tv The David Rubenstein Show Peer to Peer Conversations Bloomberg December 23, 2018 3:00am-3:30am EST
♪ david: you met your wife in high school? michael: we met in seventh grade. david: so you didn't date around when you were in the seventh grade? [laughter] david: can you explain how you kind of invented high-yield bonds? michael: to de-risk america, you don't want to be dependent on a handful of banks. david: you came down with prostate cancer? michael: i have lost 10 relatives. david: what is it you did that helped change the way finance things? michael: we collect data. david: do you have regrets in your financial career? michael: sure. >> would you fix your tie, please? david: well, people wouldn't recognize me if my tie was fixed, but ok. just leave it this way. alright. ♪
david: i don't consider myself a journalist. and nobody else would consider myself a journalist. i began to take on the life of being an interviewer even though i have a day job of running a private equity firm. how do you define leadership? what is it that makes somebody tick? you signed the giving pledge, agreeing to give away half your money. what did your children say about that? [laughter] its interesting. -- michael: well, it's interesting. they've been involved in our philanthropic efforts since they were young. and my wife, lori, lori defines wealth as she can buy any book she wants. and so, i think that has been instilled in our children from the very beginning. david: you met your wife in high school? michael: we met in seventh grade. david: seventh grade, and you 've been married for how long? michael: well, we just
celebrated our 50th anniversary. [applause] david: ok. so you didn't date around when you were in the seventh grade? you just -- [laughter] michael: we dated maybe once in the ninth grade. david: ok. michael: but she knew who i was, i knew who she was. she was voted in high school the most likely to succeed. so i wanted wanted to hang around her as much as i could. [laughter] date: what were you? you weren't voted that? michael: i was voted the most spirited, friendliest at that time. michael: so you grew up in los angeles, is that right? michael: yes. my father was a lawyer and accountant. and my mom was a homemaker. and yes, i got to work -- anyone who is the child of a person has his own accounting firm, you get to work on balance sheets and tax returns when you are eight. [laughter] david: ok. did you, at the early ages, word -- were you a pretty good student?
michael: oh, i was a very good student. what they did instill in all of us was for us to have a meaningful life, at least everyone had a chance at a meaningful life. and if our children or our children's children were going to have a meaningful life or good life, then all children had to feel they had that opportunity. and that was instilled with us. david: so you go to berkeley and you're going to major in science and be a scientist and so forth. what happened? why did you change? michael: on august 11, 1965, what became known as the watts riots occurred. so i didn't have to go to vietnam. there are armed personnel carriers on the street. the city is on fire. and it took a while for me to convince my dad to let me go and understand what was happening, because i was convinced i knew everything. and i met a young african-american man who was sitting outside looking at a
building that had burned down that he worked in. no one would give any financial support to his father or him because he was an african-american. and it struck me that i thought i knew everything, and now everything i believed, a chance to succeed based on your ability, not who your parents were, not where you went to school, not your religion, not whether you're a man or woman, that this individual had made a rational decision watching the burning down of the building that employed him, and that he felt that he wasn't part of the american dream. so i went back to berkeley, changed my major to finance and business. and was determined to change that so everyone felt they would have access to capital based on their ability. david: you majored in finance, and then went right to business school at wharton. is that right? michael: that's correct. david: you had the highest grades in the history of the school, more or less?
michael: there's that rumor that happened, yes. [laughter] david: ok. so you graduate and you are working for drexel, a leading, prestigious firm then. it's said you discovered the idea or help to propel the idea that investing in what's called high-yield bonds was a better investment than investing in, let's say, investment-grade bonds. is that, more or less, it? michael: it is. one of the ways i was able to convince the firm is i took a look at the stocks they were recommending, and most of the companies were not investment grade. so here, they're suggesting you invest in the equity of businesses, but not suggesting you could buy preferred stocks, other part of the capital structure. if we look at it today, david, you know the rating agencies -- about the lowest you can be rated before you go bankrupt and then you get a d, is a triple c.
well, let's think of three firms that are in the news today. uber, the company is worth tens of billions of dollars. it doesn't have a lot of debt relative to its equity. well, it's rated triple c. you're talking about tesla. doesn't have a lot of debt relative to its equity. it's rated triple c. and or you can go to wework. they're rated triple c. so what i discovered is quite often the future, in credit, is rated low, even though it's the future. and the real risk lies often in companies we think of as establishment or have paid dividends for a long time. david: all right, so you're doing reasonably well, living in philadelphia, and you go up to new york, commuting back and forth? michael: the person who was the chairman got into a serious accident, so they asked me to go to new york and set up the bond
department in new york for the firm. so i had my 2.5 hour commute each way. david: and you're doing that, at what age were you? michael: i was 24. david: so you're 24 and they're having you set up operations to lead the effort in new york? michael: yes. david: ok. did you, like, try to look older than 24? [laughter] michael: you know, it's funny you say that, david. in 1974, i'm in hartford giving this talk to the insurance companies. and a person said, we have a lot of young people coming up here. we generally don't like to listen to anyone under 30. i said, i fully understand that myself. and so, i was 30 for a number of years. [laughter] david: so you told people you were 30, ok. so you, ultimately, your father comes down with cancer, melanoma. and you decide you want to move back to be closer to him. so you went to people at drexel and said, i'm moving the operation to l.a. whether you like it or not? is that how it worked?
michael: this was an unusual period of time. all these theories that i had at wharton and berkeley, everything i had studied for from 1965 to 1974, i was able to apply. and all these theories turned out to be true. and the modern capital markets began. but my mother in law had breast cancer and my father had melanoma. and i could not solve the melanoma problem for my father. so i didn't really get to bask in the sun of your theories in finance, and markets, and change that occurred because i now faced really the first problem in my life that i could not solve. my father was dying. and i made the decision, we had two young children, that they needed to meet my father and spend time with him before he died. and therefore, i was either
going to take a sabbatical or i was going to move the whole department to los angeles. ♪ david: can you explain how you kind of invented high-yield bonds for people to get new companies off the ground? michael: growth companies. they were denied capital. and so to de-risk america, to de-risk the entire system, you don't want to be dependent on a handful of banks. ♪
david: ok, so everybody goes out to los angeles and they fall in love with the california lifestyle, i guess, and they're probably not wearing ties to work or anything like that. is that true or? michael: well, they're not wearing ties to work. i had the clocks set a new york time, so when you came in, at 4:00, it said 7:00. psychologically gives you a boost. david: you have to get up at 2:00 to do that.
michael: mmm, 3:00. [laughter] david: ok. michael: but then at 4:00, you send them back to l.a. time and you get your second wind. david: if someone wants to start a new company, they had to come to somebody like you and you would give them high-yield bonds. can you explain how you invented high-yield bonds for people to get new companies off the ground as opposed to traditional today venture capital? michael: i would take you back to 1974. so, what happened in 1974? the banking system had to save itself. growth companies, they were denied capital in this period of time. and therefore, once you saw the performance, the decision was, you don't want to rely on your financial institution for access to capital. and so to de-risk america, to de-risk the entire system, you want to have 10,000, 100,000
institutions like carlisle who could invest. you don't want to be dependent on a handful of banks. in 1998, when the asian crisis started in thailand, there were five banks that got in trouble, but they were providing the capital to everyone in the country. so, to understand the future, so if cable is the future industry, of course it's going to be rated very low at the beginning. but if you can find the most talented people and give them capital to grow, and that was really the mixture. let us go find people that are talented. so, you mentioned rupert murdoch. rupert wanted to build a company. he has passion for what he's done. he almost lost his company when he was in school in england and his father died in adelaide and
they tried to take his family company. he remembered that. but he wanted to build something. ted turner wanted to build something. and so you're interacting, craig mccaw was in cable, radio, television. they were willing to give that all up for cellular. you wanted to find that individual who had passion for what they were doing. and if you believed in them, finding great people and backing them is obviously one of the great decisions. and so bringing capital to them, they might be low rated. and there were only 500 companies in america rated investment grade. so you can imagine, i'm coming to wall street. i have millions of companies. and everyone else is focused on 500. and those 500 don't create jobs. david: did you ever have somebody come to you if you didn't finance them and they turned out to be successful later? did that ever happened or? michael: i'm sure there were, but there were plenty where the
idea did not make sense. you know, i remember we had a presentation on investing in an oil and drilling business and an oil exploration business. and we brought them in. and we wanted to see their data. and about an hour into the meeting, i asked them what technique they used? closeology. i think one of the things i've discovered over the years is if you don't understand something, ask what it is. a lot of people don't ask. they don't want to show they don't know. and i'd never heard of closeology. so their drilling technique is they see where others drill and get as close as possible. [laughter] michael: there's no geology. there's nothing going on. david: ok. michael: so we decided not to finance that company. david: you're at the height of your power. you're the most important person in finance in the u.s., i think
most people would probably say at the time, and then all of a sudden, people didn't like what you're doing, investigate, and ultimately, you leave drexel at a very important point in your career. michael: you might have felt i was the most important person. but i don't feel that way. the most important person is the person responsible for running that business. we can help create the capital structure, but the other person is responsible for the business. we can coach him. we can talk to him. but, yes, long before i left, in the mid-1980's, there was legislation introduced in america to ban the deductibility of interest for noninvestment grade debt. so if you're one of these 500 companies, you're entitled to borrow and deduct interest, but if you're not, then you're not. we were surprised by the reaction of congressmen and senators.
one of them told us if their state has to sacrifice to get rid of the scourge of junk bonds -- by that time they were junk bonds -- that they would sacrifice that. so the idea that you were going to deny capital to smaller and medium businesses who, at this time, were creating at this time 100% of all jobs, it reminded me of the nobility in england with the mercantile class. where you went to the king and said, ok, we can no longer compete with these businesses or these people, so therefore, you have to deny them access to capital. david: you ultimately left the company and you started different businesses, and then you came down with prostate cancer. you were told that you didn't have very long to live, is that right? michael: it spread through my body. so i actually had to lay down for almost 24 hours and think about it. i had lost 10 relatives to cancer. and so i had to think, ok, what can i do differently than they
did? so the first thing i decided was i'd stop eating anything except fruits and vegetables. this idea that it may be something i was eating that was accelerating the growth of cancer. second, i reduced stress. i had just come out of an extensive stressful period. me versus parts of the u.s. government. and so i started meditation. and i had to do something different to survive. i went and visited doctors in china. healers from russia. witch doctors in africa. indians in the northwest amazon. david: what did you conclude? any of them know more than the western doctors? michael: i didn't have a lot of faith in the healers, but the one that i embraced was from india.
and i moved a doctor into my house for six months. and the herbs, the meditation, the chanting, and i took these hormones. i felt that there was an opportunity here using immunology to change my outcome. we need to accelerate research if i'm going to save myself, or i'm going to have to change how medical research is done. we created camp cure, and the promise was we're going to double the money going into medical research. we're going to triple the money for cancer research. david: for prostate cancer. michael: and we're going to increase prostate cancer tenfold. david: today, you're in remission.
michael: i'm in suspended animation here. but i'm in a, you know, you could say i'm in remission. i have celebrated my 25th year. the death rate from projected levels has fallen by 82%. there are millions of men alive today. i can see the end of cancer as a cause of death with treatment. the changes that have occurred in bioscience are so dramatic, particularly immunology. david: what is it that you did that helped to change the way we finance health or look at it? michael: i would say first, you collect the data. if you're going to accelerate science, it has to be based on basic science. so first, data. let's check your micro-biome. let's sequence your disease if you have it. and then let's give you something that'll work for you. david: you talked about health. are you an exerciser? michael: yes. i would say it's two thirds what goes in, and one third the
exercise. david: so what do you -- are you a sports person? just gym? what do you do? michael: here's one of my problems. when i was 12, i was 5'11". now at 72, i am 5'9.5". and i did not grow one quarter of an inch from 12. so i was a star basketball player at 12, player of the year. then something happened and everyone else grew two inches and i didn't. i went from center to forward to guard to the bench to the stands. ok? [laughter] david: do you look back on your remarkable career and have any regrets in your financial career? michael: sure. ♪
david: let's talk about other things. -- other things you're doing in philanthropy. you're very involved in education. why is education so important? michael: when i was in elementary school in the 1950's, only 20% of jobs required a skill. today, whether it's a skill or semiskill, 80% to 90% of jobs require some skill, some knowledge. and i think when we studied education in the 1970's, what we discovered was the united states was the most educated country in the world. and so other countries have now caught the united states and passed. and so, yes, we are the leader in higher ed. as you know as the former trustee of so many of them today, but we are strained in many ways in education, so our whole emphasis and foundation was education. and that's why it was launched,
and it really was the education i got, that we didn't focus on the schools for our employees as much as we should have. david: as you look back on your remarkable career, any regrets of in your financial career? michael: sure. there are a few people i wish i would have never met. ok? [laughter] michael: or a few phone calls i wish i would have never returned. but i think also, i regret that the american public didn't understand. almost every person is high-yield junk. you know, when things started coming from japan in the 1960's and 1970's, everyone said they were junk. it's junk. and then all of a sudden we felt , by the 1980's, the quality of their products and cars was better. everything coming out of china was junk. the american public didn't understand they were talking about themselves. 60 million jobs being created by non-investment-grade companies in the latter third of the 20th century. minus jobs being created by investment-grade companies.
and i think going forward, i'm going to devote a large percentage of my time here to what i call living the american dream. david: you're creating a center for the american dream, so why don't we conclude with what you think the american dream is all about? michael: i think the american dream, which is so unique, is the chance to succeed based on your ability, your willingness to work hard, your knowledge, your insight, which is one of the most valuable qualities. now, i can't tell you how depressed i am when i see that 26% of americans under 30 think they're going to have a better life than their parents. a long time ago, it was 90%. of americans. so why do they feel that way? why do 50% of americans under 30 think socialism might be better than the free enterprise system? you can see socialism in
venezuela playing out. and so, something is missing. and i think, as i've been focused on it, one, it's hope. what i see is a large percentage of americans don't see that hope. they have their student loans that are burdens for their entire lives. even if you go bankrupt, you can't get rid of your student loans. we have to eliminate student loans. we have to find another way to finance college. two, someone tried to take their parents' homes in 2008 or 2009 or 2010, or they lost their homes. so, their interaction with our financial system, they haven't really seen the benefits of it. we need to make sure that the financial system is working for them. it needs to and it should. and it starts with education and it starts with health, and it starts with access to capital. so for me, i'm going back to where i was 50 years ago.
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