tv The David Rubenstein Show Peer to Peer Conversations Bloomberg March 31, 2019 10:00am-10:31am EDT
♪ david: the legend is you began trading convertible bonds out of your dorm room. ken: when you make a few thousand dollars as a freshman, you are rich. david: but the time you graduated, did you say, i am now going to do this full-time? ken: i became boy genius but i knew i was lucky. david: how does somebody invest at citadel? ken: we have been closed for a long time. david: even from interviewers, you wouldn't take anything. [laughter] david: your parents must be proud of you. ken: i'm certain mom is proud of me. david: does she ever say, where do you think the markets are going, where should i invest? [laughter] ken: mom is all set. >> 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? let's start with your beginning. you grew up in florida. is that right? ken: i was born in daytona beach. my father worked for the space program. i grew up in florida, wisconsin, we went to texas for a brief period of time, back to florida. david: you applied to many colleges, and applied to harvard. were you surprised to get in? did you think you would get in? [laughter] ken: david, i have spent my entire professional career working on probability.
odds, stocks, up versus down. when i applied to college, it was the same game. in the dark ages of using a typewriter, i typed out 13 different college applications. david: ok, and your chance to get into each of them, you applied to 13 colleges? ken: i will get into one of them. david: you were president of the math club at high school. i guess you are pretty good at math. ken: i was pretty good at math. david: you got into harvard. when you got into harvard, did you decide to go right away or did you see if other schools would accept you? ken: that was a complicated story. ken: my father's business partner was a princeton graduate. princeton was my first choice. my father had a falling out with his business partner. that was just before the time i was picking where to go to college. my dad said it would break his heart if i went to princeton. and, i went to harvard. [laughter] david: well, that has broken the heart of the princeton development people. [laughter]
ken: one of my partners at citadel, who i have had the pleasure of working with for two decades, served on princeton's investment committee oversight and has done wonders to help princeton feel better. [laughter] david: the legend is you began trading convertible bonds out of your dorm room. ken: that is true. my freshman year, and i am at bloomberg, so i have to say my gratitude for the press, i read this article saying the home shopping network was overpriced. having read this forbes article, i bought contracts and home shopping network, and low and behold, the stock cratered shortly after i bought these puts. when you make a few thousand dollars as a freshman, you are rich. this is the moment you have dreamed of. that was what really started my interest in trading. david: you have never been that
involved in it before? ken: i'd never traded a financial asset before then. david: your classmates are doing presumably other things, not worried about convertible bonds and arbitrage. what did they think about you? ken: i was an anomaly. my classmates and i, we debate politics rabidly, we would have fun playing soccer in the yard and hope not to run into a tree. and you have your friday night fun. it was a college experience. but, i spent a lot of time at baker library trying to understand and learn about finance. david: the story is you installed a receiver in your room so you could receive data. is that true or a legend? ken: it is true. this is the early days of harvard saying no to any form of business on campus. the supervisor of the building gave me permission to put a
satellite dish on top the building so i can have real-time stock quotes. this is before the days of the internet. david: did you have a roommate who said this is not a good thing to do? [laughter] ken: i purposely chose a single so i would not have a roommate i would annoy every day. david: by the time you graduated, did you say i will now do this full-time? ken: timing is so important in one's career. you're going to love this. when i started in arbitrage, i literally launched in september of 1987. i was very confident as to how this portfolio would behave in a bull market, and uncertain in a bear markets. the mathematics on the way down are more nebulous than on the way up. i was short more stock than my back of the envelope math would tell me to be short. what happened a month later? it was the crash of 1987. and so, at that moment, i became boy genius.
i knew i was boy lucky, because i was shorting the market intentionally, but outside investors said this person is a genius. he made money during the crash. that was a defining moment in my career, the crash of 1987 and being that short gave me a track record early on that was attractive to investors. david: so you graduate, you say you are going to set up my own company. your family said you are too young, or did they say this is a good idea? ken: i was incredibly fortunate. my father was the first generation to go to college. he was one of seven. my grandfather worked on the railroads. my parents always placed importance on education. on my mothers's side, my grandfather was not for it. he literally borrowed money from my grandmother's mother to start a business and ended up in the fuel oil distribution business. that entrepreneurial bug was part of my mom's life.
she grew up in a family defined by my grandfather, who was a maverick. the idea i would try to pursue this dream to my parents was very much just go for it. david: who made the trading decisions? ken: i was very fortunate to have hired a handful of colleagues who understood the products and had very good judgment. what was most important in my life's journey is we traded 24 hours a day from almost day one. we traded convertible bonds in the united states, japanese equity warrants in tokyo, and the convert market in europe. why was this so important? because i could only be at work 13 to 15 hours a day. i had to learn to delegate. if i look at our success over the last 30 years, it really comes down to have learned, to trust people, to trust their judgment, to delegate. david: are you someone who holds
onto to the market until comes to your knowledge and wisdom, or get out when it's going against you? ken: first of all, the market is rarely dead wrong. the history books are littered with people smarter than the market who lost all the money. when you're in an investment and it is not working out, you need to step back. what don't i understand in this situation? if you really think you have resolved all the unknowns, you stay with your position. david: before we went through the great recession, how big was your company in terms of employees or assets under management? ken: from 1990 to 2008, we grew from effectively three people to right around 1300 to 1400 people, $25 billion assets under management. david: the great recession comes, and how did you survive it and how close did you come to not surviving it? ken: survival is the right
choice of words. it was the only moment in the history of citadel that our actual existence was in question. david: did you think it might not survive? ken: i will make it very clear. i would go home on a friday. if morgan stanley did not open for business on monday, i would be done by wednesday. if you remember morgan stanley, the question was with the japanese following through on the financing commitment. their very existence was in question. you quickly come to terms with the fact we may not survive. it may be an exogenous event in some sense that causes us to fail. i have to accept that reality. now that i have accepted that reality, what are the best decisions we can make to survive? that was the playbook we came to work with every day. we are going to fight to survive knowing we might fail, but we are not going to give up. david: how does somebody invest with citadel, and is there a minimum? how long should they hold the money with you? [laughter]
david: now you have built your business up in the hedge fund world to what size level now? ken: $30 billion. we have been there the last three or four years. david: do you make the investment decisions, or do you delegate investment decisions to your investment professionals? ken: we have then here about 30 or 40 minutes. in our hedge fund today, we will trade about 3% or 4% of the entire u.s. equity turnover. no blackberry, no phone. 99.9% of decisions we make my colleagues are making.
i firmly believe i want the individual closest to the information who has good judgment to make the call. there is no way from my seat i am going to be able generally speaking to make a better decision than my analyst who has covered xerox or amgen for a decade. there's no way i will make a better call than they will. david: it is said you have spent a very good amount of time recruiting good investment specials. is that a big part of your job, recruiting others to come to citadel? ken: i have interviewed ballpark 10,000 people in my career. so recruiting -- i will leave today and do two interviews today, two tomorrow. i am always looking for talent. david: if somebody is watching this and they say, i will be interviewed by ken griffin, what should they do in the interview to make you like them? [laughter] ken: what is interesting is make you like them is a cognitive bias in interviewing people.
you want to avoid being caught in that trap. i am looking for two key drivers in a candidate. i'm looking for their passion. do they actually love what they do? do they love the problems they work on? there was a young woman who worked for us 16 years ago, a year or two out of ivy league school, i forget which one, and her boss says, she will leave. she is incredibly talented. she wants to go to medical school. you need to convince her to stay. i said, with all due respect, the minute she walks in my office, i will offer to write her letter of recommendation. if she wants to be a doctor, the world needs another great doctor, and i want to make that happen. what is the passion of the individual in this field? that is what i'm looking for. because that passion is what drives our success.
the second is i am looking for clear accomplishment. i'm looking for individuals that have a demonstrated track record of having made good decisions and accomplishments in their life. david: how does somebody invest with citadel? if they want to invest with you, is there a minimum, and is there a certain rate of return that that person should reasonably expect? and how long should they hold the money with you? [laughter] ken: so, i am going to be the bearer of bad news, we have been closed for a long time. we are not actively soliciting new investment. david: even from interviewers, you would not take any money? [laughter] ok. ken: you fall into one of my idol categories. heroes i will figure out how to solve for. that is an important statement. your success is an important story that helps to encourage the next generation to pursue a life with vigor and with
passion. leave that aside. we are closed to new investment. david: your wealth has created opportunities for many things, including philanthropy. how do you decide which are philanthropic gifts will be? ken: i am in bloomberg's corporate headquarters. michael bloomberg's gift to jon hopkins makes what i have done seem pretty immaterial. congratulations, michael, for completely setting a new bar for all of us to focus on. nothing is more important to american competitiveness than education. there is nothing more important. it starts at preschool and goes through our greatest universities. i have done a lot of work in k-12 education. the numbers involved are staggering. if you look at a city like chicago, we will spend about $5 billion a year in k-12 education. here is what is incredibly regrettable. we know how to educate youth in america, we just choose not to do it. it is heartbreaking.
in that arena, i spend more time on the political front because it is our body politic letting our kids down. it is inexcusable. it creates so many problems we face today. i wish elizabeth warren had 1% the passion to fix k-12 education as she has to attack those who have been successful. on the issue of higher education, america leads the world. this is not a given. this is not a given that we have the greatest universities in the world. but i want to support american education. david: you have been very involved through art institutions. what is the appeal of art collecting to you, and where do you keep most of your art? [laughter] ken: i have a painting at home that i did. it is so profoundly ugly that it is beyond imagination. i have zero artistic skill.
my maybe my love for art reflects my admiration for talent i am so dearly lacking in. it started two decades ago in new york. they were auctioning off an iconic sculpture. there was a girl, about 14 years old. she is so determined, she will not be put in her place. it appealed to me so much. that was the pivotal moment that started my interest in art, that work. it was that work. for the record, i was outbid. i was outbid. i tried to buy it. hammer went down. i wasn't going to go that far. i have never been so frustrated in my life. david: you've probably never been outbid again. ken: i have been outbid again. there is some level of discipline. but, i hung up the phone the next day and i offered more money to the buyer. that was my start of my passion in art. i really do believe art is one areas where we can find common
ground as a society, we can find appreciation for art that brings us together. my art collection is in the art institute in chicago. it has been there for years. david: are you going to have your own art museum? some people build their own museums. are you thinking about that? ken: no. [laughter] ken: i am not. for me, 700,000 to one million people a year will have a chance to see some of the greatest works of art of our culture that i am fortunate enough to own, i have great satisfaction in that. david: what is your view on political matters and freedom? and things related to that? ken: it is important that we as a country embrace freedom of speech, freedom of opportunity, freedom of what our founding fathers put their lives on the line for. that is important to me. so candidates that really support personal rights and personal liberty, on all causes, are important to me. ♪
david: so you have bought the most expensive apartment ever in new york city and maybe in the united states. you have bought a lot of property in palm beach and other places, london. you can't live in all these places, so what is behind it? [laughter] ken: you and i would probably be in competition for hours spent on a plane. i think i spend 800 hours a year on a plane. i am actually in new york every single week. we have hundreds of employees here. we pay the new york investment banks roughly $1 billion a year in revenues. this is my second home in some
sense. this is home away from home. i have three little kids. my ex-wife and i debated do we make new york home? the apartment represents the possibility this might be home for me and citadel might be headquartered in new york one day. i am frustrated by the political winds in the city. amazon opting out of new york is heartbreaking. it is heartbreaking. because when you bring a firm that has such a great user of technology into your city, it is not just about the success story of amazon, it is about the fact you have a talent magnet that creates an entire ecosystem of success stories around it. they plant the seeds of other success stories. david: you are a successful businessman, philanthropist, art collector. your parents must be proud of you. do they call you tell you how great you are, still give you advice? ken: i am sure my mom is proud of me. just as i am proud of my children. we are all proud of our children.
my mom -- we don't talk about it much. i saw my mom yesterday. i was at a conference in boca raton. my mom's down there for the winter. we had a quick drink together. i got parenting advice. how to be a better parent. we talked about raising children. because that is near and dear to my heart. i have three little kids. mom is going through in high school, here is how i thought about trying to encourage your interests. david: does she ever say, where do you think the markets are going? where should i invest? does she invest with citadel or do her own thing? [laughter] ken: mom is all set. [laughter] mom is all set. mom does not need to worry about it. david: let me ask a couple of final questions. you have been somewhat involved in the political world. as a donor to republican causes very often, and conservative causes. can you state your view on political matters and freedom and things related to that? ken: i have supported candidates on both sides of the aisle.
i do live in illinois. which means our mayor's race, for example, i get to pick who as a democrat will be the most business-friendly, education-friendly candidate i can find. you would probably know this, i was an early supporter of president obama because he came to me to be the education president. you want my vote, my support? that is the issue. you come to me and say i will fight for education in america, i got your back. that is number one. number two is freedom. in our country, a government that can take care of all needs also takes care of having left us with no freedom. it is very important that we as a country embrace freedom of speech, freedom of opportunity, what our founding fathers put their lives on the line for. that is important to me, and so
candidates that really support personal rights, personal liberty, on all causes, are important to me. david: will you ever be a candidate for office yourself? ken: i don't know. we live in a post-altered reality in politics today. [laughter] ken: facts no longer seem to matter. that's hard for me to understand how i would be a candidate. if i was a candidate, it would be on the substance of how america would be successful, how we have our individual rights protected. i don't do well in a debate untethered to facts. david: you obviously have many years ahead of you, but do you ever think about what you would like your legacy to be as you got older? ken: david, i am 50. [laughter] david: i know, young, but bill gates retired almost at 50. john d. rockefeller retired in his late 40's. you haven't thought of retiring at a young age, like 50? ken: rockefeller grew up in a different era. knock on wood, we will live much
longer, much healthier lives. i really hope to contribute to society for decades to come. whether it is in the business realm or philanthropic realm, i want to be relevant to society. i am very fortunate to know how to build teams and make things happen. that was not a gift given to me. that is a lot of trial and error. a lot of learning. if you look at citadel, we are so successful. we are far more than the sum of the parts. we are far more. when you can put together the right team with the right mission, you can accomplish great things. what i am most proud of is how we have reshaped financial markets around the world with citadel securities. if you look at interest rate swaps, for example, we have helped to create a competitive dynamic. that is money that goes right into the bottom line of pension plans, corporate treasuries, and other parts of society, and not
into the wall street value chain. by bringing competition into the securities markets, we have created a huge creation of value for the end users of this product. david: i want to thank you for an interesting conversation. if you ever open up your fund again, which you let me know? ken: absolutely. [laughter] [applause] david: thank you. thank you all. ♪
jonathan: "bloomberg real yield" starts right now. ♪ jonathan coming up, concerns -- with junk debt in the united states delivering its best quarterly gain since 2009 even as the market continues to price in doom and gloom elsewhere looking for a rate cut . we begin with the big issue despite all the attention it has been a global bond rally. >> i think everything looks great and bonds.