Jim Millstein on the Fed and AIG’s Restructuring (Podcast)

to be an absolutely fascinating conversation. He has a deep expertise in this space, starting out at Cleary Gottlieb, going to Lazard Frere's, launching his own firm, Milstein and Company, which was recently purchased by Guggenheim Securities, and Dead Center in the middle of that being the chief restructuring officer at the Treasury Department, in the middle of the bailouts um oh nine ten eleven. So I found this to be an absolutely intriguing conversation, and I suspect you will

as well. With no further ado my conversation with Jim Milstein, I'm Barry Ridholts. You're listening to Master's in Business on Bloomberg Radio. My special guest this week is Jim Milstein. He is the co chairman of Guggenheim's Securities Uh. He comes to us with a bachelor's from Princeton a master's from Berkeley. He graduated with a degree in law from Columbia. Currently he's an adjunct professor at Georgetown University Law Center.

But perhaps most interesting for our purposes, he was the Chief Restructuring Officer at Treasury from two thousand nine to two thousand eleven, responsible for oversight and management of Uncle Sam's la just financial sector rescues. Indeed, he was the principal architect of the restructuring of American International Group. Jim Milstein, Welcome to Bloomberg. Great to be here. Thanks. So you have a fascinating background. You begin your career as a

lawyer at Cleary Gottlieb. What did you imagine your career was gonna look like when you first started as an attorney. Well, like many attorneys, I kind of wandered into my first job without a real clear vision of what I was gonna do. But um, you know, Reagan had gotten elected.

I had spent a couple of years out of Berkeley being a policy analyst and working on what was then called industrial policy, which was something that the United States probably implements only through the Defense Department UH and UM, but we had been part of a small group of scholars who were trying to urge the United States to deal with the then Japanese threat to our electronics and semiconductor and steele an automobile industry is by actually coordinating tariff, trade, tax,

and investment policy the way Trump is doing that. Well yeah, maybe not quite not so coordinated. Yeah, but the basic premises we should be proactive here. Yeah, well, you know other countries are right. We were dealing with the mercantist nation in Japan, really Germany the same after World War Two. China is obviously now engaged in the signal signs of yeah, the same kinds of behavior. But they've all learned from

each other. You know, the Koreans learned from the Japanese, the Chinese learned from both of them, and they have a coordinated policy of credit, investment, tax, trade, UH in order to promote domestic employment and production. And you know, the United States, we've taken a more free market hands off. Le's a fair approach, and you can see the consequences now, um as we find ourselves in a much more competitive environment. Anyway, low story short spent a lot of a couple of

years working on those kinds of issues. Reagan gets elected, we're now in the You know, Reagan Thatcher dismantle the welfare state. UH, industrial policy is probably the never going to be on that agenda. So I determined, instead of going back to Washington and working in the government, I'm gonna work for a liberal international law firm, Cleary Gottlieb that helped create the predecessor to the European Union after

World War Two. A group of it was founded by a group of State Department UM officials in Paris and Washington simultaneously, and they helped create the Iron and Steel Union, which was the precursor of the EU. So how do you transition from Cleary Gottlieb to Lezard Freres. That doesn't

seem like a natural path. Well, I had been working on the Lazard and clearly shared a client called Pan American Airways, which was the dominant international carrier in the fifties, sixties and seventies and inside PanAm and disappeared into the dustbin of history. But in the fifties, sixties, seventies, and eighties it was the dominant international carrier for the United States.

It fell on hard times as markets were deregulated and they found themselves uh subject to competition they really couldn't handle because they were a product of a regulated industry, and they ultimately went bankrupt. Blazard and Cleary shared it. It was my first big debtor case as a lawyer, running in effect and orderly liquidation of Panama, selling its roots off to United and to American and hither and yon and uh. And at the end of the case, Felix wrote and called me and said during the wrong

business she really should be a banker. And I resisted then that was like nine two or nine. I resisted changing my career then. But in nineteen nine they came calling again. And after I was working on a large restructuring in Korea called day Wu. They had giant company they again one of the one of the Korean kiddets. So their version UH and you know, trading company of

steel company, electronics company, textile company, finance, real estate. The whole nine yards ten percent of the Korean economy and one company under one roof what could go wrong with that?

What can go wrong with that? And they borrowed sixty billion dollars and all over God's Green Earth, and you know, fell on hard times as a result of the Tai Bak crisis, which became the Korean law crisis in the late nineties, and so they hired, They hired clearly, and then I was in charge of that, and I hired Lizard to help me with it because they had restructuring and they had presence all over God's Green Earth where we had to restructure various debts. So I got to

know the guys running that practice very well. At the end of it, they leaned over across the aisle from some god awful flight from Tokyo to New York and said, you know, you're in the wrong business. And I said, I've heard this, so this time I succumbed to the the offer. So you're there from two thousand to two thousand eight, and we had a couple of little things

happened in oh eight. How did you go from Lazard to incorporate restructuring to working with Uncle Sam, who was a little concerned about Lehman and a I G and everything else. So I answered, the phone is basically the is basically the answer to that. I had a you know, it's funny how the world works. I had a friend, a guy had worked with when he was a young, UH policy analyst in the Carter administration, when I was

a young whipper snapper lawyer. Well now, when I was, you know, graduate student at a Berkeley and I was writing things on industrial policy, and he was reading them and helping promote them across the Carter administration. And uh, anyway, I picked up, you know, shortly after the election, like ten minutes after the election of President in Obama, then to be President Obama. I got a call from him and he said, you might have noticed we're doing a

couple of restructurings down here. The admitted the new administration could use someone with your background. Would you be willing to come? And you know, I've always had an interest and who would have believed that the country needed my expertise in particular, but there it was quite quite fascinating. So you mentioned you got a phone call. What made you decide to take what sounded like a pretty thankless role well that's you know, that's what I do for

a living, pretty thankless roles. But um, you know, I think the I thought I might be able to make a modest contribution given my background and uh and I had been, you know, a student of the financial crisis as it was unfolding. We at Lazard, you know, we're running the leading restructuring practice. We had a lot of these the front end of the subprime crisis running and you know coming through our doors America mortgage companies, originators

and distributors coming through. I mean the you know, they were the first to fail, right at the front end of the system, with the first to fail, and that was enough seven Uh. And you know, I'm a curious fellow, and I was. There was a plethora of these companies coming in. It was like what's going on. There was a website called mortgage implode dot com and it tracked something like four hundred of them, but it would track it in real time and kept a running list. It

was quite astonishing. And some of the biggest ones, you know, new century American home mortgage showed up at our doors as our clients. We were you know, presided over and helped them liquidate themselves in effect, and uh so, I you know, my antenna went up. I got smart about the subprime crisis and the leveraging of the financial system

and how they were levering themselves around these products and others. Um. So when this call came, you know, having become a student of what had gone on in the American financial industry between two thousand and two thousand eight, um, you know, with my curiosity alone drove me to Washington. So so the news crosses, A I G gets a hundred and

eighty two billion dollar bail out. What's your immediate response when you see these These are hard We're kind of used to them today, but at the time, these numbers were just unfathomable. Yeah. I mean by the time I got there, Um, A I G had already um borrowed from the Fed in one pocket or another a hundred

and thirty two billion dollars. So that was in over the course of eight weeks between September eighteenth, when the first loan was initially in was inked, to the time, you know, the transition team was in place and we were now trying to figure out what we're going on. Um, they had borrowed a hundred and thirty two billion dollars,

and that's when you know the restructuring first began. Right that the in in most cases with the exceptional demon brothers, what the federal government, the FED, the Treasury, and the fdi C did during the um course of two thousand eight was just refinance the balance sheets, the short term debt coming due on the balance sheets of all of these companies, basically saying, these companies are effectively solvent, but they have a very short term liquidity issue and if

we could free that up, well, these are companies worth worth saving and if they crash it causes a big problem otherwise well, and insalvency expert would say, they're two definitions in its solvency. There's a balance sheet in solvency where your liabilities exceedure fair market value of your assets, and then there's illiquidity. You're an inability to pay your debts win due. It was clear at the time that none of these companies could pay their debts win due.

They needed, in effect what the FED was established to do, to be a lender of last resort, an emergency provider of liquidity when the markets freeze up. In their panics, and the FED and the fdi C and the Treasury Department did this to a fairly well during the Bush administration under the leadership of Secretary Paulson and Ben Bernanky at the FED. UM. So by the time we get there, uh in you know later, oh ay, we haven't yet

assumed the powers. But there's a transition going on, a baton passing exercise going on between the Pauls and Treasury Department and the guid Treasury Department UM, and those guys had worked together previously, so it wasn't like they were strangers. Was at the president of the New York FED. So everybody kind of knew each Yeah, no, no, that there was a very seamless transition. And you know, sometimes you

get lucky as a country. Right, we have the leading economic historian of the Great Depression saying, as the chairman of the Federal Reserve, he may not have had a playbook as to what to do, but he knew what the FED did wrong in the thirties and he was dedicated not to doing that again. Hey, learning what not to do was half the battle and put your way ahead of people. So so you mentioned the difference between the liquidity event and a solvency event. And you mentioned

in passing Lehman Brothers. Let's talk about that a second. There have been some academic studies that said, at the time Lehman Brothers went belly up, their value was somewhere between a negative hundred billion dollars and negative two billion dollars. Of all the companies out there, they really seem to

be completely insolvent. Fair statement. Well, so if you took a snapshot, I would venture to say, if you took a snapshot and mark to market the balance sheets of any of the major financial institutions, particularly the broker dealers Goldman, Morgan, Stanley, Meryl Lynch Ah on September one, maybe make it September ninth, the day after Fanny and Freddie are taken into conservatorship, and panic runs through the entire conventional and subprime already

run through the subprime market, but now you take the largest mortgage so can exactly and you put them in a conservationship on the on the theory that either they're illiquid and need the government support, or they're insolvent and

need the government's balance sheet to back them. Ah, if you took a snapshot of the balance sheets of any of the major financial institutions in the the United States on September nine, and said, mark this all to market right now, where anything is trading, I dare say in a balance sheet basis, they'd all look and solvent. But and that was sort of the thing is, there's a relationship between

your ability to maintain a position and your solvency. So, you know, Kaine's famously said, the markets can stay irrational longer than you can stay solvent. But if you can stay solvent that is liquid, through a downturn, you're okay. And so in fact better come out the other side actually pretty good. So in the case of Lehman, right,

so you have Lehman Weekend. You know this story has been told many times, but the FED, at the New York Fed, they're trying to figure out if they can broke her a marriage between Lehman and Barkley's or Lehman and Bank of America, and each of those institutions prospective buyers is doing diligence as fast as they can on Lehman's book to try and figure out which part of the bank, if maybe the entire part of the bank,

they will take and um. In particular, b of A has done as good a job as could be done in the circumstances and analysis of Lehman's real estate portfolio, and they conclude that the marks that the that the last marks on the portfolio vastly overstate the value fabricated completely fabricaly well, who knows where there's fabricator? The market was can collapse if you could have held onto it, So who knows? So lets let me share my pet peeves, which is the will will hold aside the fast by

rule change that no longer required mark to market. Will discuss that later. But the REPO one oh five. If if you have to every quarter a few days before you report your earnings and you have to square up your quarterly numbers, you have to move fifty plus billion dollars of liability off your balance sheet, that kind of implies that not only is your accounting not somewhat opaque, but it implies that you were committing accounting fraud on

your investors. And you're probably either in bad shape or deeply insolvent. And we've since found that forget the market to market, they're deeply insolvent. Yeah, okay, so that was the conclusion the federal reached, and they concluded that they really didn't have a statutory based on which to be able to fund provide emergency lending to Lehman. Um. You know, I think in retrospect, given the fallout that immediately occurred upon the filing of that bankruptcy, maybe we should have

been more creative. We could have foisted losses on the shareholders. We could have foisted right well that we had a bankruptcy. Um. You know, we could have achieved the kind of you know, anti moral hazard problem with bailouts potentially in the way we structured alone to the broker dealer so as to avoid the kind of adverse impacts that I mean that the filing of Lehman Brothers created a panic. Well, okay,

I'm not going to disagree with that. And so you know that the whole the whole script of the rescue from you know, the beginning of with Bear Stearns to the opening of the f X lines to make sure that the European banks didn't default against their on their own debt and therefore default on their American counterparties, which would have created a liquid crisis here to the you know, putting a Fannie and Freddie into conservatorship, the saving of a I G. A series of emergency the alphabet soup

of emergency lending programs, the Fed instituted um, you know, the prime dealer credit facility, the TALF, the TAFF, the you know, commercial paper facility. I mean, you know, there was every market that had frozen up. They intervened in and tried to restart in order to provide liquidity to the system. And so the question is, you know, in the midst of that just tsunami of credit support and liquidity,

you decide to take one company down. My my pet thesis is Dick Fold said no to Warrn Buffett's offer to inject capital over the summer. And I wish I was a fly on the wall in that room, because I have to imagine between Paulson and BERNANKI and guys and there someone said this, This idiot said no to Warren Buffett. How can we possibly save him? They had an opportunity. He was a pig, He's always been a pig, and now he should be in an orange jumpsuit. But

let's we're not automatons. Personalities and personal histories matter, and I So I don't think there's uh, I don't think you're crazy in that thought. So let's talk a little about what's going on currently in your career. Um, after you leave Treasury, you go to work as a bank run an investor, and you pretty much decided to hang out your own Shingle Millstein and Company. UM tell us about the launch of that firm and what the thinking

was as opposed to being attached to another giant financial entity. Yeah, I mean, one thing working in the government cures you of is the desire to have a boss. So, UM, I decided I would set up my own shop. I really had no you know, grand plans, but um uh we went from you know, one answering one another call to another call to another column before I knew it.

You know, I had offices in New York and Washington, and we were working on large corporate restructurings and sovereign restructurings again and uh and also you know, reinvesting the profits of the business. The partners, the guys who joined me and galleys and gals who joined me, you know, we all agreed that, uh, the advisory business is a

business that goes up and down. The revenue is volatile, whereas if we could actually make some solid investments, we might be able to provide ourselves with a little more secure income in a manner and to generate wealth, particularly for the young kids who were working for me. So anyway, seven years into this, we ended up with thirty five people doing corporate and sovereign restructuring and you know, fifteen people doing investing. We had raised some third party funds. Uh.

And you know, I'm not getting any younger. I'm sixty three years old. And the people who had joined me were all in their thirties and forties. And you know I turned to them and said, uh, we have a strategic problem. Uh. To strategic problems one where a small boutique entering what I think will be a tsunami of restructuring to come. Uh. And we really could use the leverage of a larger firm with you know, arms and legs in various industries with real industry expertise as opposed

to our sort of products specialty UH called restructuring. On the one hand, and the other strategic challenge was, you know, We've built a franchise and and I'm not getting any younger. So eventually we concluded that merging with a larger financial services firm made sense. Alan Shortz and I had been talking for three or four years. Former bear Stone CEO is a bear Stone CEO and really one of the most widely respected bankers investment bankers in the United States.

I mean he's you know, Disney's banker, Verizons banker, he's a he's a very well respected boardroom banker, UH and tactician and strategists. So, and he and I had become friends after the crisis, um and so it became it was a natural fit. They have, you know, a full hundred bankers who do you know, tech, media, telecom, power and energy, real estate and the whole uh landscape, waterfront as well as sales and trading. So they're kind of, you know, where what Morgan's Stanley and Goldman Sacks were

back in the early nineties. Uh. They've built an independent investment bank but before they went public, before they went public and expanded their balance sheets enormously. Right. So you mentioned something in passing I can't let go by. You think we're at the leading edge of a wave of future structurings. Is that global? Is that industry specific where where do you see that happening? Well, let's do some stats. UM. You know, corporate to GDP is the highest it's been

in American history. So we have a very lever corporate sector. And part of that is, you know, they're financial re engineering of their own balance sheets, stocked by backs funded with debt UM. Part of that is, you know, the buyout waves and leveraging generally that's associated with the buyouts UM,

and part of that is UM. You know, just the general tend to the credit has been so cheap that that corporations have re engineered their own So that was that was the question I immediately popped into my mind if you said that was, well, is there a reason for them not to be leveraged up when money is almost not quite free? And as long as there, I hope everyone learned the lesson about UM fixed versus variable

lending in the financial crisis. As long as those rates are locked in, it seems like their debt servicing is fairly affordable. It is, uh, but there are two sides of that, right, And you know, if your cash flows declined because of a recession, suddenly your leverage codes from manageable to unmanageable. And if you're an a rising interest rate environment, forget about floating rate. You know, a lot of bank debt is floating rate, but that's at a

leverage level. It is generally two to three times, so it's not going to sink a company even into cline and cash loow environment. But the real risk is refinancing risk, which is exactly what we saw during the financial crisis with the financial In other words, they have to roll that debt over and now it's at a much higher rate, or maybe they can't roll it over at all. Exactly so,

with a very highly leveled, levered corporate sector. And if you look at credit quality, Barry, I mean, I'm sure you know these stats of the so called investment grade debt is the body is the lowest investment grade ranking, and the non investment grade debt now constitutes more than half of all debt on the corporate sector in the United States. So you have a highly leveled sector with

very low credit quality. Um, you know we could, and you have a FED raising interest rates, the federal government borrowing um like a drunken sailor on leave. I always object to that metaphor because drunken sailors spend their own money exactly. Okay, you're right, the federal government borrowing like there was no tomorrow. How about that? Fair enough? You've had a ringside seat to some of the most fascinating

restructurings of recent memory. You either worked on these or near these, or people in the firm um did some work on them. US Airways, Charter Communications, the auto workers, the car makers bail out and reboot, even countries like Cyprus and Greece and in the United States Puerto Rico. So I have to ask you what do all these things have in common and what are the important differences when when you look at these big financial snaff foos,

What what should we make of these? Yeah? So uh Tolstoy and Anna Karnina says that all happy families are alike, and each unhappy family is unhappy in its own way, and each restructuring, you know, is unique in its own way. There's sometimes it's management that just you know, went off on a frolic and detour, spend too much money, levered up and on a mistake and strategy. Other times, Uh,

it's you know, a change in the business cycle. Uh. And highly levered balance sheet that takes a perfectly good company that uh, in ordinary times to generate even in bad times of generating cash flow, but it's just got the wrong balance sheet for the kinds of cash flow is capable of generating through a cycle. And so you're doing a balance sheet restructuring of a good business, um,

you know. And other times it's a business that you know, whose time has come, whose mission has long since passed. Hypothetically company like Sears exactly. Um, and so we're not so hypothetically yeah, so world apparently yeah uh, you know, in the case of countries, it's some combination of investor enthusiasm, misplaced enthusiasm for sovereign debt, and a failure to really look at the underlying dynamics of the country's economy. Um. I was just in Iceland, and the story there is

just it's crazy. It's now it's it's crazy again. Right. It's an island of you know, Boston, right, And and they were levered like eight one against GDP s just nuts. Well, they were a product of you know, open capital, no capital controls and capitals you know, swishing swashing through the system. Um. So how is that different from Greece re Puerto Rico. Well support I mean Puerto Rico, the capital markets were open. Uh. And as long as they were open, you could do

deficit financing. Even those states and cities are not supposed to do deficit finance, that's right, but there. But you know, municipal bankers at which I do not count myself as one, have found lots of ways to us well, to find ways to finance deficits that are not completely transparent. Uh and so uh. Puerto Rico went into a recession in two thousand six as a result in change in federal law that had formally subsidized pharmaceutical production on the island.

They had had a twenty year tax break that encouraged pharmaceuticals to do their final packaging on the island and created three fifty thousand jobs and lots of tax revenues. And that expired in two thousand and six. Puerto Rico went into a recession that they still have not come out of, you know, decade plus later, decade plus later. And they financed the decline at tax revenues with that, uh,

lots of it. So they by the time they got to us mill Steining Company then in two thousand fourteen, they had seventy five billion dollars of debt for an island of three and a half million people. They had pension systems that were underfunded at the tune of thirty or forty billion dollars UH and UH, and a real inability to pay their debts win due and particularly as the capital markets shut to them. As long as you're

gonna roll that debt over, doesn't matter. It doesn't matter. UM. But if you can't roll it over, because you know, suddenly you're borrowing what you would the debt you would incurred at two percent in the muni market, you're now having to pay eight percent tax free. UM. You know, it just makes it unsustainable. Right. I was on in Puerto Rico, I want to say, fourteen or fifteen, and already there was a brain drain going on. There were people, forget,

it's not a different country. You could hop on an American Airlines flight and go anywhere in the United States, no passport required, right, and lots of people did UM and have UH and so in any event, so you know,

countries are much more complex. UH. And you know we're seeing I frankly, we're doing a lot of work now in the United States, because you have a series of states that, um don't look all that much better than Puerto Rico did to Illinois has to be a giant Leinois Connecticut, I mean, all of the how did Connecticut go south so fast? I mean, at one point they were one of the wealthier states in the country. Well, there's still one of the welfare states in the country.

Of the problem is is that they've their economy is growing slower than the rest of the surrounding states, and they've levered themselves up and deferred pension contributions for twenty years. And as we right, I mean, you know, this is the responsible handling of the commitments who make as a state is critical to the financial stability of the state.

So if you're a fill in the blank teacher, police off for sir firemen in any of these states, are you gonna get a hundred cents on the dollar of your expected pension retirement or everything's on the table in order to make these states solving again, you know, it seems unlikely. Yeah, there's a three and a half trillion dollar deficiency in the funding of state employee pensions nationwide,

three and a half trillion dollars. Uh. And the you know, the the problem for these public employees is that, um, you know, the at least today, even in Trump's America, Uh, there are no walls built between the boundaries of different states. So if a state starts over taxing compared to other states, it's it's employed, it's citizens and under serving them in terms of the provision of current services in the form

of good infrastructure, good schools. Um. If people people believe, and when they leave, can what a mess they made over that they take them When they leave, they take their tax revolues and property taxes and income taxes with them, and it becomes an adverse feedback loop. A fewer and fewer number of citizens are supporting a greater and growing liability for legacy costs. And so you know this is there's going to have to be a reckoning here. That's the name of your next book. I like that. So

let's talk about something that's a little more cheerful. I know you are a fan of watching the financial sector and looking at some of the dominant players which have become very concentrated post crisis. UH. And I know you're a fan of fintech what when you look at this are are these big companies gonna stay entrenched and keep putting up walls to prevent competition or can the new financial technologies? Um, can these new upstart companies break that

hegemony from from the big finance companies. The answer to that is, um, it's going to depend on government policy because what is going on with the financials and fintech is similar to what's going on with Facebook and Snapchat and Google and every other you know, high flying startup technology company. Now, why aren't those tech companies just thought of as aggressively competing in the marketplace? And you have Apple, and you have Amazon, You've Google, your face, we have

all these companies. Granted there are four giant winners, but still any you know, you could look at how many search engines were there before Google became dominant, right, so so, but these companies are rolling up you know, potential threats to their competition. Uh. And it's a great exit for a venture capitalist and for an entrepreneur has a great idea, um to sell yourself to Google to Amazon, to Apple to Facebook. And the big banks are doing the same thing.

In fintech. There have been you know, a multitude of startups in and around the financial services space, and the big banks recognize the potential threats. So they're doing a lot of in house R and D, but they're also acquiring a lot of the new startups. And so government policy will really make a difference. And here's the thought experiment that I I urge you and your listeners to

think about. So, today we have a bank centric deposit system. Right, if you want to store your money, have immediate access to your cash liquidity right, a trade off from liquidity versus return. You're gonna have a deposit account to bank UH to meet your ordinary and mediate spending needs. Um, it's safe because it's guaranteed by the federal government. UM. The banks in turn take your deposits and deposit them.

There are excess reserves at the FAT, and the FEED is now paying them seventy five basis points for the privilege of having those exercis serves onto positive the FED. The FED is basically a clearing house among all the banks. Well, what if you, Barry Ridholtz, could have a deposit account at the FED. You could get seventy five basis points and you could direct the FED to transfer your money, to your mutual fund, to your utility bill, to your

wherever you wanted it to go. In other words, what if you had a bank account at the FED UM If I could become a systemically important financial institution, I know they'll they'll be able to bail me out with

Well maybe that that wouldn't come with your deposit. But but the the facility with which monetary policy could then be conducted is extraordinary, right, because if they want to encourage savings to be if they want to encourage savings and reduce the money supply, they would increase the interest rate in your deposit account. If they want to encourage investment and spending, they would reduce the interest rate, maybe even have a negative interest rate to force your money out.

But the point is is that it would disintermediate the banks uh and banks arguably would have to go find other sources of funding other than subsidized deposits from the federal government. And you're implying fintech is going to play this role, well, potentially can't play this role. I don't know where you are on the cryptocurrency debate. I'm of full blown meth as opposed to Neureel who is you know, a full time still okay, but in effect the FED

could issue with digital currency. You have a trusted agent issuing a digital currency that allows individuals to in effect transact uh in electronic form as opposed to just allowing via the blockchain. Is that what you're might implement it via plain but right now the implementation itself is quite expensive in blockchain. The processing costs, you know, far exceed with the the antiquated networks of Visa and MasterCard. UH

they're processing costs. But it may get there. Now people something like of all cryptocurrencies have been lost and if I lose my credit card, my liability is capped at fifty dollars. So until we find a way around that, yeah, no, I think there are lots of problems with this. But the biggest problem, the biggest problem with any currency, fiat currency, is whether it's legal tender and so, you know, until until it's accepted as a form of payment by the

federal government. It's really just a speculative tool. Quite quite fascinating. Can you stick around a little bit. I have a million more questions for you. We've been speaking with Jim Milstein. He is the co chairman of Guggenheim Securities. Uh. If you enjoy this conversation, we'll be sure and come back for the podcast extras, where we keep the tape rolling

and continue discussing all things restructuring. You can find that at iTunes, Stitcher, overcast, Bloomberg dot com, wherever your finer podcasts are sold. We love your comments, feedback and suggestions right to us at m IB podcast at Bloomberg dot net. You can check out my daily column on Bloomberg dot com Slash Opinion, or follow me on Twitter at Riolts. I'm Barry Rihults. You're listening to Master's in Business on Bloomberg Radio. Welcome to the podcast, Jim. Thank you so

much for doing this. I am not only fascinated by the entire financial crisis overcod that that was my doctoral thesis um sort of um, but there's so much minutia in that space that I think so many people don't know. And you were literally table right there. You were. You have a seat at the table right in the middle of that of the beast, and and never any interest

in writing, uh a book going out. I mean, for posterity's sake, there should be a full data dump on everything you we we have, but not from the perspective of a central banker. I'm glad Bernankey had his expertise, although you know, whenever they screw up in surgery and they have to send someone in to fix it, it's never the original surgeon because he is a vest and

interest in protecting his own reputation. My my thought process was, Hey, Larry Summers was there, you know, was the guy who repealed glass steel and passed the Commodities Future Modernization Act. Tim Geithner was the UM New York uh Federal Reserve President, and Bernanke was kind of there cheering green span along to doing all of his UM talk about a reputation collapse, but all of his ideology. Bernaky was right there with him.

So I wonder if this really was the optimal Maybe that's the right word, the optimal crew to go on and rescue. That said, I completely appreciate Bernankee having had his expertise, and perhaps of all of them, he was the right guy in the right time. Yeah, well, Tim, Tim had his own qualifications, right, He had lived through I mean people thought he had worked at Goldman sax

or something. He've been a long term treasury, right, he said, And he had gone through the Thai bot crisis, he had seen the crisis in Latin America in the eighties when he was a young man, So you know, I think he he came to the crisis, this crisis with some background and experience and understood the tools and the

importance of doing what we did. So all that said, Um, you know, when I got out of the government, um, having been a corporate restructuring guy rather than a financial regulation financial industry banker, you know, I determined that I needed to go teach a course on financial regulation and the crisis in order to figure out what I had just gone through. And you know, you write in order to figure out what you think in your case, you teach in order to figure out exactly so, and you're

still doing that at Georgetown. Yeah, I just finished the third semester of teaching on that with Tim Massett, who ran the CFTC under the last in the last Obama administration, and he had also been a treasury with us in the tar program, and so he and I taught that together, which was, you know, was it was fun to do it with him my third time around. But um, I think it's still too fresh, you know, from the point of viewing it. Yeah, but I think it's still too fresh.

I mean, you have a lot of kind of you know, from the front line accounts that have already been written, and those were written pretty much in real time. They came out within a year or two exactly. And then you know, Secretary Guytner wrote his book, and Brananki wrote his book, and Paulson's written his book. Can there have been a couple of you know, lieutenants and sergeants have written their books, but I think plus random idiots who had to do with it out and spilled their point.

I'm actually in the middle of reading um two's book, which I think is Adam two is. It's called Crashed. It just came out. Yeah, it's very good because it takes a it situates the crisis and the kind of macro economic environment of the early two thousands, of the early adds, and you know, if you've just cast you know, the thing about the crisis is it kind of overwhelmed everything else that might we might have been thinking and

using as a frame of reference. It overwhelmed you know, the introduction of the iPhone, which has had at least as an important and impact of our culture and society as the crash itself had in two thousand eight. You know, the iPhone introduced in two thousand seven. But you know what two highlights is and it's relevant today to the existing problems with Chinese. You know, we had a savings glut. It we were all worried about that. We thought that,

you know that I've always hated that. But but but it's true, having run deficits and trade deficits, run deficits since the Clinton administration, and run trade deficits since the sixties.

You know, we've been exporting dollars around the globe for forty years at the same time that we're deregulating the financial system and the largest holder of dollars where you know, there were two pools, huge pools of dollars offshore in Europe, China, Japan and in Europe, right, and that savings glut was the you know, was the concern of the Fed and of all the Macronan wrote a white paper on that. I thought it was just the horrific, just completely clueless

argument from people who were It's a classic example. I have a lot of respect for academic research and writing um. But often when you get into the real world situations, sometimes the academics take an idea and they go off. So what's what's more significant? The savings glut or rates at zero and bond managers scrambling for any sort of yield and telling their existing um traders and managers go find me some yield and if you can, I'll fire

you and find someone who can. What's what's this all day? In some prime security stuff that is safe as treasuries and paying a few hundred basis points higher. Why don't we have more of that? That's a real world thing that the academics have a tendency to miss until until after the fact. Yeah, but you know, but they're in

defense of some academics. My friends Gary Gordon and Andrew Metric at Yale have done, you know, great writing about the confluence of events that led to the great innovation of a subprime mortgage of you know, two year teaser

interest or the three seven. I could have saved them a lot of paper and said, you have no real wage gains for thirty years, and people are going to do to maintain their living standard even though their incomes are much lower, so that means debt and restruct So here's another book, that obscure book that you might want to read called Capitalizing on Crisis. It's written by Krippner.

I think it's her name, Greta Grippner, and it's all about the political um origins of of modern American finance and the story she tells, which I think is you

and I lived through. I think you're a little younger than me, but not you got about five six years UM was that, you know, the stagflation of the nineteen seventies created political crisis because lasting impact that people were unaware of and and the one of the biggest policy initiatives of the Reagan administration every administration since has been to UH expand the provision of credit where income, where incomes were lagging and failing and falling behind. UM, we

substituted credit, no doubt why. It sped credit availability, and you know, levered up both the government to do so, levered up the households in order to UH turn their homes into cash machines to supplement, so they could supplement their incomes with the increase in the value of their homes to finance the purchase of everything under the sun from every consumer durable available through credit cards and installment credit.

A lot of that goes back to post World War two fifties and sixties, but really the seventies is what flipped that when suddenly giant inflation. No, that was the beginning of of no real wage gains, and then the whole Reagan era forward. It's clear that capital had a better seat at the government policy table than labor did. And thirty or forty years later we've seen what do we now night The the percentage of UM corporate profits as a percentage of GDP is at its all time high,

which means that labor is getting less. I pretend to be a free market capitalist, but I can't help but look at those numbers and say, hey, this is problematic. We keep this up, and we're gonna elect some crazy populist as president and then what? Okay? And then what? And So here's another book for your listeners. It is called Can Capitalism Be Saved? By my good friends Steve Perlstein, who's the chief economics writer at the Washington Post, and

he's written a really thoughtful book about is greed good? No? Is fairness? Going? To make us poor. No, um, you know, it's a very serious treatment of the questions that we're now confronting as a nation with the highest inequality in American history. So does he conclude capitalism can be saved or capitalism gonna be saved? But but we what we I mean? This has been true, you know, really since

the progressive era. You know, the this is a joint venture between government and capital to come up with a society that is productive and just. So I have a this will be my last pet thesis. Europe began as a feudal system where the king owned everything and you were allowed to work on the land and if he threw you a little bit of wheat and some food

to survive. That was up from zero. And the reason Europeans are so much more comfortable with some aspect of socialism with their capitalism is they started out with zero and as they went higher and higher, to them, oh wait, we we get to own land, We get to have well since you used to since the government used to provide everything, food protection, what have you? Having the government pay for healthcare and tournament and education seems to make sense.

The US, on the other hand, started with the exact opposite. Government did nothing, and you're responsible for a hundred percent in your own safety. So one starting from zero and going up, in the other starting from a hundred and going down, and there's resistance in both directions. But well, the myths by which we live, right, I mean, you

and I are are immediate parents, their grandparents. You have to go probably back four generations before you have someone homesteading right and you know, protecting themselves and fending for themselves. And yet this myth of the American frontier is very powerful in our political ideology and therefore in our social policy. But the reality, you know, four generations later from the last homestead of the last frontiers woman and man um

is a is a multi ethnic, multi racial society. You know, we have one of the greatest challenges, I think in human history, which is can we create a tribe, one tribe out of many you know e players them? And it really is it befalls to us as Americans to figure out whether we can make this a democracy out

of you know, many tribes. I think we need to do a better job of educating our students, not just teaching them to attest as as middle school and high school students, but having them have a better understanding of all these forces and and teaching them how to think, as opposed to teaching them to memorize. Because we've created

several generations of people. So you and I both have an advantage of illegal education, which to me, the most important thing law school teaches you is not case law is not specific, but the entire process of here's the basic syllogism here. So you don't know what the law is going to look like in the future. You don't

know what sort of random fact pattern human encounter. How can you, regardless of circumstances, apply some specific fact pattern to whatever the case law happens to be at that moment. You have to learn how to think. It's very flexible and it's it's very open minded. And I don't know of a lot of other industries that teach that. And I agree with you. I think the legal education and maybe it's I think it goes on maybe a year too long, but I think the training is unsurpassed. It's

it's not what to think, but how to think. And I make fun of my m b A buddies who are taught what to think or they're taught the canon of financial literacy, but not necessarily. And now here's how to analyze when either this stops working or this goes wrong or and it's I don't want to make this a j D versus an m B A, but they're

two very different philosophical approaches. And in the modern world where everything is topsy turvy, I have come to the conclusion that learning how to think is a tremendous skill to have. Yeah, but I also think I I agree with that, and and surely our schools can do a better job, um of developing that, you know, emotional intelligence and analytic ability, the ability to handle new facts uh and put them in find new patterns. Um. But I also think that the social media has isolated in a

funny way, has isolated people from one another. It's isolating communities as much as it's creating a cross community the possibility of cross community communication. And so I've come around to the view that we really need national service that in order to works in Israel. Yeah, it works in Israel for and it and it made sense of us from all over the world, different ethnic and um national

backgrounds into one little desert country. Uh. And it was a way of forging a national identity, and I think we have that problem in the United States now. We really we've we're separating into into separate tribes, and not just Democrat and Republican, but you know, the identity policy with a million splits, and I think, you know, I think two or three years of mandatory national service is the best hope for the future of this country. I have a buddy who's an American citizen at UBS, but

he grew up in Switzerland. And I don't know if they're still doing this, but not all that long ago, every every citizen and every resident was obligated to serve at least one year in the military or some other right. It doesn't have to be a military here. I mean, I think, I think there's lots of need in America

that could be met by a national corps. And I think having you know, the experience before you go to college of actually having to live and work with people different to yourself, but all of whom are American, would be a great national unifier. That's quite fascinating. In two thousand and eleven, I found this interesting quote of yours. The need for a Chief Restructuring Officer is really part

of the past. So how did you realize, Hey, my work here is done, It's time to move on and and um the lone Rangers goes off into the sunset. How what made you come to that conclusion? Well, I think the the macro economic condition Shirley had eased, so the FED had embarked on its quantitative easing. The markets had rallied. Uh. You know the depth of the market,

the equity market and the credit market. Where in May of two thousand nine, by the time you got to the end of two thousand ten, you had seen a rally back. The rallies had both started in both markets, and most importantly, by the end of two thousand nine, the inter bank lending market opened up again. The banks were actually comfortable enough with each other to start ending to each other overnight. And uh. And that was a

pretty real sign of that that the crisis had passed. Um. But you know, I was part of the cleanup crew, and part of my job was to um get the taxpayers money back. Um. You know, by the time, by the time two thousand ten had ended, we had struck a deal with a I. G. S Board for a

complete recapitalization of the company. We had converted some dead into tarbe equity, some fed dead into talk equity along the way in two thousand nine, UM, and then we did a series of asset sales and restructurings from a I G. We reduced its balance sheet from a trillion dollars of assets to half a trillion of assets, selling off its Asian life insurance operations, it's Middle East life insurance operations, it's Middle European life insurance operations, and a

hundred other businesses along the way that they were involved in. So what is a I G look like today? So I do today? Is still the large one of the largest property casualty insurers in the world. UM, it's one of the largest domestic life insurance companies. Uh, and UH not a lot else. We sold off the aircraft leasing business, the consumer finance business, as I said, all these other worldwide life insurance operations. They had a ton of assets

that were very savable. They were very savable, and as a result of the assets sales, we managed to use the st sales to pay off the FEDS loans, leaving the federal government with you know, fifty billion dollars of preferred stock. We converted the preferred stock UM into the common stock, and so we now had a liquid market, and eventually we had a liquid market into which to offload the treasuries shares of common stocks. So so that

brings up another peeve of mine. I think that process where the rescuer gets most of the equity is a reasonable one. Hey, we're taking all the risk, we're putting up all this money. Maybe this works out, maybe it doesn't UM, And so there's a big upside at the end of it. Not that the government is doing this for the trade. They want to prevent the next Great depression, but it seems fair. We didn't seem to do that

with anybody else. We rescued Bank America, Merrow Lynch City for I don't know the fourteen time city has been bailed out. I think it's three or four over the past century. They have a long history of that. Go down the list of other companies that were that needed bailing out UM, and we're rescued and we're a liquid

But their balance sheet was transparent. You know. The one lesson everybody forgets from Lehman Brothers is if you're gonna have an opaque balance sheet, that's forget the insolvency, just the inability for anyone to figure out what the hell is going on there? If you need to rescue, you're trouble,

and and that's a big part of that. So why didn't we take a similar approach to a I G. Where effectively Uncle Sam was the dead rain possession financer and when that worked out, they captured whatever upside there

was to be captured. Yeah, So I think, Look, I think the the structure of the TART program UM, which was where we and few ultimately determined to infuse preferred stock equity into the balance sheets of all the major financial institutions UM, I think there could be some serious criticism of the way it was done, particularly by I think it may have created more of a political backlash for sure against the program that it ted party and

everything else. Well, I mean they're the origins of the two party or something we could made for a while. But no doubt the crisis had something to do with it. But I think the one, I mean, the one criticism I would have of the initial TART program was that the UM as long as the preferred stock was outstanding, the company should not have been permitted to pay the kinds of bonuses that they paid, right, I mean, as long as you're beholden to the federal government for equity

on your balance and would have to sign off on bonuses. Eventually, they didn't sign off on the two thousand nine bonuses. Two thousand eight bonuses, and I think that was the one. Those are the bonuses that provoked the enormous political because most of the back bonuses not paying Yeah, and I think most Americans were kind of, you know, right in the view of like, wait a second, you're paying yourself billions of dollars of bonuses with taxpayer money for bankrupting

the company. Nice work, here's a bonus, now the counter. You know what Secretary Paulson would say, who designed this these preferred is it was important that everyone participated. Every all the major institutions participate, because we couldn't permit the negative inference that if Jamie Diamond held out that he

was the only solid bank in America. Uh. And so they had to make the terms of the preferred as relatively benign and painless as possible in order to induce widespread participation by all of the institutions, so there could be no picking and choosing of winners and losers. And so so here's where I make fun of academics again. And you don't want to be too heavy handed, but you could have had a less egregious set up. And if Jamie Diamond doesn't want to participate, well then Bernaki

has to say to him full new Jersey bent nose accents. Hey, nice bank, you got their shame if anything were to happen to it. How much more do you have to say to say, listen, this is a disaster. We're about to have the Great Depression. Either you participate in this or I have a feeling that the next time you come to the normal transaction process at the FED, which is what every single day. Yeah, good luck with that. Yeah,

so I I are you on that? I mean, I mean I actually got into a fight with Elizabeth Warren during a public hearing when I was testifying about what we were doing with the I G and Ally Financial and she she was beating me up that we should have tried to extract a discount from a I G. S counterparties on their um uh CDs on c d O s, which your audience probably understands what I just meant In those acronyms, uh and um, sort of counterproductive if you want to reliquefy the system and encourage some

some counterparty. But you had the power, she said, you had the power to get Goldman Sacks to give up a discount rather than to pay them off in full. Wasn't this a backdoor ball out of Goldman's Act? And I was like, okay, secretary, but she wasn't secretary, And I was you know, um, professor Warren. If so, you tell me how I'm supposed to as a over in the United States, how I'm supposed to play that hand.

I'm supposed to benefit a i G S shareholders by taking it out of Goldman Sex, when in fact we're standing behind both of these companies. The whole point was to avoid defaults across the system and to avoid ai G defaulting on any of its obligations, because if it defaulted on any of its obligations, it's credit rating would have been impaired and we would have been started had to write even bigger checks um a political response. But but meanwhile, the the you know, there's there was no

good solution. That was just what was the least bad solution, and ultimately even though we've recovered, there's been a cost to this recovery between income inequality and the rise of populism. And you know, it's um it's one of those things that it could have been a whole lot worse, but part of me feels like it it would have been, it could have been a lot better. Yeah, I think

the big mistake politically was the stimulus. If you look with the Chinese, too small the Chinese, you know, and if you look at what the federal government's doing now right these Republicans who were um totally opposed to the Obama stimulus have just enacted you know, one of the largest tax a trillion dollars at way higher in the economic cycle and as opposed to right in and by the way, for those of you who don't like that

comment about a Republican controlled Congress affecting a giant stimulus, be sure and send your emails to Jim Millstein at Yahoo dut com. Ye, but it's true. You know, if Kane's had this right in the middle of a financial crisis, you cut taxes, you deficit spends, and when you have a robust economy, that's when you can stop your deficit.

Spending and and raise taxes and balance the budget. We've done it totally aspect right and and so you know, in the two thousand nine we got Democratic controlled Congress to do a stimulus bent, but Obama. But Obama went back to the well in two thousand and ten, after the Tea Party took the Republican Congress in eleven, I just couldn't get it done, went back with an infrastructure program,

could never get anything from the Republicans. McConnell uh specifically said, my role is to make sure he gets nothing else done going right. So for you know, so we you reap what you're so, I guess we do. So. I have a million other questions, but I want to get to our favorite questions before and and uh so let's jump let's jump right into this. Um, what's the most important thing that people don't know about Jim Milstein? God, Um, I'm a horrible golfer. Really yeah, me too. But I

don't play golf, Okay that I don't know. I'm I'm a glutton for punishment. But you play regularly, you know, I try. I don't can't play regularly, but I try. That's very funny. Tell us about your early mentors. UM, I had a professor at Princeton, a guy named Sheldon Woland who recently passed, who is a political theorist, UM and a historian of political theory. And you know that's what I did my first years as an academic. So

he had a very important influence on my intellectual development. UM. As a career, I had a had a partner Clary Gotliam nim Al and Applebam who really taught me how to be a lawyer. Uh, taught me the whole how to deal with clients, how to analyze the situation, had to take a multi parties with conflicting interests and uh and produce a common result. It was acceptable to you know, we haven't even discussed your dad, who is a renown attorney. How how did he impact your career decision? Did you

know you were always going to be a lawyer? And it was like a residency requirement in my in my family, I kind of had the same thing. He UM. You know, my father loves He's still alive and still you know, practicing here and there, still practicing, still practicing, still getting advice, still giving advice to people he's consulted. And the thing is he loved when I was growing up, he just loved what he did, right. So I mean it was hard, you know, to look at him and be with him

and not see the law as something that was incredibly engaging. UM. And because it and for him it was and as has been for me, a mix of um, you know, a crossing between private sector and public sector. I mean, the law, the rule of law is what governs our private relations. But someone has to create that. Yeah, somebody has to create that law and um, and that's a public policy, the exercise. So what maybe this is a

good point to ask this question. What attorneys uh and other professionals have influenced the way you approach both legal banking, banking and public service. Um. You know there's been lots of influences on that, but I mean, I think the I think the important point here is that, UM, the I have found that, UM, there's really no upside to dishonesty. UH and that you know, people who can't be trusted are people who are not going to get stuff done

except in dark rooms and back alleys. UH. And so if you want to work in the social, political, legal business world, UH, you know, your reputation is the most important thing you have, and and observance of ethics and honesty. I know this is a counterfactual and this administration, but the observance of ethics and honesty is extremely important to

your long term success. I'm looking for a response to that, and the only thing I could come up with is it's funny how each subsequent administration's popularity gets revisited in the future. Not only has George Bush's reputation gone up during this administration, but the Obama administration's ratings have all gone up, especially because you know, drama free, no scandals. The key word that keeps coming up is integrity and hopefully that will matter again at one point in our future. Yes,

I'm sure it will. Um, you mentioned a couple of books. Tell us what your favorite books are? What do you read for fun fiction nonfiction? A nonfiction reader? And you know, again, after after having gone through a major historical event and had a ringside seat, I'm I've been reading lots around, did um, But I think the most interesting nonfiction book I've read non unrelated to the financial crisis is a book called Sapiens and Uh by Harari, and I think

it's an extremely important book. Um. Have you seen the follow up? I haven't read the He's Gotten More. It's much darker, much more. This book is very interesting. I don't agree with everything in it, um, but at least there's some recognition that humanity is special. And Homodaeus is like, all right, now here's how everything goes to hell in

the future. But I think I think the fundamental inside of Sapiens is Um, it's really important, which is, you know, the success of the species has been our ability to collaborate around abstract concepts. Are you know, our communications obviously key, the development of language and all of that, but then the ability to collaborate and coordinate our behavior. You're around abstract concepts, concepts of God, concepts of nation, of state,

of community. I mean, these are all abstractions. Um, you couldn't you know, you can't visualize the nation except through symbols and through uh, you know, a summary of its history and UH a set of objectives that you might believe are important to it to achieve in the future. UM. And you know, to me, that's the big challenge of the that the country faces is an ability again to figure out how to collaborate together on a common future

across this very diverse country. Quite quite interesting. Um, what are you excited about right now? What? What do you think is a fascinating UM issue or topic these days? You know, with the New York Giants having gone one and four to start this season. I'm I'm just so pressed. Um, it's very hard to focus on anything other than that for the moment, still licking my wounds. So let's talk about a time you failed and what you learned from that experience. UM. Yeah, So I I was in as

a young lawyer, not so young. I was handling my first major cross border restructuring and um, the creditors are represented by one of the greats of the bankruptcy bar Leonard Rosen. It walked out Rosen, Lipton and Cats. He's the Rosen and walked out. Yeah. And he was just a gentleman of a scholar and a wonderful person. And we were having a dialogue as to how we were

going to land this company and restructuring. He representing the credits, me representing the debtors, and and we were we had, as you can only have with Leonard, a kind of gentlemanly disagreement with regard to sort of what the endgame was, who was going to end up owning the company, and how we were gonna restrict trip and uh, we were resisting putting the company in front of a judge too soon until we had an agreement with the creditors, because

most bankruptcies are less expensive and less time consuming prepacted right. The judges there to confirm what everyone's agreed, rather than to mediate the dispute on going. And so we were resisting filing it. And Leonard thought that, you know, we were being irrational and impudent and um and so he did something that I didn't believe could be done. He

filed an involuntary petition. He the creditors put the company into bankruptcy in Canada, and under Canadian law, I had been advised by my Canadian co council this was not a procedure available to creditors. And so Leonard picked up the phone. So he called me one morning. He said, I think you need be in Toronto this afternoon and I said why. He said, because we have put the company into a CC double a proceeding in UM the Ontario Superior Courts this morning. And I said, you can't

do that. He said, well he just did. Uh and so um, you know the lesson. The failure was a failure of imagination, a failure to realize that the law is not a given but something that is created and constantly created every day, a little, a little more flexible than you imagine exactly. That. That's that's quite quite interesting. So what do you do for fun other than be a terrible golfer? So I hike. Um, I've got a group of friends that we've gone on various you know,

trips across around the world, you know, hiking and exhausting ourselves. Um, that's been uh interesting. We went to we went to Norway last two last year or the year before, and we're just discussing Norway last night. That's up and down the Fiord country. It was gorgeous, food was spectacular and we had a stopover on the way to the hike and Oslo and on the back on and then on coming back in Stockholm. And Stockholm is just an amazing city,

an amazing city. And these two countries, and these two countries actually really um for for Americans, um, and particularly you know, given our current dispute about the role of government and inequality. A trip to these countries should be mandatory because they have UM national healthcare, they have UM, you know, subsidized higher education, they have UM where, they have affordable housing, subsidies, paternal all of that, all of

those basic social system supports. And yet they're dying ynamic economies with entrepreneurship and growth rates that rival ours. Now, they're small, homogeneous countries, they don't have the UM many of the challenges we have in establishing common commonality. But but these are you know, what the right would call social welfare states that are functioning UM where the gap between the richest and the poorest is only three times,

not the three hundred times it is in the United States. UM. And yet they've maintained a sense of entrepreneurialism and dynamism in their economy. The the the nanny state is not necessarily um, you know, deterring dynamism and entrepreneurship in the economy. Sound sounds fast. I've been to Helsinki, I've been to Copenhagen. I've never never been to Stockholm. Um, I assume you

do that in the summer and not yes, exactly. UM. So if some young lawyer, recent college grad, a millennial came to you and said they were thinking about a career in restructuring and that aspect of banking. What sort of advice would you give them. Well, it's a choice, is just just as we were talking about before, is a choice between business school and law school. It's a good law school, Um, get firm grounding in uh in the law. Um. You know, it's been a great career

for me. You're the I like being a problem solver. And you know, each of these restructurings as different as I said before. But you know, an effect, you're taking something and uh and you know, making something out of a failure and um, you know, and sometimes this something is just redeploying the capital, liberating the capital that's involved in a bad business. Um. But most of the time, you know, you're you're figuring out what went wrong and fixing it uh and saving you know, capital and jobs

and uh. And you know, so you can kind of feel like you did something good. Quite quite interesting. And our final question, what do you know about the world of corporate restructuring today that you wish you knew thirty years ago when you were really first getting started. Well, it's you know, this has been we talked a little

bit about the deregulation and the financial system. I mean the consequence of that is we went into the ninet eighties with a bank centric financial system where credit intermediation was primarily conducted by banks. We ended, Uh, we came out of the financial crisis after forty years of de regulation with a market centered funding system. And UM, the development of the secondary markets and the secondary credit markets. UM, the shadow banking, the shadow banking system starting with you know,

the junk bonds created by Mike Milliken in the late eighties. UM. You know, we have a bond market that now dominates credit and intermediation, and we and the bond market has greater and greater transparent ency with secondary you know, with traits all the time and prices. So there's a there's the illusion of fair value created by you know, the

day to day pricing of a given bond. UM that that pricing may not hold, and that prices may not hold, and it may it may reflects applied demand dynamics rather than fundamental value. UM, it may reflect you know, the interest rate policy of the Federal Reserve as compared to where it was at a when the bond was originally issued. UM. There are lots of it. But but but market participants today who live by their marks and are judged by their marks, and are measured by their marks, and are

compensated by their marks. Um that is that that is the biggest difference. Right. I used to sit in rooms in the nineteen eighties with banks and insurance companies and talk about fundamental value and the mark didn't matter. What they were trying to do is maximize the recovery of their position. And today room with traders who are trying to who are trying to maximize their liquidity, and there and and their mark and very different from fundamental That

quite fascinating. We have been speaking with Jim Milstein. He is currently the co chairman of Guggenheim Securities, an adject professor at Georgetown University Law, and former Chief Restructuring officer at Treasury. If you enjoy this conversation, we'll be sure and look up an inch or down an inch on Apple, iTunes, overcast, Stitcher, Bloomberg dot com and you can see any of the other two hundred and twenty five such conversations we've had

over the past four plus years. We love your comments, feedback and suggestions. Right to us at m IB podcast at Bloomberg dot Net. I would be remiss if I did not thank the crack staff that helps put together these conversations each week. Michael Batnick is my head of research. Medina Parwana is my producer. Taylor Riggs is our booker. Attica val Bron is our project manager. I'm Barry Ridholts. You've been listening to Masters in Business on Bloomberg Radio.