it would have I think it would have surprised me. Well, it's certainly surprised a lot of people, especially those who were long the stock. And we mentioned the previous segment, um uh, folks from Jim Chainos's funds, can A Coast Partners? Had you had reached out to them? This wasn't them shopping and around you had tag them? What made you go to them

of all people? Well, I think going back to this column, I did companies to watch where I was selecting these stocks to write about. I felt burned. I felt like I was inadvertently becoming part of this buy machine that was succoring the American public by writing these positive stories about companies that were soon to implode. So I began to seek out short sellers and try to get to know them because I thought I need another source of information.

You know, I'm tired of writing this glowing story about this company, not hearing another point of view, only to have my phone ring and somebody start, you know, swearing at me on the other end, being like you stupid whatever, How could you not have known that this is? Did that really? Have? It did a couple of times, and I thought, you know, I need to at least understand the other side of the story, even if they're wrong.

I want to know it and then I can do my own thinking to figure out if they're right or wrong. So trying to get to know Jim was part of a broader effort on my part of trying to get to know people who are skeptics so that I could doom with things that were more accurate. So with with the benefit of hindsight, it seems kind of ridiculous that here's a company. They make money in ways that no one really knows. Their books are completely forget transparent, they're impenetrable.

Nobody has any idea what's going on with that? How did the best and brightest of corporate America, of Wall Street, of the investment community not stop to think, Hey, what's really going on here? How did everybody buying into the story which turns out to just be complete and total fraud. I think there are a bunch of answers to that. I think one thing is that we like the story, right.

We all want to believe in the story of this company that's revolutionizing markets and that's going to make everybody a fortune. What could possibly be wrong with that? But I think underneath it there are some things that are specific to end Run. I think Jeff Skilling was a really powerful personality and the biggest a very intellectually convincing personality, and charismatic personality and intimidating personality, and the most the greatest compliment he could give you was that you got it,

was that you you were part of the team. You got it, you understood what they were doing. The biggest insult he could give was that you didn't get it. You're too stupid. You're too stupid. And so people, because we get it, we're the smartest guys in the room,

you don't write. And he would say this to people who were Harvard, M. I. T. Wharton, like really the best and brightest, and literally intimidate them into thinking, you're not smart enough to understand what we do, right, And so people were afraid of feeling like that, are being made to look like that in a crowd, and so I think a lot of people pretended to get it when they really didn't get it because they wanted to

bask in Jeff Skillings admiration. I think it happens far more frequently than you would think, even today, though I think it's a common phenomenon. It's the Emperor's new clothes right when we live with it today, that is um absolutely stun so. Someone I mentioned I was interviewing you, and someone said to me and we talked about the article, and the question that this person asked was interesting enough that I'm gonna pass it along. Assume your article never

came out. Is en run over priced? How long could this have continued before someone would have noticed that the emperor was not wearing any clothes. I actually don't think that my article influenced en Roun's trajectory at all. I think what my article did was pick up on the underlying skepticism about en Ron that was growing in the marketplace.

And in the end, what brought en run down was a funding crisis, right, they couldn't roll their debt, and then the rating agencies rating agencies downgraded them, and that was the final nail in the coffin um. But I think my article highlighted because it was at that that time where it was becoming undeniable that the broadband business, for instance, was collapsing, and Jeff Skilling was continuing to say,

this is a great business for en Ron. We're defying the industry, and it was becoming more and more apparent than what he was saying was at odds with what everybody in the industry was was was saying. So I guess I believe it probably didn't. My article probably didn't influence the trajectory of events at all. I think it. I think it explained what was starting to happen. So at the time he was saying that you already had Metromedia, Fiber Go belly up, you had Global Cross and go

belly up. They were spending thousands of dollars per mile to lay this dark cable that will eventually light up with all this content, which turned out to be true Facebook and YouTube and all these things a decade later. But that was brought up for pennies on the dollar later. How can someone be so brazen as to make that claim in the face of collapse. Was it just oh, those were poorly run companies and people brought into that. I think that Jeff Jeff was the ultimate stock salesman.

He could sell and run better than anybody else, and he desperately needed to keep the stock price high or high because all these complicated financial things Andi Fasto the CFO had built depended on keeping the stock price above a certain level, and if the stock price started to decline, all these losses would come back on and Ron's balance sheet. So I think Jeff was very aware of the need to keep Enron's and Roun stock price high UM, and

I think that was part of it. Just share desperation UM to en Ron was is a great example of you know, the famous quote is a Pendiman Graham that a stock in a company are two different things. And Enron's case, the company became the stock to say the least. I'm Barry Hults. You're listening to Masters in Business on Bloomberg Radio. My special guest today is Bethany McClain. She is a former Goldman Sachs analyst and Fortune magazine reporter who broke the big story on en Ron, ultimately writing

a number of really well regarded books. And let's talk about a different book of yours, which is shaky ground. The strange saga of the US mortgage giants. Now, I've covered subprime, and I've covered mortgages, and whenever I talked about Fannie or Freddie, the two government sponsored enterprises that handle most of the mortgages in the country, they are

one of two reactions. Either people are furious and they want to shut them down, and let's turn this over the free market or their eyes glaze over and they lovingly slip into a coma never to be seen again. But nothing in the middle. What do you find when you talk about mortgages? I went to a housing finance conference, the Goldman Sachs speaking of which hosted um when in the winter, when I was working on the book, I guess it was last winter, and the Goldman Pierre guy

said what are you doing here? And I said, well, I'm writing a book about Fanny and Freddie. And he looked at me and he said, well, no one's going to read that, and just how book sales going, you know what? For what it is, so I published it through this upstart publishing press called Columbia Global Reports, which seeks to write mini books. So it's not a long book. But many books on topics of global importance that are there are meant to be walkier. So for what it is,

it's actually done quite well. Okay, that's great. It's every time the conversation comes up, it's just so difficult, and it's amazing because mortgages. Look, anybody should care about Fannie and Freddie. I don't care who you are, if you have a mortgage or if you want to buy a ho If you want to buy a house, you should care.

If you just own a house, you should care about what the government's going to do with mortgage finance because the availability of financing determines the value of your house. And if you're in none and homes are still, by the way, the most important asset to most Americans for the vast majority. And if you are in neither of those camps, but you care about the economy, you should still care about housing because it's still fift our g d P and so whatever the government does full fifth.

So whatever the government does to resolve we are still housing is still There was a great quote Mariner Mariner Echoes back in the nineteen thirties who said housing is the wheel within the wheel of our economy. And it and it still is. And so even if you care about the just care about the economy, you should care about what the government does with Fannie and Freddie. Ultimately, that's it's it's a big topic. I did a column don't care here right. I did a column not too

long ago. I moved a year ago. We bought a new house, and the experience with that house, the hoops you had to jump through in versus the experience with the prior house we did. I recalled doing the refinancing in OH five or oh four, where literally the guy would pull up in the driveway, you left the engine running, flung open the door, ran in with papers here initial initial sign sign I apologize, I have a closing around

the corner. I disappeared, left us with the check for thirty dollars was gone, and I looked at my wife. Did that really happen? Contrast eight years later, where you know, I've had colonoscopies that were gentler and easier and less intrusive than than these sort of um experiences. So that raises the question, why has financing, the most important purchase most Americans make, become so insane? Well, there are a bunch of answers to that. The fate of Fannie and Freddie,

as most people know, it's unresolved. They were put into a state called conservatorship during the dark depths of the financial crisis. It was supposed to be temporary. There they still said, they're making lots of government money. The government is using their money to reduce the overall budget deficit. I think it's a huge scandal, But that's but and that's been reported that, but that's out there. But the big problem is that the government's been schizophrenic and what

it wants out of the mortgage market. So politicians, including President Obama have said repeatedly, we want more private capital in the market. At the same time they've done everything possible to discourage private capital from getting involved in the market. Again, witnessed the huge fines the big banks have paid, um so, and so what are the big banks paying fines? Well

for for behavior for which they should pay fines. But nonetheless, if you realize suddenly that you Mr. Bank may have to pay billions of dollars in fines because you screwed up on some lending to subprime customers, you're probably gonna say, you know, I don't think I'm gonna do that. Len, Let let me push back on that a little bit, because I know you've written about foreclosure gate, which is

one of my big pet peeves. Yes, as it turns out, if you actually commit fraud and take these signed documents and present them to a court, they're usually a penalty for for lying under oath that way. And yet it seems there has been no one woman one mid level executive who was just a irrelevant to the whole story got prosecuted. But the vast majority of people who said, just make up documents, throw people out of the house. We'll probably get the right people agreed. Agreed. I'm not

defending the big banks. Nonetheless, if you say, if you penalize something for doing something bad, they're probably going to say, I'm not going anywhere near that bad thing in the future. And maybe we'll get there, But before we get there, the government has to figure out what it's for. All in the market is going to be right and right now, there's no resolve about what the government's going to do with Fannie and Freddie. So the present political function, or

a political malfunction, is that what it is. It's not economic, it's it's basically nobody in Washington knows what to do with these two companies, and so we have complete and total stalemate. Everybody knows we need Fannie and Freddie to keep providing a thirty or fixed rate mortgage to the majority of Americans. Nobody really seriously wants to risk ripping that underpinning out from under the mortgage market and see what happens. And yet nobody can say, actually, we probably

need Fannie and Freddie either. So we sit in the state of dysfunction, made worse by the fact that the government has gotten two hundred plus billion dollars in profits from Fannie and Freddie because they're seizing all the profits, and so what politician wants to get rid of that source of money. So I think it's it's it's not a great situation. I'm Barry rid Halts. You're listening to Masters in Business on Bloomberg Radio. My special guest today

is Bethany McLean. She is a contributing editor at Vanity Fair and uh well regarded journalist and author. Let's talk about one more book of yours, which I happened to have pulled off my bookshelf. All the Devils Are Here, The Hidden History of the Financial Crisis, which you actually wrote with the Jonah Sarah. He's a really interesting Uh. Joe was my longtime editor at Fortune and he actually edited the End Round book. Oh really, I didn't know that.

I'm a fan of his only because I have big issues with the n c a A. And he's been well for many reasons, but most recently he's been torching them read his new book in Denschard. It just came out, just came out presolutely. He's absolutely I love the fact that these guys have gotten away with so much for so long, and suddenly one person comes along and completely changes, you know, the narrative. The story is something wholly different,

and that's it's nice having a free press. So let's talk a little bit about this book because it's really interesting, and we could talk about a number of other columns that you've released following the financial crisis, some of which I find endlessly fascinating. Let's just jump right to this. What was the hidden history within the financial crisis? What do you think most people just don't realize that took

place in that whole collapse. I think one of the most surprising things, okay, two of the most surprising things to me where the whole history of subprime lending, how it developed. So even sophisticated people tend to think of subprime lending as a phenomenon in the mid tooth, but

it really wasn't. There was the first wave of subprime lending in the nine in the nineties, and then the second wave in the two thousands, which was run by the executives of the companies that that first proliferated in the nineties. So understanding how that happened and the regulatory response to it that made it, that made subprime lending something that nobody in Washington would would rain in, I think to me is a really important part of part of this story. It's funny you said one or two

things that people don't know. I have like listen list of things that people are always surprised at. One of the things that came up recently, Hey, how come it was that all Wall Street banks got killed in subprime except one JP Morgan? Why Why is that? Because they had their subpront crisis in the early two thousands and when they went to get out of it, it was

actually buyers for their paper. Very interesting. Yeah, a huge difference from everybody else, right, But that's a really it's a really important part of the story for a bunch of reasons. One is because consumer advocates were going to Alan Green's fan then the chairman of the FED in the nineties and saying basically, look, people are getting loans they can't pay back. Something's going wrong in the system.

And greens Band would say, what a lot of regulators and politicians thought, which is that the market doesn't work that way. People banks, lenders won't make loans. Banks certainly won't buy up loans and securitize them. Investors won't buy the resulting securities if the underlying loans aren't sound. A market economy doesn't work that way. And so I think he let his ideology get in the way of the facts, which I think about that a lot is a good

as a good as a good life lesson. But I think a lot of people did not Not only did consumer advocates, but on the Federal Reserve Board was a gentleman named um was Bill Pool. I thought it was Ed Graham Graham. That's right. Bill Pool is still around and grahamar unfortunately passed away and Ed grahamlock. I think maybe Billpool did the intro to his book. That's why it's on my head. Ed Graham look was saying, hey,

none of these things makes sense. I understand what you're saying, but look, here's all of your predatory, predatory owns that are defaulting in these huge numbers, and amongst the many things that people don't realize in oh five, uh, I think it was the o c C issued an edict to the States that said, you cannot enforce predatory lending laws against banks. That's our it was. It was preemption and and the o c C thought that subprime lending

was contained outside the banking system. And I think that's another huge lesson for the modern world. You know, our market, the global markets are very complex place, and people don't see all the interdependencies and interconnectedness until it's too late. And that's one reason why the financial crisis is still so relevant because people said, oh, the subprime lending thing, Well, it's all these lenders, these little shops out in California,

and so it really cares. It's not infiltrating our precious banking system. But oh yes it was. That's right on one another. One of the many things that people probably didn't know when they were selling these thirty year mortgages to Wall Street to securitize into a new new paper, um came with a warranty like a toaster. Wait, I'm warranting that this thirty year loan against a house that could last a hundred years at the last three months, so we promised they'll make the first three payments. How

crazy is that it's astonishing. It's completely astonishing. And it's interesting in light of Fannie and Freddie, as we discussed, because you know, there's been a whole political movement to blame Fanny and Freddie, blame low income and lending to low income borrowers and home ownership for the financial crisis, and when you actually look at the history of it, I might have gone into my book thinking that was true.

When you look at the history of it, then you see, oh, no, no, no. This whole subprime lending thing that started in the ninety nineties was enabled by Wall Street, had nothing to do with Fanny and Freddie. It started outside Fanny and Freddie. The other fascinating thing to me that I think most people don't realize about the subprime crisis was that it was not about home ownership. If risky loans had been limited to first time homebuyers, we never would have had

a crisis. It was cash out refies. So this so this the crisis doesn't prove that giving mortgages to poor people as a bad idea, as a lot of people seem to think. It doesn't prove home ownership one way or the other. What it proves is that extending credit to people of any income level who can't afford to pay it back. It's a really bad idea. So I think that's another huge misconception and kind of an evil misconception about the crisis. Right, So there's so many components

to that. One is, you have a population that's not seeing their wages go up, especially in the two thousands when there's really high inflation. So flat wage is high inflation means your standard of living is falling unless you have a way to get more money. And the cash out reflies, which, like Endron, it works as long as this price keeps going up. Once that stops, well, when

the music stops, that's where the real trouble comes. And you drive through Chicago streets and you see in the dirty snow, flat flapping banner from Chase that says let your home, take you on vacation, and you say, not so much. Take you on vacation, get you a big screen TV, buy you a new car, all standard of living things, and that's really eating your sat coorn. But

you're absolutely right. The underlying stories of the stagnation and American incomes, right, that was masked for a while by the creation of credit, and I think that's a huge underlying story that we have yet to see play out. Creation of credit, flat wages, and when people are talking about income inequality, there are two sides. Yeah, the top one tenth doing great with stock market and all sorts of other things, but there's a huge swath of the

country that's just seeing stagnant wages. And when you say to people who aren't used to having free money, hey, here's free money, I mean that story I mentioned about us doing the cash out refly, so we got starter house, replaced a kitchen, and I know neighbors who were why is there a portion your little starter house driveway? Well, because I can't. And it gets to another huge issue about our society too, which is that a lot of

people aren't financially sophisticated enough to understand these products. So they assume if the lender is giving them the money, then the lenders that and the lender knows that they can pay it back and the lender has done the work. And that's obviously a really bad assumption. But lenders, especially mortgage brokers, are trained to be your friend and say it's all going to be okay in the end. So I'm a big believer in personal responsibility, but I think

responsibility has to go two ways. And you can't put it all on people and then have financial services institutions out there selling bad products that they're trying it just it doesn't work that way. Responsibility is a two way story. Thanks to the Consumer Finance Protection Board, is a direct result of the exact sentiment you mentioned the other the other thing that people forget when we talk about or or don't know. You know, Fannie and Freddie they got

into subprime. Yeah, they got into subprime. They petition o FAIO later oh five because they were losing so much market share to Wall Street. Hey, the subprime is where the growth is. All our business is going away. If you don't let us compete with them in the subprime space, we're not gonna have any business. So they jumped in around oh six just as the market was topping the time and couldn't have been better. And that's why their

losses were so bad. But that's actually fascinating because you know, there are forces in the government that wanted to see the private label Wall Street market take over Fanny and Freddy's market share, and there was a big change in around I think it went into effect around O one or O two that allowed these Wall Street created mortgage backed securities that got triple A ratings to be treated the same way for capital purposes as Fanny and Freddy

back securities. The two things are obviously totally different. One is a creation of the credit rating agency process. The other actually had two companies standing behind them saying we'll pay if the homeowner can't. Plus the United States government behind those two, right, But the banking lobby got them treated the same way for capital purposes. And that's what

unleash the crave of craze of some prime lending. So let's use that as a leaping off point to look at some of the columns you have written and on the rating agencies UM subject you wrote, if everyone hates the creating credit rating agencies, why won't anyone enforced dot frank provisions to dethrone them? So I have to ask you what are the provisions and why has that not happened? Well, some of it has in limited ways. The SEC is trying, um,

but very ineffectively. Um. The main thing that was supposed to happen, and the big issue is the way credit rating agencies have been enshrined in regulations, making them making them critical arbiters. And the idea and Dodd Frank was we were going to take them out of all the regulatory framework, and that is not happening. People have basically

admitted it's really difficult. It's really hard to do. And part of the problem is that institutional investors love being able to blame the credit rating agencies when it all goes wrong, and so they don't necessarily they kind of like being able to say, but the credit rating agencies said it was so um. So there are a lot of forces against any any reform. And the clearest way you can see that is if you remember that the credit rating agencies were already reformed before the financial crisis.

In the wake of en Run, when they famously rated en Run's debt investment grade up until two days before it's collapsed, there was a huge outcry about the credit rating agencies, and in two thousand and set Congress past the credit rating agency reformat. So did you know that heading into the financial crisis, the credit rating agencies has had already been reformed. And once once you know that, you realize why nothing is happening. If people want to

find your work, where would they track you down? Mainly through Vanity Fair, but I guess you can google me. You can buy my books on Amazon if you're interested. If you've enjoyed this conversation, be sure and hang around for the podcast extras, where we keep the tape rolling and continue chatting. Be sure and check out my daily column on Bloomberg View dot com or follow me on Twitter at rid Halts, where I tweet a little more than once a week or so. I'm Barry rid Halts.

You've been listening to Masters in Business on Bloomberg Radio. Welcome to the podcast portion of the show. This is where we take off our shoes and kick back a little bit. I'm literally taking my shoes off, Bethany. Thank you so much for doing this. This is really quite interesting stuff. You and I have an interest in a lot of similar wonky, tedious, boring stuff. That's true. The Dick Fold thing, So did you know that about it?

I did not know that story. There was a Bloomberg article on it, and I've had this conversation with countless people. They're like, no, no, if he was offered money by Buffett, he would have had to take it. Not only was he offered money by Buffett, he was offered more money then a better deal than what ultimately now six months later obviously was a much uglier situation after following the

collapse of Lehman Brothers. But um talk talk about reality distortion field and being a salesman and surrounding yourself with people who are afraid to say no to you. That's a This is a not uncommon set of circums now except now, which I think is almost worse. If you talk to any leader, they're going to tell you that they surround themselves with people who challenge them and that they really like being challenged. And as soon as I hear that, my bsmter goes off because I know it's

not true. Nobody likes being challenged. The trick is to do it anyway. So if I hear an honest leader, they say, I really hate being challenged, but I make myself undergo it anyway. Now that's honesty. The other if you, if you've read some of the Bridgewater stuff, what what Dahio has created in terms of some people have called it a cult. I think that goes too far, but

it's a really interesting culture. Where so there's another book Um Originals by Adam Grant that I'm just starting, where he references how like a junior analyst sends an email to Dahio like screaming in him, essentially saying, we told you this was a really important presentation, and you muffed it and you came in unprepared and you were unfocused. Then that's the culture, and it makes them it's not a coincidence that they've become the biggest hedge fund in

the world. It would be very hard to execute, but it's a powerful idea. Yeah, very hard to execute. So so let's talk about some other things that are a little hard to execute or easy to execute. What one of the columns of yours that I really liked, just want to buy the new Jersey Turnpike privatization and it's discontent And I don't know if that's your subhead or mine,

but I just remember that column being fascinated. And you see this for cash strapped states, municipalities around the country selling these really impossible to replace things to the private sector, and these are disasters, aren't they. Well, we did it in Chicago, right, And the problem is if you really actually did take the money and invest it as a city and do what you were supposed to do with it, then maybe at least financially for the city, it wouldn't

be such a problem. But all you're doing is getting rid of your long term assets in exchange for a quick cash infusion, right, And so it ends up being a complete disaster because then the assets are gone and the money's gone, and all it does is bridge a short term gap instead of funding anything for the future. And then there are a lot of questions about how well the private owners actually do. Horror stories with enforcements of traffic tickets and and parking tickets and raising rates

and everything. Real real horror stories about about how it works. Um. And there was quite a push a few years ago for the banks to get more into this business, and everybody was talking about setting up an infrastructure fund. So it'll be interesting to see how it pans out. If we've got another economic downturn, it won't do well. The other title I really liked squid Love, Why Aren't Clients Fleeing Goldman Sacks. It's a great title, but the point

it raises, why didn't clients fleet Goldman Sacks? Well, you could have two different interpretations. One could be that clients didn't care even though the rest of us did. When you say didn't care, didn't care about them taking the other side of the trades, didn't care about how Goldman behaved in the financial crisis. When I think by any characterization, they looked out for their own interest and didn't look out for their client interests. That a given is and

everyone assume, hey, that's what they're doing. I know who I'm in bed with. Well, look in Goldman and Goldman's defense, they say that's the trading business, and the clients knew what they were doing. But Goldman has always said is one of its ten principles. I think the number one principle is our client's interests come first. They don't say our client's interests come first in our investment banking business. They come way down the list in every other business.

And so it's hypocrisy, right, I think they mean their client's interest in principal payment. Until we get those payments, we just can't even chut it. That's really funny. But but but Goldman has done fine in the years since the cis there still at the time, still at the top of the M and A leagues, they haven't lost client business at all. And I think if my there's no way to know what the answer to that is, my guests would be that clients still want what they

perceive as the best advice. They still think Goldman is the best, and they're willing to take the whatever risks come with that. I think the other part of it is that it's not like any investment bank came out of the crisis well, right, So it's not like you have the super Goldman who did perfectly and behave beautifully during the crisis. Don't everybody you have Wells Fargo as as a survivor did really well, and you had JP Morgan,

but not among the top investment banks. So Morgan, Stanley, Maryland, I mean far worse behavior, right, can you go down that hole? List Ubs and Credit Swiss Following shortly after the crisis, the Buffett quote that when the Todd goes out, you see who swimming naked. Suddenly a lot of warts that were not seen previously to the crisis, we're all revealed. And you have to think no one would have noticed

but for the crisis. Right. So if a client were going to leave Goldman SAX after the crisis, they would have had to go somewhere else. Where is that somewhere else? Deutsche Bank, Royal Bank of Scotland, they do great work. It's it's well so. In other words, there there are no options. And as long as you're dealing with the sharpie,

they might as well be your sharp right. And you do have um a bunch of independent investment banks, boutique investment banks that have been set up, particularly in recent years, some of them populated by ex Golmen bankers. It will be interesting to see how that plays out, but there is, you know, there is some truth to the idea that a global client base they want financing when they come to you for adeal. They want the whole package that

a big bank like Goldman can offer. They don't want a boutique and you can't get that with a potique. I've also noticed that there have been a number of companies seeded, but it's it's like when there's a super over in a star, all that star dust eventually becomes

another star. When AI g blew up, there's a whole bunch of other little companies, including I think it's called Pure Coincidentally, an insurance company that's trying to compete with chub on the high end for residential real estate insurance x A I G. Guy so following, and I think that began long before the crisis. But it's fascinating how every time there's a disaster, you have good people, you have less than good people when some of the good

people ultimately end up. There've been a couple of stories that have been interesting, one tracking former Drexel people, another tracking former end Round people, a lot of whom have gone on to do really interesting things. I mean circling back to end Round to me that the that company is just such a tragedy. There are a lot of

good ideas and a lot of brilliant people. They just couldn't wait for the ideas to actually produce revenue, so they accelerated the revenue through ways both legitimate but sketchy and totally illegitimate. And that's why I understanding you correctly. You're saying there were a lot of really good ideas. It's just a shame it was all a fraud. Is that what you're actually saying. I'm sort of saying that except Ron, you know, it was a fraud and very it was a legal fraud. A lot of what they

did technically met the letter of the law. It was legal, so it's still a very complicated scam. But but yes, there were the ideas were good. It's just that they couldn't wait to show revenue and profits that they came up with scammy ways to make it look like they were producing more profits than they were. But the ideas and the people who were there, there are a lot of good people. I'm fond of saying one of the biggest problems in finance is that no one's willing to

wait to get rich slowly. And it's really Oh, I love that life. Every time people run into trouble, I've I've met and worked with and been on the other sides of discussions with people who are just incredibly talented salespeople, and invariably some of these guys end up getting into trouble.

And it's almost always guys, and it's the question is always all you have to do is put your head down and be a reasonable human and not do really stupid, ethically dubious, legally questionable things, and eventually you become very wealthy. What what is so challenging about that? I don't know. I've been thinking a lot lately about the difference between being smart and why being wise. And I think there's a lot of smarts out there, but there's not a lot of wisdom. So how many how much time do

we have left? So in the last few minutes we have let me get to some of my favorite questions that I asked for of all my guests. UM, and I have I have us with Oh, you're right about the time. UM, So let's talk a little bit about mentors. Any mentors stand out in your mind? I think i'd have to say Joe No, Sarah is the the is probably and John Huey too, who ran Fortune magazine when

I got there. I still remember John Pulling calling a big meeting of Fortune right when I started and basically saying, if you don't know what you're doing, there's no place for you here at this magazine. And I was like, I don't have a clue. I'm not gonna last long here,

and this this is my my new job. But Joe too has always been really good both on the big picture He's the one who encouraged me to write the un Run book, but also really good at sorting through ideas because I have a lot of ideas and I need someone to say this one sucks. Go for this one. So let's talk about books. Since you mentioned what are some of your favorite books, fiction or nonfiction? Let's see. Um. Okay,

so I'm a total sucker for The Lord of the Rings. Okay, I think it's one of the one of the best, and thinking about it again and I actually am Now I have enough distance between the movies and I'm willing to watch the first three movies again. The Hobbit. Hobbit not as not as great as the first three. Lord of the Ring now, no, no, no, But the Lord of the Rings is absolutely amazing. Game of Thrones is awesome. I haven't been able to watch the TV show because

I found I found the book so stressful. Um on a on a more series friend, Um Middle March obviously amazing. I love biographies. There's a great biography of Collette that really made me think about called Secrets of the Fresh of the Flesh, that really made me think differently about how biographies can be done. But I think life stories. Secrets of the Flesh, yes, but I think I think stories about fascinating people that explore the nuances of their lives,

particularly fascinating, controversial people are are just great. And then I loved UM recently All the Light We Cannot See. I think that's one of the most beautiful books, although deeply sad, books, that I've read in a long time. I gave one of the people in my office The Right Brothers book for the holidays, and he raved about So now I have to everything. All rights is great, but now I have to I gave it as a gift. Now I actually have to wait. Now you have to

go read it. UM. So, millennials, you've been doing this for a couple of years. If a millennial comes to you and says, hey, I want to get into your field, what sort of advice would you give, either a recent college graduate or a millennial. Seriously, now what what I What I actually say is that you have to be really committed to this, and you can't expect it to be something where there's a set career path, and there never really has been. Right, You've found your way into

showing this in a totally different way I did. Some people go to journalism school and train to be journalists all their life, so it always has been a flexible career path, but now so that more than ever right, we don't know where our industry is going. It's not like there's while you start on the bottom run here and then you get a job here. It's it's all

made up, All bets are off. So I think you have to have a real passion to want to tell stories and learn things and be curious and and not to and to be willing to work hard, to say the least. And our final question that I ask everybody, what is it that you wish you knew about investing companies, journalism? What is it that you wish you knew twenty years ago that you know today? I think I had wish I had known. I think I wish I had known how to be more skeptical. And I still sometimes think

I should be more skeptical even than I am. Not only do people not always tell the truth, but sometimes people don't even know that they're not telling the truth. And so I wish I knew to listen more and really challenge things that don't appear to that don't make sense. And you know what, sometimes you're an idiot because you just missed something somebody said and you didn't understand and

you actually didn't get it. But sometimes if you're really willing to say that doesn't make sense to me, can you repeat that you'll really learn something? And I wish I were better at that than I am. That's quite fascinating. For those of you who have enjoyed this conversation, be sure and check out Bethany's various books. You can look Up an Inch or Down an Inch on Apple iTunes and see the other eighty or so conversations we've had. H be sure and check out my daily column. I

already said that, so I don't need to say that again. UM. I want to thank Mike bat Nick, my head of research, for helping me um do the deep dive into this, as well as Charlie Vollmer, who is about to kick me out of the studio. I'm Barry Ridholts. You're listening to Masters in Business on Bloomberg Radio.