 Okay, let's get started. Good afternoon, everybody. My sense is I'm way behind, just generally. So we'll speed through some of the issues. I think some of the things in Outline we've to a large extent already discussed. And there's some things I really do want to talk about and other things that I think are more optional. So we'll go through, try to wrap everything up today. Last time we talked about one of the essential critiques of the modern corporation, I would argue maybe the most legitimate of all of them, in the sense that this is the criticism presented by legal scholars and finance professors. And this idea is of ownership, the separation of ownership control. The idea that shareholders don't have control over the corporation and therefore managers can get away with stuff. They can act as presented in the literature. They can act in their own self-interest, which is not consistent with the self-interest of shareholders. And my argument was that given if both parties are rational, there is no conflict between the two self-interests. There is no conflict between the interest, the true interest of the CEO and the interests of shareholders, that their interests are aligned if they are both rational. And the question arises, well, what if the CEO is not completely rational? There are certainly examples of that. Are there ways in which the market can help make sure that that CEO does not misbehave, if you will? Are there mechanisms by which we can align the interest when they do get out of whack, when the CEO is interested in doing stuff that the shareholders wouldn't otherwise be interested? For example, reducing his risk by diversification when it's not necessarily in the best interest of shareholders to do that, or taking on a huge, huge salary when it's not commensurate with his abilities and with his level of productivity. What can a market do to make sure that those things don't happen? One of the things we mentioned last time was, well, if you have a board of directors that truly represents the interest of shareholders, then that's their job. Their job is to make sure that the CEO does not misbehave or call it, does stick to maximizing shareholder wealth, does stick to the mission of, does stick to that alignment of interest. And the best shareholders from my perspective would be, I mean the best board members would be shareholders, because then you've got a clear alignment of interest, right? If the board owns stock, what's their incentive? Well, it's to maximize the value of shares, which is the same incentive, same interest as do the shareholders. And we talked about last time how many regulatory barriers there are in the United States to blockholders getting established, taking significant chunks of stock in a company, and second to then being represented on the board. And they're actually, as we discussed, they're actually regulations, laws in place, the restrictability of bankers and insurers and pension funds and mutual funds for sitting on boards and for even taking bankers, for even taking large positions in industrial companies and non-bank companies. So regulation has eliminated a whole market mechanism, if you will, from existence in terms of monitoring managers and making sure that that alignment happens. If large shareholders are not at the upper boards, who is at the upper boards? So who is at the upper boards? The idea here is, particularly today, particularly post-Sawbains, and really, I'd say over the last 15 years there's been a real push for this, is the idea that we need on a board of directors independent directors, and I'm putting that in quotes, independent directors. We need directors that are not affiliated with the CEO. That's their independence. They're supposed to be independent of the CEO. And we know that if we put on the board of directors business associates, they might have a relationship with the CEO, right? Because they're all in business, they're all in the same country clubs, and they all, you know, they golf together and stuff. So we don't want business people on there, right? And if we put shareholders on the board of directors, if we put large shareholders like Warren Buffett, for example, then he's not completely independent because he's a share owner, and the CEO is a share owner, and you know, he somehow, he now has an interest. What is his interest? Maximizing shareholder wealth. But that's an interest for these people, for these people advocating for independence. So who would be an ideal independent director? Well, politicians, former politicians, note Al Gore is making a fortune, put aside his movie, by being a board member on a number of boards. Unfortunately, for those of us who love the Macintosh, he's on the board of Apple Computer. So politicians, former politicians, lawyers, and we'll talk about the kind of environment that creates on a board when you have lots of lawyers on a board. College professors, former deans, but not businessmen. Not, certainly not bankers. You know, maybe today you need accountants to be on the audit committee. But retired naval officers, that would be good. But the principle is this, we want people who are literally independent of business. We want people who don't have a selfish interest in maximizing shareholder wealth, because the real agenda behind board reform, as it's being advocated is, not to maximize shareholder wealth, but to represent stakeholders and get stakeholder theory into the board of directors. All done in the name of aligning the interest of shareholders and managers by providing independent directors. And why is it that Juan Buffett is not acceptable as a director, but Al Gore is acceptable as a director, particularly if he owns no stock in the company. The reason is altruism. Al Gore has no selfish interest in monitoring the CEO and making sure that the interests are aligned and making sure he's doing it out of a sense of duty, out of a sense of love for the shareholders or love of the world. It's the same idea of why we have a Federal Reserve. Why is it that we distrust the JP Morgan to run the equivalent of the Federal Reserve was accused? But we trust Alan Greenspan. Because Alan Greenspan has no selfish interest in the outcome. He's doing it, what do we call those people? Public servants. They're doing it for the good of the country. That is something that as a culture I've been trained to think of as the good, but JP Morgan ran the banking system to the extent that he ran the banking system. Why? To make money. Juan Buffett sits on the board of directors to do what? To make money for Juan Buffett. Al Gore sits on the board of directors on the illusion that his interests are the interests of the country, the interests of the company, the interests of the shareholders. But we really know that his agenda is actually undercut all those interests ultimately. So altruism today drives even the selection of directors who we as a culture, many people in the culture, feel comfortable with is non-selfish people sitting on the board. People don't have a selfish interest in the interest of it. That's what makes them independent. They don't have an interest. There's an extreme that Juan Buffett who was on the board of Coca-Cola had been on the board of Coca-Cola since New Coke. Do you remember New Coke? That was like 88, something like that. He bought into Coca-Cola at the bottom when that whole catastrophe happened. He bought a huge chunk of shares in Coca-Cola and wrote it up and made a fortune of Coke stock and was on the board and was an incredibly valuable member on the board of directors because not only does he know business, credit, maybe the most accomplished investor of all time but he had a clear interest in the success of Coca-Cola because he owned a big chunk of the stock. About two or three years ago, Calpas, the big state pension fund, put pressure on Coca-Cola to get rid of Juan Buffett because he wasn't independent. I mean, that's how it's moving now. He resisted and he's still on there. He'll be leaving. I think he's maybe left already but that's because he's slowing down because he's reached that age and he's leaving boards of directors but there was huge pressure to get rid of him. So that's one way in which boards of directors could be a market solution to whatever problems might exist and again, I believe these problems are relatively rare but if they existed, boards of directors could be a solution, but they can't be because indeed we've taken out those elements. Now, we're seeing a replacement of what the mutual fund, the bank, the insurance company and the pension fund should be doing in today, in the new industry of hedge funds today and you're seeing certain hedge funds devoted to taking large positions in companies where they think they can help improve the situation and trying to have a positive influence on the board of directors and sometimes even taking over the whole company and replacing the board and replacing the CEO. I can think of one example of that and that's Kmart and Sears. Eddie Lampert who runs a country with the name of the hedge fund is today the chairman of the combination of Kmart and Sears and he runs a hedge fund that basically specializes in what we used to call in the 1980s, hostile takeovers and we'll talk a little bit more in a minute about what hostile takeovers do and how they help in this case as well. Okay, and we're seeing how the cultural trend including Sarbanes-Oxley, actual regulations are moving us towards boards that in my opinion we create more problems than solutions and I call these boards today these are going to be compliance boards. They're not going to be boards that are going to help us align interests, help the CEO strategize about making the business a better business, how to maximize profitability, maximize shareholder wealth because they're not composed to do that. Lawyers and accountants and politicians have no clue how to do that. They have nothing to add. So a CEO who's struck with the real purpose of a board, one of the purposes other than monitoring would be if a CEO has a problem he can go to his board of directors filled with other businessmen and say how would you deal with this marketing issue or how would you deal, I mean it's a guidance. It's help. It's reviewing a strategic plan but if you fill the board with all these independence it comes to these kind of things. But what are they good at? They're good at making sure you dot all the T's you dot all the I's and cross all the T's in the audit committee when they audit the financial statements they're making sure that you follow all the regulations to the T because they're accountants and lawyers and that's what they're good at. And they'll put constraints on the CEO and they'll limit him in his ability to do things because they'll follow the letter of the law and they'll conform because again that's what accountants and lawyers are good at. So I see this as the trend as boards becoming less and less effective and placing more and more constraints and acting more as compliance making sure that as regulations become more complex that the company follows regulations then is helping the company be more successful. Okay, what else in the marketplace aligns if you will helps align the interests of management and shareholders. Well, ultimately I'd say that it comes in in three categories if you will the product market, the capital market and the market for managers, the managerial labor market. Well the product market is kind of kind of pretty basic. If all the managers doing is lining up, if all the managers doing is thinking about his big yard and penthouse and so on, then he's not focused on running a company, a company is just not going to do well. It's ultimately going to go best. Now that's not a very efficient solution. That's not a real efficient market solution to wait all the way until the company goes bust. Now let's say he really has the board in his pocket and there has to be, and that's the product market that's what it means, it means that the products won't be good, they won't be competitive, they won't be successful. And at that point how would the capital markets kick in? What happens to a company who's not doing well, is not making money? Share price declines. Now, in what way is that helpful in aligning the interests of managers and the shareholders? Well, a number of things. A, if managers own stock, and if managers own stock options, they're going to be less rich. So it's going to hurt them. As the stock price declines, their net worth declines with it. And there's a lot of hype about managers don't own anything. There certainly was in the past, a lot of hype about managers own very little. But as a percentage of their net worth, as a percentage of their net worth, most CEOs have a huge amount of their net worth tied in the stock and the stock option of their own companies. And when the stock declines, it hurts them significantly. There's another element of a stock price going down. What happens when a stock goes down to the cost of capital for the company? It goes up. It becomes more expensive to raise capital whether through issuing new stock even if you're going into the bond market. The bond market is not stupid. They can see the stock declining. That is a negative signal. That means increased risk. And that means the rates that you're going to get on your debt, if you want to borrow money, you're going to be higher. The cost of capital goes up. So if, as we talked last time, one of the theories is that these managers in order to protect themselves need to buy and conglomate these conglomates, well it's not becoming very expensive for them to go out and buy in order to protect themselves to reduce their own personal risk. And that affects them if they want to grow the company. Anything they want to do now becomes more expensive and therefore hinders whatever actions they do want to take become much more difficult for them. To the extent that a board might have been asleep and you can see that things are going well the board just doesn't pay much attention. A stock decline tends to wake them up because it wakes up the shareholders and partially because if you have a even semi healthy board they own stock, right? They might not own as much stock as if you had if you allowed the block holders but they still own some stock. But also shareholders get upset when the stock price declines and they start putting pressure on the board. So the stock price declining wakes the board up and the board becomes alert and you know if it has to replaces CO at the very at the very least it slaps the risk of the CO up and says you can't continue to do this. We got to do something different. So the capital markets one of the great virtues and this isn't of course on the stock market but one of the great most important things about stock markets is the signals they sound to the company itself. Rational stock prices rational values are indications to the company about things are going about you know feedback mechanism about how things are going. And if a stock price decline says wait a minute what's going on? What does the market see that I don't see? That's how a board would look at the stock. And of course if the stock price declines which is the point made earlier it makes it cheaper for somebody to buy. And that somebody could be what we call today we used to call hostile takeovers they're not so hostile takeovers on sexy anymore or really regulatory not approved anymore but basically think about an ideal market with no regulations stock price declines I can go in there and I believe that with different management the stock price is declined because the manager is patting his pockets or whatever stock price is declined he's not paying attention to the business I can buy up the stock, put in somebody who will be motivated to pay attention and the stock price will rise I can then sell it and make a profit and in a truly free market I could probably go in there and buy 51% of the stock without anybody knowing or without announcing it to the world like we do have to do today walk into the CEO's office fire him, replace him and move on and indeed that is what not exactly that way but that is what happened in much of the 1980s in the 1980s I think the case was because of a lot of things because of the inflation of the 1970s because of regulation because of competition from Japan and from Europe a lot of American businesses were not doing well going into the 1980s and stock price were low as we said the Dow Jones industrial was about 800 in 1982 and many people saw opportunity there they saw opportunities to buy businesses relatively cheap replace the management focus the business incentivize the managers to really make money take on leverage the story is one of the one of the ideas behind leverage takeovers is that you load up managers with debt so that most of the cash flow coming out of the business has to pay the debt and if they don't work really really hard to make that cash flow then they're going to go bust and they're going to lose the shares that they have so it focuses managers on working really really hard to pay off that debt and once they pay off the debt what's the value of their equity if they got just a little bit of shares in the beginning because of leverage it is huge so one way to look at leverage buyouts is a way to incentivize managers to turn over on companies and in a very intense you know get them to work really amazing hours which if you read some of the stories of the turn-arounds in 1980s they clearly did but hostile takeovers was a way in which to replace the management when management was no good for a variety of different reasons with better management and the freer the market the easier hostile takeovers would be and indeed I believe that one of the reasons we had such a healthy corporate market in the 1990s was because of the takeovers of the 1980s so in the 1980s not only did many inefficient businesses in America get taken over and made efficient but managers of inefficient businesses who didn't want to lose their job noticed that other companies were being taken over didn't want to lose their jobs and therefore brought about the increased efficiencies in their own companies and that's why I view people like Michael Milken and many of those corporate raiders as heroes they made all that transition possible and companies if you look at American corporations coming into the 1980s many of them were conglomerates many of them were running some very efficient businesses but others not they weren't spinning the non-efficient ones off they weren't willing to lay people off they were practicing at least some of them were practicing some of the stakeholder stuff and indeed the 1980s was I think a resurrection of this idea of shareholder wealth maximization of refocus on shareholders on making money and it was ultimately it turned out to be an incredibly healthy period of fixing stuff that needed fixing so what did we do it what did our politicians do is they basically in a variety of different forms banned or restricted dramatically the ability to do hostile takers so we have several at the state level several states I think well over half the states in the United States have anti-takeover provisions in those states typically brought about by how did anybody know how these typically brought about well the first one Pennsylvania and it was brought about when a Pennsylvania company got a hostile takeover bid somebody wanted to buy them out and it was clear that as a consequence of that some of the plants in Pennsylvania were going to be shut down and moved to cheaper places the company ran to the legislature this is pragmatists businessmen were pragmatists ran to the legislature and they in emergency sessions passed an anti-takeover legislation that made that bill impossible a similar thing happened in Nevada similar things have happened and again over 50 over half of the states in the United States have them in addition courts have upheld things like poison pills and other mechanisms by which management so I think gimmicks can basically completely thwart a hostile takeover if they want to do so compare that to pre-1968 when you could literally buy up enough shares of a company to have to basically take control of it without even announcing it today if you let 5% of a stock you have to fire if you have 10% of a stock you have to find a 13G I think it is where not only do you say you have 10% of the stock but you have to state what your intention is with that 10% so if you're just an investor you say well I'm just a passive investor but if you have an intention of taking over the company i.e. gaining 51% you have to say that your official tender offer which raises the cost of doing it raising the cost of business because you have to let the world know what you're doing so you have to pay a significant premium on the stock and even if you just intend to have 10% 15% and you know just knock on the board's door and yell and be active you have to let the world know otherwise you could get in trouble if after the fact it turns out that you are an activist investor and you didn't announce it that's the Williams Act of 1968 put all those provisions in in spite of all those provisions we still have takeovers in the 80s but note that today you almost never see a hostile takeover it is very very rare because it is very difficult to do so hostile takeovers are another form of fixing problems when they happen you're not doing a good job managing the company I think I can do a better job managing the company I pay a premium to come and shareholders in order to replace you in a sense if I'm successful I make a lot of money if I'm not successful I lose a lot of money but that's business we'll see that today to some extent private equity is serving a similar function although note that almost all the private equity deals done today are friendly deals they're not hostile deals they're deals in which private equity team up with management in order to take over a company and to buy out the shareholders and we'll talk about why I think private equity is so popular right now some other options the market allows us shareholders can get together they can get together and vote the board out you know they can get together 51% of the shares and replace the board shareholders can do that it's called a proxy fight and it's expensive it's not easy but let me point this out that regulations make it much more expensive than it needs to be for example shareholders all kind of regulations about what shareholders can talk to each other about and under what conditions I can say what to you if we're too large shareholders it becomes very cumbersome and costly to put on a proxy fight now it should be costly this is not something that should be done lightly but regulations make it much more costly than it would otherwise be so there are market mechanisms to resolve whatever issues might occur as a consequence of separation of ownership control but most of those mechanisms have been eliminated by government regulation and then when a problem happens who's the villain the market is the villain the market is the villain the market would have sold the problem and who's regulated the market's regulated so as a consequence we take more out of the market in terms of its ability its flexibility to adjust to correct the fixed problems when they occur what means they're actually left open to fix these kind of problems well as I said you can still do a proxy fight it's expensive you can still do the shareholder activists are still out there although they are few of them and it's again it's quite expensive that while the hedge fund industry is still almost unregulated that is changing we're seeing more and more regulations in our hedge fund there's a whole movement to regulate hedge funds so even that one island of freedom if you will in the financial markets is going to come under regulations now already you have to register with SEC I mean it's complicated but you already have to do some things I can see a day when if the right pressure group comes around to influence congress you could see a shutting down of the ability of hedge funds to kind of advocate for their position private equity is a solution we'll see we'll see that later you can still do hostile takeovers in some places but again they're more expensive they are none you know one of the things that happened in Japan for a whole other set of reasons Japanese companies many of the Japanese companies particularly in the middle market were very very inefficient and the whole ownership structure and the whole involvement of the government and the banks in Japan literally in the companies and the fact that they wouldn't allow companies to go bankrupt and nobody was laid off created these really inefficient companies in Japan and when the stock market crashed that became evident and I remember a headline in Forbes magazine in five six seven eight when it was clear Japan was not coming out of this they'd been in a basic depression for five six seven years and nothing was happening and the headline was what Japan needs is Michael Milkin now what Japan needed is not quite Michael Milkin but what Japan needed is free financial markets because financial markets can fix these things people like actually Chibun Pickens tried to do a hostile takeover of Japanese company in the 90s and the idea was to take one of these inefficient layoff the people who need to be laid off and refocus the company and the Japanese laughed him out of the country I mean he had no chance of doing it so if Japan had free financial markets or even semi free financial markets like we do in this country they wouldn't have been in my view in a depression I think the biggest constraint in Japan economically was its inability to restructure itself free markets restructure themselves that's the correcting mechanism for when something goes wrong when a businessman or a particular business or even an industry if something bad decisions are made or crooks take control or whatever although that's kind of bizarre how crooks take control of an industry in an unregulated environment it's interesting that crooks can take control of an industry in a regulated environment that happened quite a bit in the SNL crisis but you have to wonder why SNLs, why did crooks in SNL why did that because of the particular nature of the regulations of SNLs made that combination feasible in a truly free market that would have never happened of course we never have SNLs in a truly free market yeah I would say would I say that the current bid by Murdoch to take over Dow Jones was a hostile takeover yes in one sense yes in the sense that they didn't talk to them before they just made a bid and put it out there into the public however if Dow Jones wouldn't have wanted to do it if the Banker family they have controlling they control the voting shares if they had got together and said I don't want this I don't care what price it is they wouldn't have sold and it would have been it could have gotten ugly in terms of the proceedings what's happened is the Banker family it seems has negotiated with Murdoch and it looks like a sale is going to happen on terms that are agreeable to both parties so I think Murdoch knew when he made the bid that that he made such a high bid it's a huge premium that it would be so appealing to the Banker family that ultimately they would succumb but in the 1980s these things led to lawsuits led to white knights where the company found another investor to come in this was real conflicts and I don't like to use warfare terms to describe business it suggests a zero sum game and it's not but real struggles real challenges they've evolved even hostile takeover it's just not the right term because ultimately who is it hostile towards it's actually incredibly friendly to shareholders because what are you doing you're offering them a premium so it's hostile maybe the managers don't like it but so what you'll notice that disparage business they use warfare violent terms in order to describe it and there's a reason because they want to give you the perception of zero sum and they want to give you the perception of no difference between economic power and political power no difference between the dollar and the gun so they use terms that suggest violence when there's no violence this is all voluntary bottom line it's all voluntary there's nothing being forced something I've seen work on smaller stocks and investment newsletters investment newsletters doing writing them up affecting management yeah somebody notices that something bad going on to some extent Enron's decline was brought about by stories in business week in the Wall Street Journal that brought out some shady what they believed were shady transactions and that alerted the markets to what was going on and that made people in the markets alerted to that to short sellers but it certainly alerted them to that issue finally the third market that functions here is the market for the services of managers you know unless a manager thinks this is his last job ever and it doesn't matter well I mean there's quite a bit of turnover among CEOs I'll give you some statistics in a little while I'm talking about CEOs and a CEO wants another job again the perception and the culture is I don't know a Nardelli at Home Depot made $164 million say he's going to retire obviously but Nardelli loves business this is what he loves to do he wants another job this is not just about the money the money's important but it's not just about the money it's about the love of the work and somebody in a Nardelli doesn't want to go out of Home Depot like he did with the perception of being a bad CEO because that means he won't get a job later on so the market the labor market for CEOs has an impact here again to align those interests when and if they get out of whack so the market has solutions to this problem but at every place almost every place government regulation has come in to block to suppress and in my view to the extent that we've seen real problems like in the late 1990s with the end runs and the world comms and all those companies in my view that is not a failure of the market that is a failure of regulation that is the consequence of placing so many roadblocks on the market to function and I'll also argue in a minute that it's no accident that these kind of cases happen when they happen you know it's not an accident that all these cases came to light in 99-2000 at the top of what I consider a stock market bubble but those two are related as well but I'll talk about that in a minute finally there are internal things that we can do and that any rational company does quite easily to ensure that managers and shareholders are more aligned stock options were a great mechanism to help do that fantastic mechanism to do that because let's say like we talked about last time that there's something inherent about the CEO that would make him more risk averse than the shareholders because the shareholders are diversified right then how do we encourage the manager to take risk by rewarding them but rewarding risk slightly disproportionately and how do you do that a stock option stock option rewards risk-taking and it aligns the interest because the stock goes up the manager does very well if the stock goes down he gets nothing right so stock options just stock grants of aligning the interest so they are internal mechanisms simple stuff that you know stock options are a little bit more complex they came about in the 1980s and were incredibly popular and of course today they are viewed as the big demon right do you see reporting stock options expenses a good thing or part of sort of destroying one of these corrections so should stock options be reported to expense I don't have a strong view about this I think that ultimately they do need to be particularly in high tech companies where they were issued enormous numbers of stock options and their elusive effect on shareholders was substantial I think they probably should have but this is my view of and I was going to leave the stand but this is my view is that in a truly free market the market would decide that in a truly free market you would have competing accounting standards I mean maybe it would all end up being one I doubt it because I think the different industries would probably get different accounting treatment I don't think that all industries need to have exactly the same accounting I don't think that accounting for a bank is the same as accounting for Cisco they're just different ways in which you should value you should value revenue the way you account for revenue or liabilities it's just complex I believe that in a truly free market you might have accounting standards that develop around industries you might have accounting standards that develop around the like the NYC or the NASDAQ so the NYC might have its own standard I'm not sure one of the points I'm going to make is I'll try to predict how markets would actually behave in a truly free market because they're far more innovative than I could ever imagine but I do know that markets can come up with solutions so whether to expect options or not is something that ultimately should be a market question and I haven't seen any studies but there probably are studies to see if once this option issue came about did the market not get it because ultimately all of these were reported say I'm a sophisticated shareholder or I'm an analyst at an investment bank and Cisco just issued 20% of its stock as options even if they don't put it into the financial statement I should be able to figure it out and if I didn't who's fault is it so again I'm torn I think ultimately belongs probably as an expense but I would leave it to the market to determine that to accounting firms in a truly free market to dictate that okay let me just one last point about this issue and that is that the separation of ownership control is no way as bad as most academics presented that is if you actually look at share ownership in the United States it's fairly concentrated there are significant block holders they're not as active as maybe we would like them to be but they're there it's not true that share ownership is as dispersed you know millions of people unrelated and it's also true that managers own quite a bit of stocks so the whole issue is somewhat is exaggerated dramatically put it that way okay let me say something about bubbles which I think is going to be the most controversial thing I say and then we'll move quickly on I believe the bubbles do exist stock market bubbles and I would define the stock market bubble as when when a broad broad number of stocks their value has departed from a rational discounted present value of their potential future earnings okay so when it's departed from reality I think they're very rich they're very difficult to call although at the peak you usually know it's a peak and they're almost impossible to identify when they were going to end I and I know lots of other people have actually lost money on that particular attempt as to predict when the downside is going to happen but I don't think that at the at the height they are difficult to call I think it's quite easy to see when they happen I don't I'm not an expert on this so what I'm going to say now in terms of why I think they happen is from my perspective still speculation I'm not I haven't looked into it as deeply you know since the bubbles bust I've not been exactly I've I was a finance professor before the bubbles not after and in those days I didn't believe in I have to admit that in the mid 90s and so on and and towards even in much of the late 90s I didn't believe that they existed so I think it's the reality and the reality of actually trading in the market which ultimately convinced me that bubbles do exist and and and I'll tell you why we've been talking about bubbles in a minute I think that bubbles might my view of the bubbles are caused ultimately by monetary policy combined with a certain euphoria among investors associated with with technological change I think it's caused by depending on money by inflation ultimately I think that just like inflation fools businessmen it fools investors as well and and I think money does sometimes will flow into financial markets and not be flowing to prices and to goods in a way as to be perceived as price inflation but you could see asset price inflation rather than a good the prices of goods increasing and I think I think there's a correlation there between the increase in the money supply and the existence of bubbles but I think it has to be more than that I think something has to happen to get people very excited and to get people so excited that they behave irrationally and I think that a significant number of investors during the late 1990s behaved irrationally they took a legitimate technological change i.e. the internet technology telecommunications, fiber optics all of that exciting wonderful stuff that was going on and extrapolated off of that irrationally including extrapolating that behavior irrationally that is assuming the Fed would behave in ways that it didn't and everybody should know like decreasing interest rates forever and never increasing them so that people are willing to buy stock at ever increasing prices on ridiculous or non-news on little or no information but if you see that with individual stocks it's relatively easy to see we saw it all the time you know my favorite story because I lost a lot of money on this for somebody else unfortunately it's much easier to lose your own money believe me it's much much harder when you lose other people's money and I'll tell you this quick story there was a bank in 1999 called NetBank and NetBank was trading at 40 bucks a share and by any ratio you measured the most expensive bank in the country it was for those of you anything about it was trading at something like 6 to 8 times book and what it was NetBank? NetBank was a bank that accepted deposits over the web and didn't have branches that couldn't give out loans that went and bought out mortgage backed securities so it had a nice 2% spread pretty good business you make 2% you can make a lot of money but 2% that's it normal banks were making 3% 4% because they could lend it prime plus and to attract money over the web NetBank had to offer above market deposit rates so its spread was really low for the for the banking market at that point in time 99 the yield curve was pretty steep and it was yet it was the most expensive bank in the United States we shorted this bank I shorted the bank on behalf of a client at 40 bucks a share because we figured 8 times most banks at those days were selling it below 2 times so this was 4 times more expensive than most other banks in the country during one week in April of 1999 actually during one day in April of 1999 that stock went from 40 bucks to 250 dollars and on a 200,000 dollar short position I lost a million bucks that still causes goosebumps the next day of course my investor was on the phone and my view was let's just wait I mean it's gonna come down and if you use your view what I didn't make money by waiting you liquidate the position now we recognize the loss and we move on which is how he made money so the next day we liquidate the loss and of course by then it already came down to 160 but it went 40 to 250 to 160 and 2 years later the stock was trading at around 4 and today just a few weeks ago actually net bank was finally liquidated it sold off all its assets and is gone which caused quite a bit of chuckle around the office my form of financial office remembering stories of net bank not only that but during that one week in April the same week the net bank went like that a number of small community banks around the country announced they were launching internet banking activities and in the future they weren't even now launching they had plans and their stock doubled a number of them and luckily in those we caught it at the top and shorted it and made some money because within that week the stocks went up and then they crashed so it was a one week bubble in bank stocks that announced internet something we made money off of that we lost money off net bank much more than we made off of the other ones but we made a little bit of money off of the other ones by shorting them and by doing that hopefully correcting back to normal prices and it lasted a week for banks now banks are not exactly a sexy hot industry it lasted a lot longer for dot coms of a wide variety but it happened I mean it's an issue for a lot of lots of economic reasons because it causes misallocation of capital and so on but it's an issue with regard to what we're talking about as well because it creates now the stock market is not acting as a signal indeed when a bubble occurs the stock market is acting as a false signal providing managers with false incentives providing them with incentives to invest in the wrong places and it's no accident that all the all the corruption that happened that was discovered in 2001-2002 happened in high flying stocks where there was enron worldcom all these it happened two features of these industries all the corruption happened in high flying stocks and heavily regulated industries all of them utilities and telecom all of the problems were utilities and telecom heavily regulated industries going through regulatory change re-regulation as I like to call it but where they could manipulate stuff and they could schmooze with the regulators and get it manipulated and where their stocks were in the stratosphere completely in my view detached from reality that provided wrong incentives wrong incentives in terms of investment and I think it caused focus more and more on what somebody called quarterly expectations quarterly earnings and as a consequence they started manipulating those quarterly earnings because the stock market was so irrationally in my view sensitive to those numbers so instead of the stock market as it is most of the time I believe markets are efficient most of the time as it does most of the time project out into the future not just look at today's number in the context of what numbers are coming in the future and adjust all of that and discount it all back to get a stock price today during the bubble the market was looking at every number as you know way out of proportion and managers responded to that and some of them responded to that in dishonest ways by finagling the numbers but they also believed what the market was telling them so for example the story in WorldCom goes like this they had a bad quarter right? stock price was valuing them at some astronomical amount they ended up being the largest bank of sea in American in US history bigger than anyone so the market was valuing them and they were laying fiber optics by the way which everybody was laying fiber optics and somebody should have seen that and I think a lot of people did by the way what happened during the 1990s is the people who typically were short and correct problems were exiting the market because believe me after net bank the word came down you don't touch anything with technology you can still short banks but you don't touch any bank with the technology any net bank like so we exited the market so we who did shorting who helped correct valuations were out of the market and indeed if you know Julian Robertson the big hedge fund manager one of the most successful hedge fund managers in history in 1990 I shut down his fund took I think it was three and a half four billion dollars handed it back to investors says I don't get this market I'm gone and Warren Buffett wasn't trading much in those days and he said publicly I don't get this market so a lot of in my view rational investors exited the market stood on the sidelines and watched because they didn't they did again you don't know when the correction when your short position will actually pay off so what was happening at WorldCom was they believed in this high valuation they had a bad quarter and they went we could announce the bad quarter to the market and our stock would plummet because we've seen what happens to other people but we know in the market seems to indicate that our long-term prospects are fantastic so what we'll do is we'll cheat a little bit on this one quarter and next quarter will be so good that we'll cheat downwards next quarter and we'll flatten it all out it's called smoothing has a technical term earning smoothing right of course the next quarter comes around and it's worse than the first quarter but the stock price is still in the stratosphere and they're still convinced that they are doing well and they cheat again and it doesn't take many quarters before you've cheated on seven billion dollars because it's a you know you know in gambling when you lose a little bit and then you double up and then you lose again and you double up it's the same thing with cheating it happens the same thing if things are getting worse and not better like you predict what happened to WorldCom nobody at WorldCom sat down and said how can we steal money from shareholders indeed everybody at WorldCom most of the people at WorldCom lost everything it's not like the CEO walked away with gazillions of dollars because he committed fraud the fraud was committed in order to adjust expectations adjust the earnings and that happened for most of these companies yeah are you saying that these bubbles would happen because of the technology or euphoria without the monetary policy in the regulatory environment in a truly free market would bubbles happen I don't think so the reason is A, you would take out the monetary impetus and B there's another a problem with regulatory problem and that is that it's much easier to buy a stock than to short it shorting there's a lot of regulations that restricts your ability to short so I think shorty would be easier I also think and maybe this is also called I also think that if you had a free market people would just be more rational maybe that's a prerequisite for having the free market to begin with and I do believe that the state of the culture and again this is not necessarily accepted among objectives but I do believe that the state of the culture affects the extent to which markets are efficient if everybody in the culture is being taught by public education that can't read and do math then the stock market is not going to be as efficient as if everybody in the culture has a much better level of education would insider trading prevent bubbles? yes, insider trading would help to prevent bubbles and I don't want to go into a whole discussion again my view of insider trading is to use this let the market decide I don't think it's a government function to dictate it's a contractual issue between managers and shareholders and exchanges and between those three parties they would have to decide whether insider trading was allowed I think if it was allowed it would be allowed only in certain situations it would not be just short just because obviously for example you couldn't let CEOs short their own stock so I think it would be I think again it's a contractual issue but the fact that most in insider trading would not be allowed but again I think the market should decide I can make really good economic arguments why insider trading is really good for prices and for markets but I can also make arguments why from a shareholder perspective you want to limit it somewhat and again I don't try to predict how those contracts would be finalized in a truly free market generally I mean I believe prices should the most efficient prices that which has the most information insider trading conveys the most information and therefore prices would be more efficient okay so Bobo's I think a cause of a lot of the problems that we saw in the late 1990s and if you add to that the fact that these were regulated industries where a lot of what they got they got not because they were great businessmen because they were great schmoozers it's no accident in my view that Ken Lay at Anron most of the photographs you see of him are with the Bushes or with other local politicians in Texas and he had to I'm not even blaming him because if you are in the utilities business your survival depends on your ability to schmooze with politicians and indeed one of the real risks that we face as we move forward is that the more and more regulations you place in business the more and more you attract to the CEO position schmoozers rather than businessmen political types like the guy who runs Procton Gamble who admits he's a politician first and foremost rather than real CEOs dedicated to business dedicated to making money that is a risk we run and I think we're already starting to see the signs of that happening okay let me go through some of these issues that I said that I would go through I think we've talked about COVID democracies I'm not going to talk much about that we've already discussed it why it's wrong, why it doesn't make any sense why indeed I think shareholders today had too much voting power not too little voting power the only area I'd like to see that freed up is in the area of shareholders talking to one another shareholders coordinating in cases like proxy fights and so on in terms of they should only in my view be allowed to vote on economic issues i.e. issues related to profit maximization so I think what we need is less democracy not more democracy and the root cause here is a confusion between political and economic power is this idea that the corporation is somehow a political model versus an economic model okay let me talk about CEO pay because that's a big issue what's the claim of CEO pay like the separation of ownership control the CEO controls the board therefore he can manipulate the board shareholders don't have a say and they're not often they don't know because disclosure is so weak and therefore CEOs manage to pocket much more money than they deserve and the example given the example most evident in last year or so has been not deli at Home Depot right here's the CEO of a company whose stock basically went nowhere it was flat during his tenure and when he was making a significant amount of money as salary and then when he was fired he got a huge pension which was 30-40 million dollars so he landed up over the life of his tenure over the five years I think making at least he's something million dollars so it's a huge sum now how could that happen well who is who was Robert Nodeline yeah yeah but I actually think that the earnings that the stock market was right that is I think he made mistakes I think he wasn't good for Home Depot that he did not do now you could also argue that the industry was in bad shape but if you look at Lowe's they competed they did phenomenally well during that same period so I think Nodeline was also in a tricky situation because let's first talk about who Nodeline is Nodeline was number two at General Electric one of three people who were number twos at General Electric under Jack Walsh was the best businessman in the country according to Jack Walsh who is a giant among American CEOs over the last hundred years one of the giants in terms of wealth creation for his shareholders in terms of the business model he built and when Jack Walsh retired there were three people who candidated to his place Jeff Immelt Nodeline and a third person whose name I can't remember he was considered the favorite he was the most Jack Walsh-like in character and he was considered the favorite to replace Jack Walsh and what's interesting is that the board chose Jeff Immelt and I think the board chose Jeff Immelt I don't know if you follow GE but if you follow Jeff Immelt Jeff Immelt is more of a politician Jeff Immelt is a stakeholder guy he's a user he's environmental friendly he's worker friendly and they I think sold the shifting wins and decided to go with that political type of CEO rather than a hard-nosed Nodeline type CEO Nodeline is also a manufacturing guy his whole career was in manufacturing he did phenomenally well if you look at his background how he did a G he did phenomenally well so here's a super star literally a super star maybe the most coveted CEO to be available at that point in time when at Home Depot which at the time was flying high stock was very high and the founder retired founder who had built up and they were looking for CEO and they got by all estimates the best CEO in the country and they negotiated a contract and at the time they said wow Home Depot got a good deal because at the time Nodeline looked like the best CEO in the country now looking back Home Depot is in a retail business Nodeline was a manufacturing guy maybe he wasn't the best fit maybe the board made a mistake but that's all exposed that's not, that's cheating if we could do that in life if we could go back and fix all our mistakes I would have never done that bank but Exxante that is pre it looked like a great contract and the board was happy shareholders were happy and for whatever reason and we could speculate forever it didn't work out, share price stayed flat maybe the stock was inflated when he took it over which could be because of the time period when it was maybe the previous the founder had grown Home Depot to its max there was no way to go maybe Nodeline made a lot of mistakes I don't know but it's irrelevant how did Nodeline get fired a hedge fund an investor didn't like Nodeline's strategy he was getting wholesale stuff and he knocked on the board's door and said I think the strategy is wrong I think the CEO is taking it in the wrong direction I really think he should do something about it and he made a lot of noise and I think some other pension funds and so on made some noise and they made noise primarily because of the pay but the original hedge fund guy it wasn't about the pay, it was about the strategy and the board looked at it and they decided that the critics were probably right and they fired Nodeline and now to me, that's the market working and Nodeline got a pension plan because five years earlier that's the contract that he signed and that's the cost and that's the cost in this case of a mistake but mistakes happen so to me the whole thing is an example of the market working options back-dating do this without getting too technical CEOs are granted options they're typically granted options for tax reasons primarily for tax reasons at the current price of the stock there's an advantage to getting stock options at below the current price of the stock because then there already was something when they were already granted so what some companies did is they back-dated them i.e. the current price of the stock is 20 but six months ago it was 10 so we priced them at 10 even though they're issued today and the way these things are reported most companies actually reported that fact and you could argue and i think legitimately if they didn't report it given all the regulations and so on and given the shareholders expectations that was probably wrong they should have reported it to shareholders if they back-dated them but all that the back-dating did was provide more compensation to the CEO and as a consequence he probably got less compensation somewhere else because the package probably wouldn't have changed it probably would have been the same package but this was a tax-efficient i can't remember the exact specifics or why it's tax-efficient but there's a tax-efficiency to doing the back-dating rather than paying him in another way and yet again i think there have been almost no prosecutions of this but the SEC is investigating hundreds of companies and of course a huge uproar and another reason why CEO payers are out of control it isn't they could not align any of this back-dating with extraordinary pay most of the time it was just a different form of pay it was just a choice between different options um welcome to the total wireless store where total confidence awaits i need to keep up with my teens this summer without sweating high cell phone bills don't worry you got this with total wireless we have plans to fit all your families needs starting at just 25 bucks on the nation's best 4G LTE network i won't miss a thing focus on the important stuff like arguing about curfew discover the total wireless stores and get total confidence the latest phones the best network all at great prices now open in LA refer to the latest terms and conditions of service at TotalWireless.com what other ones were there yep anything at all wrong with the back-dating only if it's not important no but there's nothing wrong with back-dating as long as you the shareholder know cause it affects you the shareholder other than that there's nothing wrong with back-dating i mean again i don't want to get into the tax implications cause they were claiming that this was some tax manipulation but that's the problem with the tax people and i just nothing i've read stories on this trying to figure out what's the problem with it and write enormous buses and enormous scandals and those things the only issue is that if the shareholder doesn't let to expect that they're getting accurate information about options and then it turns out that the information they're getting on is not accurate then that's deceptive that's deceptive practices it might even be fraud in some cases but if shareholders are told then what difference does it make it doesn't affect customers doesn't affect suppliers doesn't affect employees indeed one of the unreported things about it and this is something that living in Silicon Valley everybody literally everybody knew that everybody was back dating i mean those of you who lived in Silicon Valley worked in Silicon Valley we knew that everybody technology was back dating and it wasn't just your options that were being back dated everybody's options were being back dated when you went to work for Cisco i'm just picking a Cisco cause it's a it comes to mind you went to work for Cisco you were given there was something you could buy the stock and there was six months they would give you stock at some low price and they were doing the same thing with options not true for Cisco not true oh sorry I should have but it was happening all over Silicon Valley IBM was doing that IBM was doing that and it wasn't just the CEO it was all the employees isn't just the only issue that is an expanse the difference between the stock price and the whole stock price sure but again if you're reporting anybody can do the math so that's the only issue isn't the issue that it's an expense cause now the options are in the money so they have a value right so there's a certain expense associated with that again it goes back to the expensing of options and again if you report it the shareholders can do their own math so that's my view of back then ok so again we've seen this story now what do the empirical evidence suggest about CEO pay well a little known fact is that since 2000 to date CEO pay has actually declined it's been flat to declining and given the stock market performance particularly in those early years past 2000 you would expect that a lot of stock options along with stock compensation schemes didn't work very favorably to CEOs when the stock market collapsed so CEO pay indeed has not grown much since 2000 CEO pay grew a lot much faster than pay in the economy between 1990 and 2000 isn't a large part of that just the talent pool and what CEOs are expecting to get paid if you want the good guys to do that yeah we'll get to why that something else interesting is between 1990 and 2000 indeed actually continued the trend even to today many other high paid individuals salaries grew at faster rates than CEOs athletes if you look at athletes how much they paid in 1990 how much they were paid on 2000 on average athletes high level athletes pay grew much faster during that same period than CEO pay the amount of income generated by hedge fund managers grew much much faster than private equity managers private equity venture capital managers drew much much faster from 1990 to 2000 than CEO pay pay on Wall Street investment banker pay grew much much faster from 1990 to today than CEO pay in other words in extraordinary talent in that segment of the population of extraordinary talent pay grew at astronomical rates really really high rates I mean spectacular rates between 1990 and today CEOs actually slightly underperform the rest of the high owners not overperform now we can now talk about why that happens why is talent more valued over the last 15 years and I think there are a lot of reasons and most have to do with supply and demand in the case of athletes also has to do with increased wealth and the fact that we're willing to spend more money on athletic activities and therefore they can charge higher rates for the seats and therefore they can afford they can pass on the cost because of the increased wealth but we're willing to pay for that we're willing to pay for that in the case of athletes we'll only pay for that in the case of movie stars and in the case of CEOs I think the situation is simple there's a talent shortage there are very few CEOs in the world who can manage a large corporation it's hard and it's huge demand because the demand today is not just from the US this is where globalization plays an important role globalization has created demand for CEO talent all over the world who's running Chinese companies big Chinese companies some of them are Chinese but many of them are Chinese from Hong Kong so they're driving CEOs away from Hong Kong to mainland China many of them are from Taiwan many of them are from Malaysia ethnic Chinese from these other countries but somebody has to fill in in these other countries we're seeing Americans go overseas to run companies who runs Sony today I mean this was unheard of because it's Japan who is the most it's a British guy right runs Sony I think he's British you're seeing a global market for CEO talent in Europe you're seeing American CEOs go to Europe you're seeing European CEOs in America there's huge demand for CEO talent extraordinary CEO talent and there's a shortage in supply and what happens when you have a situation like that where demand is going up supply is constrained prices go up to attract more talent to that profession and indeed the opposite in my view is happening at the low end of the skills of the job market at the low end you've got lots of people who can do the simple jobs and indeed as board is open and as capital can move around you can pay somebody in China a lot less than you can pay somebody in the United States to put two things together to screw a screw and therefore salaries at the low end wages at the low end are going to decline or jobs are just going to move elsewhere but at the high end they're going to increase globalization has brought that probably not because what will happen if there's talent in the world I mean, ultimately remember the theme of Alice Schrock China will develop its own talent and now maybe one day Chinese CEOs will be running American CEOs if China goes the right way and everything goes well and capitalism really does thrive and so on but for now that's the situation I think the same is true for investment bankers the same is true for hedge fund managers I just think there's a shortage of talent and that's a consequence of a bad educational system it's a consequence of the culture we live in it's a consequence of a lot of things that there's just fewer people who rise to top and when they do rise to top they're worth more they're worth more more of a corporation's resources are going to be allocated to paying a CEO a lot of money because they need a CEO and there's very few talented CEOs out so the whole issue of CEO pay seems to be seems to me a completely bogus issue there might be exceptions I'm not saying there are no CEOs out there in some company that hasn't done well who make more money than they should make because of all the other inefficiencies I've talked about that don't allow the market to correct those companies should be taken either a two-free market, those companies will be taken over or somebody would buy up a block of shares and kick the CEO out but we don't have that kind of dynamic market to allow that to happen so yes there are abusers here and there the systematic thing it's just not the case and indeed one of the claims is that the CEO has the board in his pocket and that CEOs can get away with these high pay because the boards are not monitoring them and therefore let them get away with whatever they want but if you look at the empirical evidence again turnover among CEOs is at the highest rate it's ever been in American history CEO tenure today on average is six years six years you can't do much in six years and most of these are the board stepping in and finding a CEO the board initiating some kind of transition and if the board is so impotent how could they do that now I think there's a certain unhealthiness about every six years replacing a CEO but the fact that it's happening suggests that the boards are not impotent that the boards indeed are more active than people expect them to act so there's just no empirical evidence for this for a problem to be for the existence of a problem by the way the author the two papers one on the CEO turnover and one on CEO pay relative to other very talented individuals the two papers by Steve Kaplan they're still working papers haven't been published yet but really with updated data and Steve Kaplan is one of the best finance guys out there in corporate governance okay private equity let's talk a little bit about private equity quickly what is private equity private equity are these partnerships that get established okay they have a general partner who manages the business they raise money from limited partners and what private equity traditionally has done and then number of forms of private equity venture capital is a form of private equity and venture capital they fund startups they provide capital to entrepreneurs they help the company grow and then they you know they take the company public or they sell the company to another company and they make money that way most of the public private equity market is not in venture capital but what it does is it looks for businesses that they believe are either underperforming usually private businesses not public businesses usually private businesses that they believe are underperforming or a family business where the family wants to get out of the business and they go and they buy that business they bring in professional management they improve it and then they sell it that's the typical model of private equity leveraged buyouts in the 80s a lot of the hostile takeovers were done through private equity vehicles KKR which is a famous private equity firm really did a lot of those hostile takeovers including the largest ever which was RJ Reynolds RJ Arnabisco in 1989 that was done by KKR KKR still around today what's happened in the last five years private equity has existed forever probably but in its current form for at least the last 25 years what's happened in the last five or so years is enormous amount of capital has flown into private equity and just in the last two or three years these private equity companies are taking over not in a hostile way but taking over huge public companies they're making them private i.e. they're buying up all the stock and they're making them private and the big question is why why is this happening because it's a real economic phenomenon this is not some trivial thing we're talking about tens if not hundreds of billions of dollars actually hundreds of billions of dollars if you include the debt being allocated to taking public companies and turning them into private companies and why is this happening and i think it's happening because the cost of being public is so high and the cost of being public is high because of regulation a big factor here is sawbains oxford big factor and that's why the timing of private equity's rise to where it is today is around 2002-2003 when you get this wave sawbains oxford makes it extraordinarily expensive to be a public company all the accounting rules and the internal control mechanisms the sawbains forces including the criminal liability that a CEO has when he signs off on the financials and the board has an audit committee it's just expensive it's tens we said 1.5 trillion dollars economy-wide and their economies to getting rid of that cost instead of that cost going to the government or to going to accountants or going to all kinds of bureaucrats now that cost going into the pocket of the private equity guys so there's a cost in taking that out but there's another cost today of being a public company and that's the hassle cost the harassment cost if you will you get weird of culpers you don't have to deal with culpers you don't have to deal with these union pension funds you don't have to deal with these state treasurers who are coming knocking at your door and demanding that you be environmentally friendly or worker friendly or this friendly or Connecticut friendly or whatever friendly you can run the business for the sake of its owners and what's interesting here is that it doesn't really resolve this ownership and control issue because who controls the company well this is the new CEO and the general partner but who really owns the company the limited partner and who are the limited partners what control do they have of what the general partner does zero none they don't vote on anything no democracy at all they can't even sell their shares like in a stock market there's a complete separation of ownership control and private equity which nobody talks about so why are people so confident that that's not a problem because of the way the general partner is compensated he gets a fee 2% on the money he manages and 20% of the profits so he's gone instead of to create profits yeah it's not efficient they have a lot of small limited partners so most of you are limited partners this is funny but most of you are limited partners are the same institutional investors that are harassing the corporations and now you're limited partners so Kalpas is probably your limited partner but they have no say as a limited partner where they do have a say as a shareholder but it's the same people and Kalpas and their institutional investors the unions are in this difficult situation which is great on the one hand a shareholder is advocating for these things which is pushing these companies into the hands of the private equity holders which is another basket of their funds so within they've got this conflict between the private equity and the public arm of Kalpas and if all these companies become private what's going to happen to the public equity arm I mean it's really interesting to see these guys twisting and turning and trying to figure out what to do in terms of getting small investors and have trading people are trying to do all kinds of stuff with that and they've tried in the past it might happen but this is the point I think with private equity you have to take credit in investors and that means certain net worth requirements and so on but what I find fascinating is that there's a situation of ownership control in private equity and it exists because they've let for now they've left the market now Congress is already talking about changing the tax laws to cripple private equity it probably will happen so they're starting to view this as a problem and you can see it in the headlines of newspapers private equity does this, private equity does that all with a very negative connotation and negative twist but the private equity market is here to solve a problem to get rid of regulatory costs and harassment by these politically motivated shareholders it's interesting how that private equity regulation is going both ways Congress is saying little investors we're trying to protect you through that a credit investor rule the little guy doesn't have access to this good stuff now they're complaining because the small investor can't get into the private equity world and yet all the returns are supposed to be there now I think they're going to be a lot of problems with private equity let me say that the real concerns in my view for private equity I expect that I think there's going to be a crash down the road here and I think the reason is this these GPs are basically creating conglomins I'm not a big believer in conglomins I think it's hard enough to run one business well they're basically creating, take Blackstone Group which just bought Hilton, it was in the newspaper they own Hilton, they own the largest real estate company in some way somewhat related but then they own manufacturing and they own financial and they own all these different industries and I worry whether those GPs can actually manage all that now what they do do is they find just like Jack Walsh did they find really high quality CEOs to run each one of them and what I find interesting is that people like Nardelli who got kicked out of Home Depot are finding jobs in private equity and what really kills the whole CEO pay issue is the CEO pay packages being paid by private equity firms are higher significantly higher than CEO pay packages in the public corporations by that measure CEOs in public companies are underpaid not overpaid they're underpaid and indeed what's happening is you're seeing the best CEOs leave public corporations in going work for private equity and I know at least one CEO who's done it is not worth it and the CEOs say why do you do it pays better we don't get harassed by shareholders that's it yeah quickly you can get them you can get them you know if you have a relationship with culpers and so on you can find this stuff because the limited partners find out and some of them are advertised okay let me quickly what do we got five minutes for this future future that is going to happen without objectivism the future that would I think happen in a free market I think this you know we're looking at real problems without a change running a company becomes more and more political boards of directors become more and more compliance boards less and less focus on making money and more and more focus on appeasing regulators private equity may be flourishing for a while as a solution own set of problems and no flexibility in financial markets to resolve whatever problems are created because regulations have sucked out that flexibility we could we could not want to predict this but we could see a situation similar to Japan in the 1990s where we know what needs to be done we know American business needs to be structured and how you would do it but you don't have the tools because the regulators have taken those tools away now Americans are incredibly innovative in the face of regulation but I think there's a limit to how innovative you can be in the face of those regulations and at some point this could crack on the other hand in a truly free market as I've tried to hint I don't know exactly what would happen I think that you would have some companies with concentrated ownership with block holders you'd have other companies with dispersed ownership I think you might find new forms of governance I mean there are a lot of things that might happen if you took out the whole regulatory mechanisms whether inside a trading is allowed or not you know how the exchanges behave because exchanges now become instead of the SEC becoming now the facilitators of a lot of stuff it's private exchanges that become facilitators of a lot of these things what they would actually look like and how they would evolve what I can guarantee though is that in a free market if corporations and businessmen are left alone productivity would increase dramatically at the level of the standard of living the quantity of material wealth that is available to us and as a consequence the quantity of spiritual wealth that was available to us would grow exponentially from where we are today and the sky is not the limit in this case there is no limit to where that can go freedom it is really I mean it's unfortunate to some extent the kind of creativity that can be born through freedom but what we do know is that lack of freedom particularly as it increases as it grows as the regulatory environment can only lead to disaster cannot lead to a positive outcome so in spite of the fact that things look good economy keeps growing technology keeps improving if there is no change in the culture that can't continue indefinitely that will have to come crashing down one of these days and I'm not in the business of predicting when and I think it takes a long time generally in the face of American ingenuity and creative ways to go around regulations and so on I think it takes a long time but it has to happen at some point you know A is A if you put businessmen in shackles which is what regulations are doing at some point they will be either they won't maybe they won't go on strike they are equivalent of them going on strike because they won't be able to produce and on that depressing note thank you all all material in this program is protected by copyright and may not be reproduced in any form or manner nor played before a live audience without the express written permission of the producer the Ayn Rand Institute for further information or to order other products eStore.AynRand.org or call 1-800-729-6149 they say soccer is the football of the rest of the world only soccer's championship lasts the entire month now we're talking and there's no better place to spend that month than at Buffalo Wild Wings get into B-dubs where we've got match day select domestic beer specials and a special sauce mashup to go along with a loaded roster of 21 sauces and seasonings that's enough combinations for a full month's worth of delicious cheering catch all the soccer action at Buffalo Wild Wings Wings, beer, sports offers vary by location by location by location by location by location by location by location