 Hello, everyone, and welcome back to Conversations with Tyler. I'm here today with David M. Rubenstein. David has a new book out, The American Experiment, Dialogues on a Dream, but David, of course, has done so much more. He is a founding figure in private equity, and he is co-chairman and co-founder of the Carlisle Group. But also in philanthropy, David's ventures are almost too numerous to mention. He is chairman of the Kennedy Center, has been chairman of the Smithsonian, has contributed to the renovation of the Washington Monument, the Lincoln Memorial, the breeding of pandas. He purchased a copy of the Magna Carta for $21.3 million, then lent out to the United States government. It's from Baltimore, and that is but the beginning. David has done much more, but let's start talking. Thank you for inviting me. Pleasure to be here. Now, in private equity, for those who do it well, the returns that accrue, they're being paid to what scarce factor. What is the thing that's hard to have that's scarce that makes you good at private equity? Private equity is a business of adding value to a company. The theory of private equity, and I'm talking about buyouts as opposed to venture capital for the moment, in buyouts, you're taking a company that isn't performing that well, and you're adding better management or incenting the incurring employees to do a better job. And then ultimately, after three to five years, you tend to sell the company, and you typically make a return if you're good. It's somewhere 20% percent per annum. And 21% or 20% or 25% per annum is a pretty good rate of return when you compare to other kinds of things you can do with your money. Venture capital is a little different. You're taking bets on entrepreneurs, helping them, but probably not quite the same the way you would do in a buyout. But if that boosts the value of the company, what is it the private equity firm has that the company doesn't? What's the differential capacity? Well, you have expertise. You have people that have been doing, let's say, buyouts for 10, 15, 20 years. They know what makes a buyout work. They know what doesn't make it work, for example, finance it, how to add value, how to make acquisitions, how to make certain that you sell things that are probably not really doing well, or you make acquisitions of things you think will help the company that you're already owned. So it's a mystery to some people outside the industry what private equity people do. And so private equity is one of these industries where you can make jokes about the people in it. You can, very rarely in this environment, can you make jokes about almost anybody anymore without getting in trouble. You can make jokes about members of Congress. You can make jokes about lawyers, and I and others make jokes about private equity people. But the truth is they do add value or they wouldn't be as well compensated as they are. Private equity's been growing for quite a while now, right? More so than most kinds of finance have been growing. And the fee structure of two and 20. I mean, where does the 20 come from and why isn't the 20 declining more rapidly? Well, it is in some respects, and let me explain. First of all, the market, and you're a market economist, so people are getting two and 20. It's because that's what the market will say is appropriate. It's not as if people are being pushed and forced into paying people two and 20. Nobody's being forced to go into these funds. Where did the 20% come from? Well, I'll give you two examples of where it may have come from when Venetian ship owners would send their ships to Asia to get spices. The spices would be brought back in the ships and those who brought them back, who carried them back, had an interest in the profitability of the spices when they were sold back in Venice. They had a carried interest, in effect, and that was roughly 20%. That may be where it came from, but also when the first hedge fund was set up in the late 1940s, the person who set it up actually said, I'm gonna add value, I'm gonna do more than just manage it. I want a percentage of profits, I want 20%. And when the first venture firms was set up in the 50s and 60s in the Silicon Valley, they also had professionals who said, I'm gonna add value, I want 20% of the profits. And it's amazing that for all these 50, 60 years later, 20% has still stood the test of time. Obviously, some people have higher venture capital, sometimes we'll have 30%, and some people to get in the business may have 15%. But by and large, 20% is still more or less the rule. I would say two is probably not as common as it used to be unless it's a small fund. For a large fund, it would probably be one or 1.25 or maybe 1.5% and 20. If we look, say, at mutual funds, there's a lot of entry in the cost of intermediation falls. There's Vanguard, Fidelity, lower cost than what there used to be. What's the barrier to entry in private equity that keeps that number at 20? Well, one, you have to raise money, so you have to be able to have some track record to be able to convince people to give you money. It's a lot of money. And remember, you're asking people to give you money not for a day or two or three, like in a mutual fund, but for 10 years. Theoretically, these are 10-year funds. You probably get most of your money back before 10 years, but they're 10-year funds. The barrier entry is not that significant. They're now, when I started Carlyle, there are maybe 250 private equity firms in the entire world. Now, there are more than 10,000. So the barrier entry is there, but not that significant to keep people from coming in if they want to. You just have to come in smaller and prove yourself to a track record before you get to big funds. Why did private equity take so long to globalize? Well, why did anything take a long time to globalize? Private equity as globalized, as globalizations move forward, most private equity today is still done in Western Europe and United States. Probably two-thirds of all dollars invested in private equity are in Western Europe and United States, the so-called developed markets. It's now moving into the so-called emerging markets, but it's gonna take a while because the environment is not quite as susceptible to private equity as it is in the United States. There's not the infrastructure, the talent, the financing markets, the exit markets, are not quite as developed as they are in the developed markets. How would you contrast the skills of someone in private equity with the skills of someone in venture capital? Well, venture capital people are taking bets on entrepreneurs. You don't really know when Facebook showed up, everybody passed on it except Excel. So it's obvious now that Facebook was a great company, but why did everybody pass? Because they weren't sure the concept worked, they weren't sure that Mark Zuckerberg, right out of Harvard, or dropped out of Harvard, was really appropriate to do this. So I think venture capital is a more of a bet on a concept, more of a bet on an entrepreneur, whereas private equity, you have six months typically to do the due diligence, you can project cash flows pretty readily because you have previous cash flows from which you can base your future cash flow projections. I would say it's a little bit more scientific in some respects, less of a crapshoot than venture capital is. Why did you not decide to meet with Mark Zuckerberg? Way back when? Well, when my now son-in-law told me about his classmate from Philip's Exeter and his then classmate from Harvard starting a company, I remember the dating services that had been prevalent in the 1960s and they all kind of went bankrupt. And so I thought this was described to me as a dating service, more or less, a way for people at Harvard to get to know people at other colleges and so forth for dating purposes. And that's actually what Facebook was, people forget it now, but it was only for college kids. Wow, when they expanded it to non-college kids, that was an epic change, but it wasn't really part of the original plan as far as I know. So I didn't meet with them because in those days, I didn't really think that somebody who was a Harvard student was somebody that was gonna be the next Bill Gates and I just thought it was not likely to be successful. I was wrong. As you know, investment banks were once quite often limited partnerships, but now they're not. Is private equity going to undergo the same kind of evolution? And why are they limited partnerships now? Well, you say limited partnerships, you mean the way people invest in the funds? Well, there would be partners of a smaller investment bank, say the way Goldman was a long time ago, but now it's just a publicly traded company. Well, okay, so when you're talking about that concept, yes, there were funds firms that were private and they were all privately traded, Morgan Stanley, First Boston, Goldman Sachs. Now, there are very few that are privately owned. There's Brown Brothers, Harryman, and a few others that are still private. In the private equity world, most of the private equity firms are private partnerships. There are a few that are publicly traded, Carlisle, Blackstone, KKR, Apollo, maybe TPG will come public and so forth. I think CVC is another one that's public, but generally they are privately owned because they're too small to be publicly traded companies. In other words, if you manage a fund of a billion dollars or two billion dollars, that's not likely to produce the cash flow that will make a public company seem really warranted for that kind of status. But why are they partnerships? There's a lot of smaller companies that are just privately owned, right? So law firms are often partnerships. What's the transactions cost advantage of having a private equity company be a partnership? Well, when private equity firms, you tend to get people who are fairly and hardworking, fairly smart and they also have the ability to move quite quickly and go elsewhere. So if they were gonna be working for one very wealthy person and that wealthy person wasn't gonna give them a piece of the profits, they might say I can take my skills and go elsewhere. So you tend to have partnerships because you wanna share the wealth and that's how you attract very talented people. If you had a very wealthy person, let's say Jeff Bezos or Mark Zuckerberg, they wanna set up at a private equity firm to invest and they're the only partner in it. You can probably get some good people, but in the end, the really good people have the skill set will wanna get a piece of the 20% and usually these large private family offices don't give 20% of the profits to the people working there. So that's one of the reasons you don't tend to get so highly talented people willing to work just for a salary and a bonus. And typically in family offices or organizations owned by one person, they don't usually give a piece of the profits, a very large piece of the profits to the professionals there. What do you think is the best criticism of leveraged buyouts? Well, leverage always has its downsides because leverage implies that you're borrowing money and when you're borrowing money, you have to pay it back. And sometimes when the economy goes down, it's difficult to pay these back. Now in the early days of private equity, you typically would borrow, this is hard to believe 95 to 99% of the purchase price. The famous KKR deal was 95% debt and 5% equity. And some deals used to be 99% debt. Now you have maybe a capital structure of maybe 40% to 50% debt and therefore it's not as likely you'll have a default. So the risk is not as great, but there's always risk and leverage. Whenever you have a meltdown in any economy, whenever there's leverage, there's gonna be a problem because when the economy slows down, the leverage typically works against you. If you take in combined form, the tax advantage given to debt and what is sometimes considered to be a tax advantage given to carried interest, does that mean our tax system is encouraging too much private equity? Well, some people would say you can't have too much private equity. I guess somebody in the private equity world would say that. There's no doubt that there's been a favorable tax treatment on carried interest and Congress is debating that again and it's been debating it for some time. The reason it probably hasn't changed yet is that carried interest is applied to not just to buy out people and private equity, but it's also applied to real estate. And real estate is probably where 55 to 60% of all the so-called carried interest dollars are actually paid and there's a real estate developer and developers in every congressional district. So we'll see whether it changes or not. If it does, it does. Congress has looked at it for a dozen years plus and hasn't changed yet, but it might well this time. Are private equity firms now using insurance companies as a way of getting very cheap financing? Right, there's a lot of flowed. It's like with checking accounts. People just give them money. They don't expect very high returns. Well, a number of private equity firms have bought insurance businesses or are operating where they have in effect annuity contracts where they are in effect managing the money to get a higher rate of return than the regular insurance company would get. So if an annuity is supposed to pay out five or 6% a year, but you can manage that money at 10 or 15 or 20%, you have a big spread and therefore a lot of the private equity firms are now trying to get some of this money so they can earn higher returns on it and they don't have to pay out as high a return as they would for somebody who's in their regular funds and therefore it can be an attractive business if you know what you're doing, but also the insurance regulators have to be comfortable with making sure that you know what you're doing. Now if you're with your friends or peers in private equity and you're debating the future of private equity, what's the most interesting question where you might disagree with them? Like what is it you all debate and are not sure about? Well, people are always debate what's the future of private equity? Is it gonna grow as exponentially as it has over the last 20 or 30 years? Secondly, will the carried interest 20% will that survive or not? Or because of competition, as your first one of your earlier questions suggested, maybe that will go down, you don't know. Will the rates of return that private equity people can achieve be as attractive as they have been? Private equity didn't grow to this large size because of the charm and good looks of the founders as you obviously can see. They grew to this large level because we've outperformed as a whole every other asset class over the last five, 10, 15, 20, 25 years, by anywhere from 300 to 500 basis points on average, the top quartile funds outperformed by a larger amount. So as long as the returns are probably somewhere between 300 and 500 basis points on average, better than you can get in a public market index, probably private equity will do pretty well. If private equity doesn't outperform, then probably private equity won't survive. When you started Carlisle way back when, did you see that private equity would outperform the market for this long? Well, at the time, no, 1987, the praise private equity didn't even exist. They were called leveraged buyouts and it was a different world. The biggest phenomenon in that time was junk bonds and that was what was enabling a lot of people to buy companies. It was a heavy use of so-called junk bonds at the time and equity was not really that big a factor. You didn't have big equity funds the way you do today. So at that time, I didn't foresee anything like this and most business people, if you go back and look at their original business plan, you'll find that there's no relationship to what they actually became. So if you go back and look what Bill Gates, Steve Jobs, Mark Zuckerberg, Jeff Bezos were gonna do at the beginning, what they ultimately turned out to do was completely different. For example, Jeff Bezos, and I knew him at the beginning, he was just gonna sell books over the internet. That was it, nothing else. And then later, he evolved to doing everything over the internet. But so everybody changed their ideas and I changed my ideas. Initially, I thought it would be a small firm focused on Washington, but then we ultimately became a global organization. Are SPACs a good way to bypass what is now an over-regulated IPO process or is it a passing fancy? I think SPACs have come down in terms of their inflated values over the last couple of weeks and maybe the last couple of months. I think they won't go away, but I don't think they're gonna transform the IPO process to such an extent that IPOs will go away. IPOs are heavily regulated and very carefully reviewed by the SEC. Also very expensive to get one done. It takes a lot of time. SPACs have replaced that by making it easier to get things done more and more cheaply. But in the end, like anything in life, when you take a shortcut, there are penalties for it sometimes. And right now we're seeing that people are nervous about the SPAC valuations and therefore I'd say some of the errors come out of the SPAC valuations. If we look at an IPO, it seems there's very often a price pop, which might suggest there was money left on the table. There's an underwriter taking a fairly large fee. Why don't the companies just auction off the stock, say the way Google did or sometimes happens in Israel? Like what's the value added of the intermediary in an IPO? Well, when you say why do 95% of the people that go public or more do this process, are they all stupid? You don't have to say, well, there must be some reason. The reason is that when you go through this process, by the time somebody gets to buy the stock, they know it's been vetted by reasonably impressive organizations. It's been reviewed by the SEC. And while there are a fair number of fees associated with it, the fees are not so high as to discourage people from going this way. And when you price an IPO, you typically want to have about a 15% bounce the first day because you want people to buy it the first day to feel that they made a good decision and you want people to buy the stock at the opening. So it's not uncommon to have a 15% bounce if they price them for that. If you have a 50% bounce, that probably means the underwriter made a mistake and underpriced it. And if it goes down, then obviously the underwriter made a big mistake because you're going to have a lot of unhappy investors who bought it and the stock went down the first day. That should never happen, but it does. But as the future, it's simply more direct offerings because when Google went on the market, we had all heard of Google, right? Google was as credible as anyone who might have been underwriting the stock of a Google IPO. So they just sold the stock, right? Captured whatever price pop there might be for themselves. Well, Google went public through a direct process, I think at $85 a share. And now it's trading at $2,000 or $3,000 a share. So obviously it's been a great stock, but from the beginning, there was great demand. And people knew that Google had a search process that was better than any of the other search processes out there. Remember, when Google started, people said, who wants to give Google money as a venture capitalist? Because there already saw a lot of search engines out there. Google actually had so much trouble with their venture capitalist. In the beginning, the venture capitalist talked about taking the money back because Google wasn't actually performing what they said they were going to do. But when Google was ready to go public, people knew there was so much demand for this that you didn't need an underwriter probably to take off the fees that they would probably take off because their underwriting fees might be anywhere from 4% to 6%. And I think the Google founder said, there's so much demand, we don't really need to have the underwriter and take that spread. But there are very few Googles that are out there. The average company that goes public does not have the demand that Google kind of had when it was going public. Does the financial sector draw too much talent away from the rest of the real economy? Well, I'd say the financial sector is part of the real economy. It's a large part of the United States economy. So there's nothing wrong with the financial sector getting very talented people, but there are plenty of talented people in lots of places. So academic world has talented people. The sports world has talented people. Lots of talented people in many different areas. So I don't think the financial service world is getting too many talented people. I think that most talented people right now are probably all of those people who are going into entrepreneurial startups, which you could argue that's financial, but they're basically, they're entrepreneurs. It used to be people wanted to go to Goldman Sachs or Blackstone or Karla or McKinsey. Now a lot of people coming to the best colleges, they want to start, do a startup. What fraction of the financial sector do you think is zero sum? You mean doesn't produce any value? Right, but it's just a race to get there first. Like some people would say high-frequency trading, that's zero sum. May or may not be true, but what do you think is zero sum? I'm not sure I would know exactly what is a zero sum in terms of the way you're phrasing the question. No value added, but you get profits, someone else takes a loss. You have talent diverted into seeking a rent, not producing anything that a consumer ever uses. Well, of course, those people that don't like private equity would say, well, private equity people is a zero sum, they're not adding any value. I don't agree with that, I think they do add value. But you lower costs and you boost share prices, right? At least on average. Right, well, I don't think anything that's zero sum will survive very long. You could argue that crypto currencies are they a zero sum or not? Some people think that they're complete zeros and they're worth nothing and people are buying these things at their great peril. Other people think that they actually provide a service where people don't wanna have US currency or other foreign currencies, they have something on the side that's a different kind of currency. You can argue that for some time. Right now, we don't know whether it's a zero sum game or not. What do you think of crypto? What's your best guess? My view is that the genie is out of the bottle and it's too late for the US government to say, don't do this anymore. Remember, we went through a prohibition and we said, people don't drink alcohol, it's bad for you. And we didn't really work out. So if we were to ban crypto currencies, people will find a way to create crypto currencies offshore or some illegal way to do it. People don't trust the government as much as they used to. And secondly, I think that there is money to be made in the cryptocurrency world if you're careful you know what you're doing. But if I've not bought any crypto currencies, I have invested in some companies that service the industry. And what I say to people is I analogize it to gambling. If you are a gambler and you go to Las Vegas, you know you're going to lose money if you spend a lot of time there. You don't care because you're having fun, you really like the setting and it's just, it's your pleasure. The same thing is true with crypto. A lot of people like to be seeing the oscillation of these crypto currencies. They like to hear about it. They think there are the new wave of what's going on. So they buy it and I say, if you want to do that, just make it like you do if you go to Las Vegas. Put one or two or 3% of your net worth in. Have fun watching the stocks go up or the currencies go up and down. But don't put in 50% of your money because I think that's likely to be a fool's errand. If you look at the payroll of the New Jersey net in the NBA as a private equity guy. The New York net, the Brooklyn net. Sorry, now it's the Brooklyn net. Yeah, you see you have a New Jersey bias. Correct, I do. I still do. But what do you think? Do you think the team's overrated? Their costs are too high? They need a leverage buyout? Or do you think it's fine? I'm about to go interview Joe Sy soon so I don't know if I will ask him whether his team is overrated. Look, in that business, unlike many other businesses, it only takes one or two or three players to make a championship team. So in baseball, you probably can't win a championship or football with just one or two really great players. In basketball, you can. And so you probably can't pay these people too much. And as you know, there's caps on how much you're allowed to pay people in basketball and they have these maximum contracts. I would say very few people I have known and I know a lot of people who have bought sports teams. Very few people who have bought sports teams have lost money owning those teams. You typically make the money when you sell them. Now, are the players overrated or overpaid? That's hard for me to say that anybody's overpaid if they're filling the arenas and so forth and they have unique talents. So in Kevin Durant's case, he's a unique talent, a very unique talent. One of the best basketball players the last 20 or 30 years. So I don't know you can overpay him. And Kyrie Irving, he went to Duke. So you can never overpay anybody I went to Duke. It's my view. If he gets vaccinated. Well, we'll see whether he gets vaccinated or not. But, and James Harden is obviously an incredible triple threat. So I don't know that they're overpaid, but you know, right now I think the owner is pretty happy with the team that he has. He wished he'd won a championship last year, but he thinks he will win this year. How is learning to be a great interviewer made you a better investor? I'm not saying that it has, it may not have. You know, if you want to be great at something, I'll spend a lot of time at it. I'm spending a lot of time doing interviewing. So probably not a great investor so much. Now what I've done is in the investing world, I was never the investor at Carlaw. I was always the fundraiser, the strategist, the face of the firm and the recruiter. I had other people actually knew how to invest better. So I would sit on the investment committees and give my points of view, but they weren't really relying on me. I've set up a family office and I've hired some pretty good people to invest my money outside of Carlaw without being in conflict with Carlaw. And I look at what they're doing and they, you know, tell me about what they're doing, but I'm not the day-to-day investor. So I'm not sure an interviewing has maybe a better investor, but you're doing a lot of interviewing. It might make you a better investor. I don't know. What is it you think you know about recruiting of talent that is not obvious and other people might not know? Well, when I recruit people, and I've now been doing this for many years, I generally have certain biases and my biases are ones that have generally proven to be right, but sometimes I'm wrong. I've made a mistake in hiring some people and I made a mistake in not hiring some people. But generally, I look for people who are hardworking, reasonably intelligent, have some vision of what they want to do with their life. They're not difficult to deal with. They have some humility about themselves and how to get along with other people and how to share the credit. And there's always going to be an outlier, a genius who can't work with other people who might be a great investor or a person who is not all that smart but just very, very hardworking. So you just can't really know who's going to be a great investor. I'm doing a book now on great investors and it'll come out next year and I have a TV show now on investing and basically I found that the great investors all have in common a pretty good degree of IQ, a pretty high degree of IQ, but it's focus and it's a desire to prove that they're right about something as opposed to making money. In the end, making money, once they become a great investor, they've got enough money for their real purposes. They just like the game of investing the way you might like the game of betting or some other game. So there are many different qualities that great investors have. I wouldn't say that I have them but I have observed other people having them. What does Wall Street least understand about Washington? Well, Washington is relying on Wall Street and Wall Street is relying on Washington. It's a bizarre symbiotic relationship. People on Wall Street say, well, the debt's not so bad because people on Washington, they keep passing these bills and they must know what they're doing down there or the Fed wouldn't allow this to happen or the Treasury wouldn't allow this to happen. People down here are saying, well, the Wall Street markets, these people are good investors. If we were borrowing too much money, the markets would collapse and they're each relying on the other. And so at this point, I think what Wall Street doesn't really understand about Washington is that Washington basically isn't all that sensitive to what's going on in the markets unless there's a gigantic collapse. Then they pay a lot of attention. But generally day-to-day people on Capitol Hill and the White House are not focused on the markets the way that a professional investor might be. The ups and downs and oscillations don't bother them as much unless there's a gigantic collapse, of course. What does Silicon Valley understand least about Washington? Well, Silicon Valley historically didn't pay much attention to Washington and therefore they had very few lobbyists here, they had very few people to tell their story. Now, I think the biggest lobbyists here are the technology companies, Google, Facebook, Microsoft have gigantic lobbying operations now because they realize that the government of the United States can impact their businesses in a way that they didn't probably realize when they first started these companies. But what is it they don't understand now still, right? It's not in their cultural blood, so to speak. So they throw resources at the problem. Do they understand how DC works? Well, I think they don't understand that it's... In technology, whoever has the better technology might ultimately prevail. And therefore merit is ultimately thought to be the ultimate important factor. Who has the best software? Who has the best hardware? Who has the best process for getting something done? In Washington DC, the merits are not necessarily the most important thing. It's the politics that are much more important. And so sometimes if somebody from Silicon Valley comes to Washington and says, I have the best software, look what it's doing for America, it's great. We're selling a lot of services and people are living better because of it. That may not mean much to people in Washington if some people are complaining all the time because the prices are too high or something like that over the product. Should we let members of Congress or for that matter regional Fed Bank presidents trade equities and securities? Well, there were two Fed Bank presidents, the one in Boston and one in Dallas who managed to do that and they've now resigned. But it wasn't illegal, right? Like they were allowed to do it. It was not illegal and it's not illegal as far as I know for the chairman of the Fed to do that. It's not illegal for the president of the United States to do that. It's not illegal for members of Congress to do it either. You have to disclose it, but it's not illegal. But should it be illegal? Well, I'm not sure that in all cases it should be illegal. Remember, we are asking people to work for very, very modest incomes. And are they supposed to put all of their trust into complete treasury bills and that's all they have? You might get fewer people coming to government service if they can only get treasury bill rates of return. Let's say S&P 500, they can get a blindly managed mutual fund. I think that would be better rather than doing the stock trading yourself. I do think it's better if you were to go into a mutual fund or things like that. Like the chairman of the feds, typically they have somebody like a mutual fund or they might have T-bills or things like that. But I think it's better to not be trading when you're in those positions. I do think that's true. Here's a reader question and I quote, another impolite question. Why is it that so many politicians and their aides and their wives, children, cousins become wealthy in the private sector? Well, the private sector is designed among other things if you wanna go into that area to make money. And it's not that difficult to be wealthy by the standards of government compensation. If you're a member of Congress, your compensation is roughly $180,000 a year, hasn't changed much for about 20 years. So if you go into the private sector, it's difficult to make less than that if you're really doing something in the private sector that adds some value. So, and also obviously some people who do lobbying and other kinds of things are using their contacts and so forth that they got in government service. If you were to say nobody who's ever served in government service can ever lobby anybody again, you'll probably get fewer talented people to come into government service. I think a lot of people won't go into government service now because you have to sell all your assets if you go into government service and that's a barrier to some people. So, you can have constraints on getting people into government service and therefore you won't get the best people. So for example, when we only had three million people in this country, who do we have in government service? Well, we had George Washington, Thomas Jefferson, John Adams, James Madison, James Monroe, John Jay. Now we have 330 million people and where are the Thomas Jefferson's? Where are the George Washington's? They may not be in government service. They may be doing other things. So, I think we often have more barriers to getting good people into government than we should have. I'm under the anecdotal impression that in the 1960s and 1970s, the smartest young people were more interested in joining the DC elite than is currently the case. Do you agree? Well, when John Kennedy became president, he had a clarion call to young people to come in and do government service. He was a young man who was 43 years old and his cabinet was relatively young and yes, it was a time where it was pre-Vietnam and pre-Watergate and so there was much greater belief that what government could do was good and there was much less cynicism and the government of the United States didn't have the credibility gap that it developed in Vietnam and Watergate and so forth. So, I think yes, it was a time where there was a lot of interest in young people coming into government service. Today, a lot of the best young people, they wanna go and be entrepreneurs or they wanna create things in Silicon Valley or be a venture capitalist and so forth. But there's still a lot of talent to people going into government but I do think that government does make it more difficult than it used to be to go into government service because of the various constraints you might have when you go in in terms of what you can do with your existing money or what you can do after you leave government but there's not lacking that in some good people going into government but I think the most talented people in the country probably don't wanna go into government as much as they did in the 1960s. You once mentioned that you were not a good lawyer. Why weren't you a good lawyer? To be a good lawyer, I think you have to have a attention to detail as opposed to the big picture sometimes. Secondly, you have to obsess over the merits of your clients' causes in some cases. Third, you can't be distracted by something you think is more interesting. So I thought government service was more interesting than being a lawyer and I also thought that what lawyers do and corporate lawyers do was not the best use of my gray matter so I probably didn't enjoy it and I didn't think it was all that attractive way to spend my life. Why do so many wealthy people have legal backgrounds but the very wealthiest people typically do not? Well, lawyers tend to be very process-oriented and very systematic and as a result, they tend not to take big leaps of faith because you're taught in law school to worry about precedent. Well, precedent is not what makes entrepreneurs successful. You have to ignore precedent and you'll break through walls and say, you can't be worried about what the precedent was and if you're worried about precedent, you'll never make a leap of faith to create a company like Apple or a company like Amazon. So lawyers tend to be more, I would say, tradition-oriented, more process-oriented and more precedent-oriented than great entrepreneurs are. Within, say, a 25-year time horizon, what do you think is the greatest risk to American prosperity? Probably the rise of China. China is a bigger population than we have by three times and given the fact that they have a different type of capitalist system than we do but they have a capitalist system, I would say. Given their population base and their technology strengths, I think that we will have to recognize that 25 from years from now, it's unlikely we'll be the biggest economy in the world and if we're not the biggest economy in the world, it's unlikely we can support the biggest military in the world and unlikely we'll be the biggest geopolitical power in the world. But how would that harm our prosperity? I can see it might be bad for smaller Asian nations, bad for Taiwan, obviously, but many others, but why would we be worse off as economic entities? Well, generally the most prosperous countries tend to be ones that are leaders in, let's say they're given areas. So if we're not the leader in technology, we're not the leader in financial services because those worlds have shifted to China, we probably won't get the profits and the most talented people coming here and a lot of other kind of things that you need to be a prosperous country. We've been the biggest economy in the world since 1870 and probably in about 10 years or so as measured by GDP we won't be, by purchase price parity we're already not the biggest and I do think that more and more people want to deal with the biggest economies in the world and the biggest economy in the world will have more money to develop new companies and to send to entrepreneurs and so forth but I'm still very bullish on America but 25 years down the road is hard to predict but I'd say 25 years now given our population we probably won't be as prosperous as we are now relatively speaking. Before the pandemic you were visiting China six to seven times a year. What's your favorite part of China? Well, I think the most exciting city in the world today or at least let's say before COVID was probably Shanghai because Shanghai was the center of the Chinese business world and China was doing so many exciting things pre-COVID and I've often said that before Shanghai and China came along I thought Hong Kong was among the most attractive places for business people to go in terms of pure excitement outside of the United States. Now I think that shifted to Shanghai and I haven't been to China now in about two years because of COVID but I think Shanghai is probably extremely attractive place as a business center. Let's consider your role as donor and philanthropist. Let's say and maybe you've even done this you had $200 million to allocate to Baltimore to make it a better city, right? It's not enough money to be transformative but it's not a tiny sum, how would you spend it? Well, Baltimore has serious problems. When I was growing up it was the eighth largest city in the United States with a population of 939,000. Now it's about half that size. So you've had a white flight you've also had the business headquarters have largely moved out of Baltimore. There aren't that many headquarters there compared to what it used to be. So what would I do with $200 million? Well, $200 million as you suggest is not $2 billion or $20 billion. With $200 million I guess I would put some of it in the education because Baltimore has a very high dropout rate in high school and also has a very high I would say illiteracy rate. It has a high syphilis rate and high STD rate. It has a high murder rate. So I don't know if the $200 million would solve all those problems but if I could do anything to help Baltimore it would probably be to use some of that money to incent businesses to come back in the Baltimore and give them some incentives to come back in because if you get business to come back in they'll hire people and ultimately that will help out but you've got to deal with the education system. If you have a large percentage of your population that's functionally illiterate that's going to produce a lot of crime and it's also going to produce a lot of poverty. There was a time I think in the 1990s when the word was well Baltimore has come back there's the aquarium, the waterfront has been refurbished and somehow that all didn't materialize so the momentum looked good for at least five years. What actually do you think went wrong? Well, Baltimore renamed itself Charms City under Mayor Schaefer. Mayor Schaefer was a very dynamic mayor but he couldn't control white flight and therefore the city, wealthiest people moved out and the biggest companies in Baltimore moved out and so in the end I think crime just took over and the poverty rate just accelerated and just so many endemic problems and Baltimore did not have entrepreneurs coming there starting new companies and it didn't have the kind of revitalization of the entrepreneurial spirit that you saw in some cities which had gone through difficult times but take Pittsburgh as an example. Pittsburgh used to be a steel center. Now people see it as an artificial intelligence center or as a computer center or as a city that's remade itself in many ways. Now it didn't have quite the minority population that Baltimore did but it in many ways has revitalized itself and some other cities have not been able to revitalize themselves. Take Detroit. Detroit is also like Baltimore. Enormous socioeconomic problems and despite the best efforts of some pretty talented business people there like Mr. Gilbert, they just haven't really been able to revitalize themselves to the point where they were in the 1950s I'd say as a leader. Where do you think your marginal dollar does the most social good? Being paid to government in the form of tax, being invested through private equity at a reasonably high return or in philanthropy? Well philanthropy because when I pay taxes and I do pay a fair amount of taxes, when I pay taxes it goes for good purpose I guess but it's hard to know that I'm paying enough taxes to make change the world and nobody knows exactly what I'm paying. When I do private equity, lots of people are doing private equity so I'm not sure I'm changing the world that much there but when I make a philanthropic gift that gets attention it might inspire people to do something. So if I fix the Washington Monument I might encourage other people to do something with the same kind of dollars or the same kind of motive in mind which is to say I'm gonna give back the country in that way and it gets more attention maybe it deserves. The bulk of my money goes to medical research and education and scholarships but 10% goes to what I call patriotic philanthropy so fixing the Washington Monument it gets a disproportionate amount of attention but it might incent a large number of people to really do the same things and that would probably be good. But you seem to be in good health what if someone makes the argument to you you would do the world more good by not giving away money now but investing it through private equity earning whatever percent you could earn and when you're a bit older give much more away. Right, you can always give more to philanthropy five years down the road. Well of course you never know when you're gonna die and COVID we lost 700,000 Americans in COVID I could have been one of them I'm 72 years old. So if you wait too long to give away your money you might find your executor giving it away. Secondly. But you could even write that into your will right if you wanted but you'd have more to give away maybe 15% a year. Yes, but if you take the view that happy people are live longer and if giving away money while you're alive and you're seeing it being given away and that makes you happier you might live longer. Grumpy people my theory is don't live as long as happy people live longer. So if giving away money and having people say to me you're doing something good for the country makes me feel good it might make me live longer. So if I waited till the last moment to give away the money it might be too late to have that feel good experience. Do you think the foundations of other very wealthy people after their deaths have gone well or gone poorly? Like anything in life they're good thing cases and they're bad cases. Some people have done really good things with their foundations after they died and some people's foundations probably haven't been as productive. But I would say in the end I encourage people to give away as much money as they can while they're alive. I am amazed that probably 99.9% of the population gives away about 95% of its money upon their death. You kind of say to yourself why are you waiting so long? I remember I won't mention his name but a very famous businessman said I'm gonna give away when he was 93 years old I'm gonna give away $400 million to my college upon my death. You kind of say well what do you need that 400 million between the age of 93 and 94 and 95? Why don't just give it away now? I don't understand why people wait until they're dead before the money is given away. You presumably think you're gonna be in heaven and see where it's gone but that's a big risk. How do you handle our filter? Must be a steady stream of solicitations and requests. Money, money, money, right? Everyone wants money. How do you actually process the infinite demand? I don't have the money that Bill Gates has. I asked Bill the same question now. I said Bill, everybody's coming here for money all the time. He says I have a lot of people that are hired to say no so they don't really get to him so easily. I don't have a foundation. I don't have anybody doing my philanthropy so everything comes directly to me. I have four standards I use though. Number one is I wanna see something with my money started that I wouldn't otherwise get started. Like or second something that wouldn't otherwise get finished or third I have an intellectual interest in it so I think I will stay involved and I just won't write a check and ignore it and fourth I'm likely to see progress in my lifetime. So those are my standards that I use and I'd like to be involved in the things I'm doing as well but in the end I've made some mistakes in philanthropy and some things have worked out well. Would you agree with the judgment that today art museums are less culturally central than they used to be and they need to do something to remedy that? Well I was elected earlier today the new National Gallery of Art Chairman. Congratulations. So it would be unlikely for me to say that art museums are not relevant anymore. No I think art is an important part of society and for from time immemorial people have been painting and doing other kinds of visual arts and I think people's brains get improved by seeing what people have done with their creative skills. So no I think art museums and all museums are good and this is the reason. The human brain has not yet evolved to the point where if you see a picture of the Mona Lisa on a computer slide it's the same experience as going to the Louvre and seeing in person because before you go to the Louvre, while you're there and afterwards you're more likely to read about it, you're more likely to learn about it and I think when you do that you're more likely to have a better human experience than just looking at a computer slide. So if you eliminated all museums and everything was on a computer slide I'm not sure that'd be a good experience for people. Should the National Gallery have canceled its pending Neapolitan Baroque exhibit? Well we've had a lot of issues because of COVID and so forth so we wanna make certain that people can attend and- But I've been going to the National Gallery, it more or less works, other museums are putting on the exhibit. People worked for years on it and then to- You mean the, the, the, the, um, Houston? Not the Philip Costin. What, not that much? Not that's being postponed. Yeah, exactly. But there was an exhibit planned, Grape Baroque works from Naples. That was supposed to happen and National Gallery a month ago, I'm not sure, but- Right. Basically just said no, we're not gonna do this. Well there were some considerations for that but I'd say look, we put on a lot of exhibitions. We can't, everything can't work out perfectly as originally planned but we are increasing our exhibition schedule and I hope that we can be a much bigger leader in exhibitions than we have been in let's say recent decades. And what is personally most important or closest to you in the visual arts? Well the most important thing is having people appreciate the arts. No, but what artist? What, what, what excites you to look at what? Well, I mean there's so many different types of art but I'm looking, increasingly I'm collecting art work done by minority artists. The National Gallery of Art historically has been a Western art museum but it hasn't really had very many artists who are women, very many artists who are minorities, very many artists who are African American, very many artists who are Latin American. So we are now trying to increase our ability to show people that great artists don't have to be white men from Europe and that's an important focus of what we're trying to do. How would you reform or improve the American system of arts funding? Well right now, arts funding is dependent to largest end on philanthropy and governments tend to be cutting back what they're giving for arts funding and I'm talking about performing arts as well as visual arts. So right now you have many different performing arts venues and many different visual arts venues that are really supplicants at the table of the government begging for scraps typically for money and then you're very dependent on philanthropy and I wish we would have more government funding of the arts as they do in Europe than we do have now. Right now we're very dependent on philanthropists for a large part of what makes it possible for museums and performing arts organizations to exist. But how would you do that? Would it be federal? Would it be state? Would it be through the NEA? Would it be a direct congressional allocation to the National Gallery or Smithsonian? Well we do get money from the National Gallery does get a great deal of money from the federal government but other art museums around the country don't get as much obviously from state governments as much as they might want or from local governments. I don't think there's any one formula for doing it but I think we have to convince legislators and other government administrators that the arts isn't an afterthought that's a nice little thing off to the side and it's not gonna help little Johnny or little Janie be a better person by seeing good museums and so forth. We convince people that around the rest of the world people recognize that we wanna stimulate the brain and create great people very often stimulated in through the performing arts and the visual arts is a great way to make the brain work better and so we should see it as an education tool not just as a museum. As you know most art museums put out a pretty small percentage of their overall collection. That's correct. Could be as low as 5%. As an economist this worries me. Is this an inefficiency? Should there be a more rapid circulation of artistic works? Should policy encourage this? Well every art museum and every gallery has more art than they can display. We don't have infinite amount of space but if you kept everything and put everything on display all the time you wouldn't have enough space probably for it and you might not attract new people because if people think the same things are gonna be there all the time they're not gonna come back a second time or third time. So you've got to rotate the collection so people will come back and see some things that are new. There's plenty of empty space in Washington D.C. Are there buildings, community centers? The walk to the men's room? Well there's always cost. In addition, if you display art all the time some of it could be degraded or fade because if you expose art to sunlight unduly and it's not protected sometimes it could damage the art but I think I'm glad that the art museums have a lot of things that they can circulate and get people to come back and back but yeah she's always spaced but there's always money to build that space out that's not insignificant. In terms of your time management obviously you get a lot done. What is your most unusual time management habit? Well probably I'm the only person in the United States who's still going out and buying newspapers every day and reading all six of them every day. There's two of us. Okay so I still go and buy the newspapers I don't read them online so I go drive to the place where I can find the newspapers. I buy them, I read them, I don't like to read newspapers online so that's probably a use of my time that some people would say is not a useful use because I could read it online but I don't enjoy the experience as much. Why don't you have them delivered? Which is what I do. Because I travel a lot and so I'm, you know it's, you know I'm of different places so I'm not in my home that much. At what level of wealth do you think you are happiest? You know Felix Roh within an investment banker he used to be famous investment banker later became ambassador of France. When he was asked once, how much money does it take to make you feel financially secure? He said it's exactly twice whatever you actually have. So that's probably true. No matter what wealth you have you always think you need a little bit more to be financially secure. So I have more money now than I ever thought I would have when I was younger and more money than I probably need to get through the rest of my life so I am very fortunate but I, you know I still think that I would like to have more money so I can give away more money. I'm giving away all my money. I just want to give away more. It is my intuition that the billionaires I know are quite different from the multi-millionaires. What do you think actually makes that difference in terms of temperament or character? Well of course a billion isn't what it used to be. You know now it's a term of derision. It used to be if he's a billionaire you say wow you've accomplished business person now it's a term of derision everywhere because people say this is a billionaire these are terrible people these billionaires are doing terrible things to society but multi-millionaires probably didn't have as much luck as the billionaires did. I suspect if making money is considered a matter of luck and I guess some people would consider that but I don't think that that billionaires are any happier than multi-millionaires or any happier than non-millionaires. You know happiness is the most elusive thing in life and I know a lot of billionaires and I can't say they're as happy as some of the people who don't have any money. But isn't there some difference in persistence between the billionaires and the multi-millionaires that's not just luck or no? Well there's persistence is necessary if you're gonna be successful in almost anything in life and some of the billionaires had lucky ideas and they persisted but there are a lot of multi-millionaires who said look I have a good idea and I've made a company work I now worth a hundred million dollars but I wanna spend my time doing other things. So it's not always the case that people feel they have to make a billion dollars in order to feel successful with their life. Now you've been a major donor to a number of very well-known universities. If it were all up to you how would you fix higher education? What would you change? Well the higher education system in the United States is still the envy of the world. Our K-12 system is obviously not the envy of the world. Higher education systems certainly the private universities are the envy of the world in terms of the way they work but they can always be better. It's not clear that we educate people in all the ways I would like. For example, you can graduate from almost any college in the United States without having to take an American history course. And so very few people know much about American history and in our country I think that's a sad situation. So I wish people would learn a little bit more about our country's background and probably having more core courses that would get you to learn certain basic things to be a good citizen would probably be something I would recommend people doing. Harvard and Princeton, Chicago and Duke they're all doing great but if you look at completion rates for the system as a whole it's even hard to learn what that number is. I suspect it's about 40% from what I can tell. I think the college dropout rate is about 25%. But those who finish, state schools, everything it seems to be below half. So what are we doing wrong? The returns to college on paper are pretty high, right? The socioeconomic returns, health returns may be higher yet but so many Americans are not finishing. Where are we failing whom and how? Well, one, we are telling people that the value of a college education isn't how much money you make as opposed to what you can learn as a human and actually have a better experience as a human by getting an education. So I think it's unfortunate that we only worry about whether you can make a certain amount of money by going to college and therefore sometimes people say after one or two years I'll drop out and get a job I can get a fair amount of money now or just as much as I had a college degree whereas I think it'd be better off if people actually got a degree and appreciated the value of learning and we're learners throughout the rest of their life but that's a whole separate subject. I think people are dropping out in part because of economic pressures COVID has obviously probably increased the dropout rate and also there's a lot of family pressures and other things to support families in the case of lower income people but it's unfortunate because I think higher education is really the pathway to on my view a happier life and a more successful life. If you look at data on college professors or even incoming students at Harvard it seems they're very left wing and they're much more left wing than they were before. Now one might even be a Democrat or have left leaning sympathies but it seems the system is somehow out of balance, right? I mean what went wrong and how do we fix that? Well, your presupposition is that there's left wing left wing is a majority of term you might call it what you want liberal or but I don't know that they are liberal anymore, right? Well, also you have to remember the Ivy League schools that often are the ones seen as being too quote liberal or left wing they are a tiny part of the country's education system. So if you go to Kansas State University or Oklahoma State University or the equivalent in the Midwest I'm not sure the students are quite as left leaning as you might think. So on the whole, you know, remember the country's kind of split down the middle politically left and right and I suspect college populations throughout the course of history college students have probably been slightly more liberal than they are when they're in 50s or 60s. This is the normal course of life is people tend to be quite a little bit more liberal when they're younger than when they're older. When you interview someone, how do you prepare for that? What do you do? Well, the person has read a book, I've written a book, I read the book and then if a person has written a book I will read everything that's written about the person of a last year or two, I gather it up and then what I do is I write up some questions and then I kind of memorize them a bit and sort of work my brain so that I can have the conversation with the person without, you know, referring to the notes so much because my style is not to do that but I try to listen to what the person says, remember that being a good interviewer means being a good listener, not just a good questioner and I also think you have to engage the person and get the person to loosen up and make the person feel this is a good experience and all those kind of things and it takes some time to do that and I've now been doing it for a number of years so I developed a skill a little bit and I've been surprised at how many people think the way I do it is attractive and unusual or fun to watch and it wasn't something I was trained to do but something I evolved into. What's your favorite book? Well, my favorite book of all I would say other than the ones I've written, I guess I would say is the Bible because if you're gonna be in any one place and you're gonna only have one book, the Bible is basically what the story of about humanity is more or less throughout all the book and it's probably if you're on a deserted island, you're gonna have one book you probably would get the most out of the Bible to be my guess. What is most appealing to you in the Magna Carta? Well, the Magna Carta that I own is the only one in private hands and so whenever you can have something that's unique that's attractive, it was gonna leave the country most likely so I kept it in the country but what's most important about it it was the inspiration for the Declaration of Independence. It had a bigger influence in this country's history than honestly it did in England. In England it was ignored for quite some time but in this country, people when they got charters from the King of England, the charters said in effect you have the rights of Englishmen which meant the rights of Magna Carta and so when the revolution started people started citing this as the rights of the Magna Carta and this was often said to be the kind of thing that inspired the revolution so I think it's the forerunner to the Declaration of Independence. Are there any changes you would make in our constitution? Yes, when you think about it the constitution was put together by more or less 55 white Christian men who were property owners. If you had a constitutional convention today that represented today's population and they had more gender diversity than they had then it would obviously be a different kind of thing but if I could do anything, make any one change I would probably put the equal rights amendment in. While I'm not sure it's necessary at this point given the way the law has evolved I do think it would make many people feel better were included and I think it probably it only came one state short of a ratification I think I would probably amend that. Should we have a larger house of representatives? I've never been asked that question before I would have a smaller one. As you know, the first amendment to the constitution as proposed in the Bill of Rights would have actually had a house that would now be like 10,000 members if that first amendment had been passed it wasn't approved by the states, it wasn't ratified. I think 435 is more than enough you could argue for shrinking it a bit because right now it is very large but I wouldn't certainly enhance it I think it would be too big. Living or dead, whom would you most like to interview? Well it's an interesting question the phenomenon that we're engaged in now which is an interview is a phenomenon that didn't really exist throughout most of organized history so we don't have any interviews of Cleopatra, Charlemagne, Alexander the Great, and Napoleon, William Shakespeare or William or George Washington or even Abraham Lincoln. If I could interview anybody that's ever lived it would be Abraham Lincoln I think he was the greatest American and I think he was the kind of person that would be an interesting interviewee he had a good sense of humor he had a pretty good perspective on himself and he did some things that I think were pretty impressive. If I look at your books of interviews all the different people you've interviewed and online it's striking to me there are relatively few what you might call weirdos in the group so in your new book there's Ken Burns there's Madeleine Albright there's Winton Marsalis but someone just out there right who's radical or different or not well known why not interview more weirdos? Well I interview people I usually know and I've had some relations with I don't probably know as many weirdos as maybe I know normal people. But they would accept the invite a lot of weirdos like they'll accept my invites if I ask a weirdo we had a homeless guy on this program that was a good episode. Well it's a good idea for another book and maybe just I don't you know just weirdos or I don't know but I don't know that book would sell as well but you know you could argue that a lot of people I've interviewed they were considered weird by a lot of people when they were growing up they just as they got more famous they weren't considered quite as weird. Who mentored you? Well I don't know that any one person mentored me I worked for Ted Sorenson briefly a bit when I was practicing law I worked for Stuart Eisenstadt when I worked at the White House but since I left the White House I haven't had a boss so I'm now 72 and I left the White House when I was 31 so I haven't had a boss for 41 years or so but I admired a lot of people and I brought in a lot of people in my firm and I thought were very impressive and two of them that I thought were extremely impressive were Jim Baker, former Secretary of State and George Herbert Walker Bush President of the United States and very impressive people I got to know them and I learned a lot from them. And what do you think you understand about mentoring that might not be obvious? Well it takes a lot of time. I'm not a good mentor myself because I realize that to be a good mentor to people you really have to put a lot of time into it. Now a lot of people have come to me later in their career and said you were a mentor to me but I think they're being polite. I may have helped them a little bit to give them some advice but being a mentor really takes a lot of time. Do you think a person should always have mentors including much younger mentors? Well a lot of people have been successful in life without having mentors. I think mentors can be helpful to you for sure but I wouldn't obsess over having a mentor if you can't find somebody that's gonna be helpful. Having a bad mentor can be not helpful. I know in your book you have many different interviews with of course different people. Again the book is the American experiment, Dialogues on a Dream but the process of doing the book just to close if you had to sum up what you feel you learned from the entirety of the interviews maybe at a very meta level maybe you just learned about your own learning but what's the main thing you learned doing the book? Well the country has evolved and it is not the country that was anticipated by the founding fathers. They came up with some wonderful rhetoric that all men are gonna be cred equal but the truth is that we have lived in a way where not all people have been treated equal and so the country's history and the experiment is whether we can have a representative democracy survive and actually live up to the rhetoric of the founding fathers without destroying the country and we've had stress tests that have almost destroyed the country. Civil war came close to it and as I point out in the book we had a couple of stress tests recently most recently in the election and the January 6th events but we survived that in part because what I describe in the book is certain genes of America that we have as part of our body politic. One of them is the rule of law and the belief that on the civilian control of the military and separation of powers and so forth. Those kind of genes prevailed on January 6th and subsequently I think that was a good thing. David Rubenstein, thank you very much. My pleasure, thank you for inviting me.