Transcript
0:00 I will tell you is that a lot of my time in IPO a and again and IPOC was curating the list of investors that you know I would work with and when I look at the list of people that I essentially allowed into the deal of the amount said that they did these are because these are folks that have proven to be long David thoughtful people who can take risk but understand businesses look let's shift the topic for one
0:29 second and we can come back to this what I want to talk about is why I make the comments that I did and why it touched such a nerve there's an interesting fact stuff that you should know which is that just indeed more than ninety cents of every single dollar of profit that they've made over the last eleven plus use the federal government as well as the Fed between monetary and fiscal stimulus combined have essentially transferred around seven trillion
1:00 dollars now back to those tech companies as well as you know companies slightly smaller than them and I think why I was frustrated is that I just think that that kind of behavior makes no sense and instead of being punished it has been a rewarding and if you ask me why here's how I would explain the job of a CEO especially of a public for-profit company is to be a fabulous allocator of resources and there are only two kinds
1:31 of resources that a CEO controls that matter the first is human capital right the people that work inside of your company and the ideas that they have the products that they make and the second is financial capital the money that you take to invest in great ideas to protect for the future to prepare for whether it's a pandemic or a shock or a recession or a competitor and the best capital allocators become the best CEOs so if you take a kid company like
1:59 Facebook or Google there are very capital asset like business so a lot of their skill is in peeking great people so pigs up he picks Sheryl Sandberg he picked me he put us in positions to build that business he's a fabulous human capital allocator on the other end of the spectrum date Buffett he has no human capital inside of Berkshire it's all financial capital but he's a fabulous capital out or you take Jeff Bezos the case in the middle
2:23 where he has both of those two things in all cases great CEOs or great allocators of Packer when you do things like buybacks and dividends what you are essentially saying is for throwing your hands up in the air and declaring to the world I do not know what to do with this money and instead of decided to save that money to try to do MMA to try to invest in R&D to pay your employees more these people
2:50 have given it back in an open market purchase now let's look at that for a second why is that a stupid idea well it's a stupid idea for two reasons the first is that it disproportionately only benefits the executives and the CEO and the board because those are the ones that disproportionately get most of the stock inside the property and it disproportionately benefits those specific hedge funds that were agitating for that behavior enacted we who take a
3:15 short term position and allow themselves to participate in short-term problems and now what happens is the people that believe lease in the company ie the people that sell the stock get rewarded and then who's left holding the bag the people that believe in the business let's take a specific example Scotty you can see how bad this is IBM over the last you know decade has spent 140 billion dollars on bypass this is a company with a hundred billion
3:44 dollar market cap the last CEO found a way to oversee 24 consecutive orders of revenue decline and four that was still able to compensate herself a hundred million dollars of stock based on not if you look at all of this kind of behavior and you can say how is this supportive why aren't all these companies trying to figure out how to be more resilient and it turns out that the incentives were so skewed away from being resilient it was
4:15 only focused on short-term profiteering for the sake of the managerial plastic and the hedge funds around that and the IBM is is a you could say a convenient example for you to use yes they fought back a lot of stock the stock performance over the last many years has not been good the business performance hasn't necessarily been good either I take their point on that however I can easily come back to you and say so what do you say about a
4:43 company like Apple shamov are you saying that to cook is that a good steward of that company they've bought back arguably more stock than anybody else that wasn't one kinda like the most valuable company on earth a lot of PFP on Apple shareholders or Apple employees have been rewarded as a result of that air every a pleasurable learn people who have stayed with that company for a long period of time have been rewarded the company still has a cord of cash that it
5:09 is sitting on so what's the difference you just proved my point so let's assume you have a kid two kids one kid was called by the end and the other kid was called Apple one kid every time they made a buck spent apart the other kid saved most of that dollar and every now and then spent ten or twenty cents and then all of a sudden something happens and the first game starts to ask you for
5:32 help and the second kid is just sitting around thinking well I saved for a rainy day that is the difference between IBM and Apple and that is exactly why I think Tim Cook in many ways has done a good job because he has kept so much passion always available to do with you Warren Buffett is another great example you only do these things when the stock is low when it's below some sort of intrinsic value and when the incremental
5:56 cash is just absolutely not necessary you don't do it with the primary oxygen that you need to survive and that's what most of these companies have done and that's why this whole issue is just one of these things that really upsets people because when you work inside of the business and you yourself or giving them your entire life you're giving them your most valuable asset which is your time you expect and you should expect that the CEO and the board are
6:26 exercising good judgment and in my opinion buybacks at a primary example of the growing stress the Inc confidence amongst CEOs and amongst boards and it's where we need to start thinking about how the rules need to change so that average shareholders retail investors the stakeholders of these companies benefit more I'm just suggesting the times like this on time and in times like this this is where it gets expose so for example instead of
6:57 you know the argument against this library that people always make as well the capital markets are efficient and so when we do share buybacks we allocate the capital more efficiently into other things and what I would tell you in rebuttal is it's clearly not true in a moment where we needed an economy to be resilient what we have are people making masks of socks and underwear our primary health care workers forced to use rain ponchos to protect themselves and people
7:26 instead who actually were able to profit here from the last ten years of low interest rates and debt base buyback buying beachfront condos and art and apartments in New York City it's totally broken all I'm suggesting is that all buybacks aren't necessarily created equal I take your point well and a lot of people agree with you but a blanket statement about all buybacks I think can be flawed if you use examples like Apple
7:56 which you yourself admit was not a bad example of a company buying back a lot of stock reward and rewarding its shareholders and stakeholders at the same time so let's then let's just be more nuanced so number one if it were up to me what I would tell you is that opens open market purchases of stock by companies should be banned it was banned before it should be banned again these things should be done via tender offers number two it
8:21 should be done when you can the monster we prove that you don't need the money for other things or you shouldn't have the money for other meaning a rainy day fund or an RD you know line item or something else you know there's only a third by the ROI a third of companies in the S&P 500 that even spend on research and development I mean how about we realize in a moment like this that we actually need to read
8:45 so much of the infrastructure of the United States that it is it is decrepit and it has been left to basically decay and die in the hands of profit ears absolute realize that GDP would inform and recent Marc Andreessen wrote an essay about it in the last you know several days about you know now is the time to build those those words words and I think you you agree with what he said in the essay that he put out via
9:12 Twitter so your point is well-taken I mean it's it's undeniable it's undeniable that there have been companies that have wasted away money on buybacks and other things that would be better served used right now at a time of ultimate ultimate crisis I I totally get your point but look I I don't want to get off the original point that that I had I don't I don't feel as though I got a good answer to that if you you've
9:42 gone to the public markets today in a system that you have railed against at times who who do you think is buying your deal today it's institutions and it's hedge funds are you saying that you know you went through the prospectus of the of the investors and wouldn't let anything get in on the deal yep let me pick let me be right there I picked and approved every single line item before we closed the pricing of the deal now
10:13 when it trades in the secondary market can I tell you who owns the stock no I don't know I we will find out about certain freshmen but let me be clear when we price this deal I pick every single name okay would you ask what you're supposed to do here's the mostess or more of it folks say that you know we're trustworthy and reliable and long dated now it's not that the capital markets are entirely broken and it takes
10:44 people like me and I think I have a responsibility to do good transactions and to do things that are valuable that are not short-term you know let me just go back to burgeon for a second you know we are in an environment right now we have decided to use spaceflight as a bridge and we've talked about this publicly to build a hypersonic airplane right something that can go let Los Angeles to Tokyo in 45 minutes imagine how valuable that is in a post
11:10 pandemic world people don't want to sit 12 hours inside of a long-haul aircraft anymore people don't want to be at the airport for three hours you know waiting to go through security anymore so these are things that are hard and that are needed to be built and so am i proud that I did that transaction yes do I wish that I had tens or hundreds of billions of dollars so I could do all of these things by myself yes but I don't
11:33 and so I need partners and there are some good partners that exist in the world and the capital markets are efficient in helping me find them but equally as they are efficient they are inefficient in other words and in those ways there are ways that the rules can be changed to make things more reasonable so that when things that are exogenous or externalities happen we are all as a society not left holding the bag and that's what we are doing right
11:58 now the other point frankly is that had the Fed and the government not stepped in in the manner in which they did you probably would have been able to get your deal done at all right now because the stability that it brought to the markets it's you know you mentioned it or earlier that the markets are more calm now how would you have got those any oh that's not true that's Scott that's not true the thing that I want to
12:25 keep in mind is that you know a lot of the money that the Fed put in those consequences many of which will be unintended will only be visible in the medium and long term they are not going to be visible now you know the thing that the Fed did well before this crisis which was a necessary ability for the capital markets to function was how they stepped into the repo markets and then maybe you could claim the commercial
12:47 paper market and I appreciate that help but that was broad-based support that was you know in many ways a warning sign that there was something structurally wrong with the amount of leverage that the whole industry was using another thing that was not a pandemic related thing and so you know that's a job that that has to do and they did well but you know buying you know billions and billions of dollars of you know junk debt I'm not sure what the
13:11 long-term impacts of they are I don't think it has an effect on you know good companies running their business and I don't know what the consequences of that will be back to the stimulus to begin with you know one thing that we talked about the last time which I would like to bring up togethers we just went back to the well again another 450 odd billion dollars in and again I would just make you know a claim to you know
13:36 to the to the extent any sort of you know folks are listening that that can implement this is that we really need to think about more direct payments to people and the reason is because God when you decompose GDP seventy percent of GDP is all consumer spending meaning the United States has this incredible ability for consumers to always lead the way and they drive all recoveries it's not businesses and it's not government spending and so you know the one way
14:08 that we have tried to get money to consumers is by giving it to companies in the hopes that it trickles through those companies back to employees and what I will tell you is I think we will be disappointed by that I think that a lot of companies that got support will still be struggling when the terms of those grants and loans fall off which is September and unfortunately I think we may see large waves of layoffs that just
14:34 happen in q4 anything to Christmas time of 2020 instead I think we really need to think about direct capital injections into the hands of people and when you look at the government's all around the world they've all embraced this particularly in the developing and I would just encourage us you know there's maybe maybe not that many lessons you could claim to be learned from a developing country but this is one where I think that their level of compassion
15:02 for everyday citizens in their countries is worth copy well we're putting more money into people's hands letting consumer spending dry GDP if you try to get out of this pandemic I think is a very good and smart idea we certainly need a more efficient way get the money to the people who actually need it it's one of the reasons why Harvard Harvard's acceptance of money through the cares act not necessarily the PPP program cause some level of
15:31 outrage including from you I mean that that is that's a science I think Lee Joanne what people are using their to it's a complete joke and it's a perversion of what this program is supposed to be and this is what I mean by you know it'll take a while Scott for us to really figure out the unintended consequences of you know if there are multi millionaire mine developers that are getting PPP but not small businesses that really employ one or two people or
15:56 you know that they work with banks that don't have the conductivity into the government whereas the large banks were able to facilitate and mobilize credit or payments to their best businesses all of these things are probably what happened back to your first point I just want to make sure that I you know touch this the IRS knows how to give money to every single citizen taxpayer of the United States they know this they know how to do it tomorrow it could cut a
16:25 check tomorrow it'll be the least complicated thing we've ever done because we've done it for twenty you know for hundreds of years video but there are others who have suggested like you know Gary Cohn for example during the town hall we did that if you would have had the payroll processors who know everybody they know everybody who is least getting a paycheck and then we can do other methods to more efficiently find out who needs money as well who's
16:49 not through the payroll so here's it you know they return to them immediately here's another example look leave we're we're going to spend trillions of dollars of US taxpayer money on junk debt there's a trillion dollars of US student debt that sits at the Department of Education there's nothing stopping the Federal Reserve from retiring from that been massively simple straightforward easy way to drive consumer spending to give money into the hands of consumers to do something right
17:16 for individual u.s. citizens and taxpayers that's another idea my point is it's right now we are way too tilted into things that are opaque that are difficult to administer and that may not have the intended consequences we every dollar that we've given a fiscal and monetary you know what we're talking about is less than five cents that has gotten into the hands of a US consumer all I'm saying is why not 10 or 15 cents or 20 cents and eat most of the other
17:45 programs as they are or why not be incremental spending going toward students better towards direct payment speak to us taxpayers these are not bad ideas and in a moment like this when we've already done it once and we've already ripped the philosophical band-aid off there's nothing stopping us from instead of saying here's two weeks to say here's two months or here's you know six weeks we are that compassionate and we can be that compassionate and I
18:11 don't understand instead why we continue to defend practices that were not justifiable at any point in time but particularly in a moment like this where we can see that an entire US economy was completely unprepared for any form of externality or exhaustion Ishod I would hope that we're all on the same page here in terms of believing the things that you're saying about people who need money and need it now in the most efficient way possible I'd like to
18:41 believe that we're all on that same page I want to get back to something else regarding this this conversation and discussion debate however you want to characterize it off on bailouts when you mentioned galactic earlier Richard Branson is essentially asking the British government for a bailout of some 620 million dollars he's the seventh richest person by the way in the United Kingdom should he get a bailout it's up to be UK government it's not up to me
19:10 this has nothing to do with Virgin Galactic no of course it doesn't have anything to do with Virgin Galactic but you do business with mr. Branson if you're against bailouts here what's the difference he's asking for taxpayer money should he get a bailout right so as a US citizen I told you what the u.s. you do I cannot decide what the UK government should do whatever Bojo wants to do he has proven he will did and I
19:34 think richard has a claim to make just like all the US airlines and a claim to make and that in each society if you're if you want me to tell you what I would do in the United States like I said people get confused by the difference between liquidation and insolvency in Australia what Richard did is now he is going through a process of insolvency and bankruptcy protection and I think that these are historically been thought of
19:59 as bad words but they're not these are the safest ways in many ways to preserve employees to preserve their jobs in to preserve pension so I applaud him for doing the right things and if he does get aid he'll do the right thing he's an honorable good person oh I'm not suggesting he's not I just want to have a conversation on you know if some bailouts are bad and others are good we're talking about Airlines which we
20:22 discussed last time who should get paid it all depends and who got it all it depends on the terms in the United States here's what I know for sure I don't know the terms of what's happening in the UK or anywhere but like the United States thirty cents of all of these dollars became grants that are essentially tied to a fig leaf which is that you're not going to fire folks until September 30th now the plan was a
20:42 betting man which I am it just means that it just stalls the inevitable into q4 and so you're gonna have to ask yourself when the money gets spent other people still get let go what did we accomplish what did we accomplish you you know reason the people of Stockholm on and the reason that people let go is it didn't fundamentally change the capital structure of these companies and unless you change the capital structure of these companies there are too many
21:09 people who have a claim to the planes to the revenue streams - you know coupon payments and unless we're going to basically you know put a pin in in sort of business law in the United States those folks will dictate how these airlines a lot this is why I said before we start to give a lot of money what we should probably do is take a step back and first clean up the capital structure of some of these businesses sure but
21:35 you've also suggested though jamaat that bankruptcy itself was perhaps a much prettier process than it actually is i just want to read your comments we can discuss this further as well when a company fails it does not fire their employees it goes through it's bankruptcy right if anything what happens is the people who have the pensions inside those companies the employees of these companies end up owning more of the company the people that get wiped out are the speculators
21:59 that own the unsecured tranches of debt are the folks that own the equity this statement though it does not fire their employees bankruptcy is not necessarily as pretty as that paints it out to be companies who go through a restructuring maybe they come back smaller they don't have as many employees their finances aren't nearly as good as they were pre bankruptcy isn't that fair I think their finances are generally cleaner closed bankruptcy and again there's a very big
22:23 difference between going through you know a restructuring process and a prepackaged bankruptcy process and what otherwise could be a very destructive process which is a liquidation those are two very different so you may be producing results in employees keeping their job some off I don't I don't disagree with that but what I will tell you is that you can minimize the amount of damage that's done so for example you know I think I read somewhere and
22:46 somebody I'm sure when Twitter will figure out the exact number but you know when Delta went to a bankruptcy in 2012 I believe they only shed a hundred and fifty odd jobs they have 55,000 employees and now they're you know if 90,000 employees so there are ways to do this thoughtfully in a humane way what I will tell you is in the absence of a restructuring of the capital structure of many of these businesses that have
23:09 taken money the bondholders will show up at the front door there will be force liquidations there will be force very very complicated bankruptcies and in that there will be lots of preventable damage and so what I think should have happened instead is before giving them a short-term loan is to require them to clean up the capital structure so that the employees of the batches of things would be safe I think unfortunately because that hasn't happened many
23:39 companies will exhaust the Lifeline the government's be able to still go through a lot of trouble in getting back to a hundred percent and and unfortunately will have to still let a lot of people go and again then they'll just push the restructuring event to further in the future and I just think you're better off taking this medicine now and not later because it damage will I want to ask you sort of generally where two weeks you know from your prior
24:04 parents the markets done a fair amount since then this makes sense to you where the market is is currently trading relative to the multitude of issues that you raised regarding well-being Street is going through here you haven't done an IPO today taking advantage of a more calm and call market but not necessarily a more sane one here you're you're absolutely right I don't understand particularly what's going on and I think right now Wall Street is entirely
24:35 divorced from Main Street there is no the stock market in my opinion and the bond market should reflect the actual state of affairs on the ground and right now it doesn't and so you know from my perspective here's what I see what I see is delinquencies of all kinds of loan payments cars homes you know general business obligations kicking out pop up which means people are less and less able or capable of pain I see you know
25:08 hundreds of thousands millions of people getting furloughed I see as approaching twenty to twenty five percent unemployment and I essentially see the stock market largely because of the practices of the bed completely ignoring the logic of what's of what's actually happened that if the stock markets were bound what actually would happen is our government officials would probably be more prone to act and particularly around the things that could directly help individuals and consumers but right
25:40 now we're in this world where we believe that has a stock market performance everything is okay and it's just not true and so you know when you take a step back and look at the disease because at the end of this all this all comes back to what we know about cope in 19 and this pandemic and the reality is we don't know any more than we knew in genuine and increasingly we're getting more questions not fewer questions so
26:04 when we thought that we're in Bezier woodwork now we don't know as much when we fought hydrofluoric and you know we proceeded through my sin woodwork now we're not sure anymore before we thought that all you could do is get the disease when you're young and everything was okay and now there's some early data that says you can actually be diminishing your long term life expectancy even if you do recover all of these things create enormous questions
26:29 to be not answered and in that I think the economy can do only you know sort of fits and starts it's not able to really get to the start line and so state by state county by county you're going to see chaos so look at Georgia in Georgia the governor said let's get back to work everything's going to be great open the bars open this open that and then the mayor said no we don't want you
26:51 guys to go out so even when when County health officials and the mayors and the governor of the state can't get on the same page and then they and the federal government necessarily can't get on the same page it sets up for a very confusing moment in time and what I would tell you is that an impact today is not something that's a one or two week recovery period and the impact today is a meaningful injury that needs
27:15 to be rehabilitated over months at five years and so the longer we're in this sort of chaotic back-and-forth process once sheltered places officially lifted I suspect that we are in a you know stop and go motion probably until q3 of next year and I think in that there is more damage that's going to be done this is why I'm so sensitive to and I'm just you know imploring folks to really think about direct payments and ways in which
27:43 we can drive you know consumer solvency and really think about the middle class and the folks that build up the base of the United States economy the you know most of the workers in the US and we're just not doing enough they are the lifeblood of who needs to lead us out no question you know you talk about like what George is doing we we hope that goes we hope it goes well we need people and want people to be able to go back to
28:14 work we just want them to be doing I to do it I think in in the safest not the south is not possible yep I understand that so the life but hope is not a strategy I hope to be able to dunk on draymond Green it's not gonna happen but it's these are things that you want to have happen but they're not rooted in fact but then should Georgia go ahead with its with whether to reopen because
28:38 people need to go back to work and we'll just see what happens well I think what we're going through right now is a grand experiment the Sherman could have would have doesn't matter the point is that there is a governor that's going to you know make a decision and that there are individual mayors and County health officials that are either going to toe the line agree with that or they're going to go in the opposite direction
29:01 and then individual citizens will unfortunately be put to the test and this is why I think that a lot of people in the absence of support will have to optimize to earn money and to make money to pay their bills and it may unnecessarily put them in harm's way and because we don't know much more than we knew in January this is why we have to give them the ability to think about their own long-term health above
29:24 anything else and unfortunately we're not going to do that so tens of millions of US workers are unfortunately going to basically say well I need to make money I hope I don't get sick and I hope it doesn't you know shorten my life expectancy but what can I do I need to pay the Ragman that's a that's a tragic thing that the greatest country in the world should be putting people in think that a lot of people would agree with
29:48 you come off we appreciate it as always you'd be well and we'll talk to you again soon I know next time Tribeca Jamaa qualia