Comments
Transcript
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JSThe government got their money back for a bridge loan to wreck less and soon to be bankrupt fools and the fools got to keep the equity. Yeah, no moral hazard there! Anger is not at Wall Street is not misplaced. Self preservation was priority number one in the back rooms.
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ACI was surprised (and disappointed?) that Grant said "sure, sure" (instead of really pushing-back) to "You want people to actually-- meaning investors who are watching this-- to actually believe they can if not predict what you're going to do, at least not be surprised by what you're going to do. Because the surprise element creates a lack of confidence and lack of confidence creates volatility. And then it's much more difficult to create the stability that you're actually looking for." No we don't want "stability"; we want investors to cover their arses, and be aware that anything can happen. That way they are taking risks being fully aware what the downside really is (losing it all?). A measure of volatility all the way along means it doesn't build pressure inside the system, and we don't blow the world up (again). Regular small forest fires, and all that... I thought (and perhaps mis-understood) Grant wanted the Fed to just shut-up.
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NRI think this interview could have been better received if it focussed solely on the last 20 minutes (i.e active vs passive / beta vs alpha).
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JVVery disappointing conversation. Calling Kraus a "titan" and covering him with praise and adulation, just seemed weird. The part on the GFC was comical. The discussion on AB, where as far as I know Kraus's results were disastrous, was strange. Finally, the disruptive business model, makes no sense, and seems only aimed at exploiting unemployed portfolio managers. Kraus completely contradicts himself by earlier criticizing the industry for focusing on short term performance and then setting up a business model where his managers are paid on short term performance. The incentives are all wrong. Surely, the business will fail but Kraus will come away with another big financial gain.
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AGGreat interview. Always appreciate the stories and industry insights from people that have been in the business for years. Thanks GW and PK. Keep it up
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MKDid any one else hear the Grindr ringtone at 00:05:46
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MKThis man has a god complex and I felt reminded of the “reality force field” that Steve Jobs was described with as a model for his imposition of reality and conclusions when there were emergent challenging perspectives. It seemed clear that Grant squirmed a little, it reminded me of “being told how things are around here” across the decade I spent across primarily two investment banks. I’m dramatizing certainly, he must have great kindness and cooperation and self reflection too. But i got a little bit of the heebie jeebies. Sorry for being negative just gut feel.
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SSLast part of the interview was great. Who could disagree with well aligned incentives all the way up? Sounds uncommonly sensible. Not so sure about the first part.
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HH36 minutes in is where you lost me. Everyone lost everything but wealthy got to keep their inflated assets and Wall Street still got paid. I feel very bad for the people who lost all their equity gambling with 20x leverage. At least Peter got his $25mm https://blogs.wsj.com/deals/2008/12/22/merrill-lynchs-peter-kraus-collects-25-million-then-resigns/
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BMSorry Grant but this guy is an ego ridden fat cat who thinks all is well as long as he is well. My opinion of course but I wouldn't trust him as far as I could throw him. So...how much did he pay RV for the airtime?
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TEFirst sentence of Policy path post crisis section: "..and then the question was, well how do we re-engineer risk-taking?". Did he realise he actually said that out loud?
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JBChecked in to Aperture and they only have one fund advertised on their platform. I think there is going to be a resurgence in active management. Index investing has problems. Investing in the whole market and not really giving a hoot who wins or loses in an industry is not how the stock market was designed. Activist investors are needed to keep management honest. Love the fee structure and I hope this becomes the standard model.
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MMThe most uninteresting waste of time I could possibly imagine, did GW even speak? Make that money RV
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GFAlthough listed as a single interview, this really comes in two parts. The first part about the GFC was revolting, as he implicitly seems to equate saving the banks with saving the bankers whose corruption and criminality brought on the crisis, and a second part where he talks about a new investment model that really appears to be a massive improvement on the crumbling hedge-fund model. With regard to the first part, if common citizens had been unable to access their money for a few days - until emergency measures were worked out - we would have survived just fine as a nation, even if Wall Street was devastated. But the way they used public means - TARP, QE, etc. - to save the big banks and the big bankers, well, let's just say that my perspective on that is totally different than that of Mr. Kraus.
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JHOn the one hand, Kraus is diplomatic, personable and well-spoken (vintage CEO). I initially got a good impression. On the other hand, as this interview progressed, I started to have major misgivings about his judgment and character. It is deeply troubling to me that he suggests (a) the lesson of ‘08 is that “collaboration in a crisis is essential” (mmm, yeah of course it is, but what he really means when you study his profile further is that “Collaboration”...among political and financial elites, even if it comes at the expense of the broader public...is “essential”); and (b) “populism is dangerous” — yeah, it sure as heck is dangerous if you’re a highly overpaid banker who benefited from what amounts to playing fast and loose with the public trust, effectively usurping taxpayer dollars, and then walking away with a nice, hard-earned “handshake.” What a crock - I’m sorry. I have the utmost respect for GW and RV, and love the work you do overall, but this interview made me so angry at a certain point I had to turn it off. Fewer “fat cats,” please - I don’t like to sound judgmental, but I am afraid this guy just rubs me entirely the wrong way, and the actions he and his associates took and were complicit in were utterly despicable, and ended up costing honest, hard-working Americans years of savings and indeed their very dreams.
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BMSorry Grant ok by
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AVPeter Kraus came into AllianceBerstein after the horrendous performance during the GFC and instead of cleaning house of under performing portfolio managers, he updated the executive floor and bought expensive artwork. That should give you a glimpse into his leadership. While attempting to pivot the firm towards Alts, he failed to realize that he should have been doubling down on the Berstein Wealth Management division. He also made a half-hearted effort to acquire some RIAs. Just some "inside baseball" for those that are interested.
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IHBrilliant business model.
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PGWe need more thumbs up buttons here... sometimes one is not enough! 👍👌👏
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JSNothing is perfect he says..... And how about jailing a few bankers?
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ABGrant Williams does an amazing interview - and Peter Kraus has a new management model, that if it catches hold - it is going to be revolutionary - incredible for investors and only the cream will rise WITHOUT the measure of added risk. For those that turned him off early, they missed something big here - most enjoyable and will have to give it another listen soon
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KCHis revisionist history of the financial crises led me to doubt everything that he said thereafter.
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SRIts refreshing to see alignment with investor's interests since the so-called "Wealth Management" industry is largely just a "Fee Generation" business, often at the expense of the investor. Great and insightful interview.
PETER KRAUS: John came to my office I think, day four, and said, we've got to go to the Fed, because Paulson was coming up from Washington. And basically, Paulson told us that if we're going to save Lehman, it's going to have to be you.
People don't want to lose their jobs. Financial advisors don't want to lose their clients. So they don't actually select managers that are in the nadir of their performance, even though they have a good performance record. They select managers that are at the top of their performance.
So clients are always invested in crowded factors. So if you look at the big fund companies in the world-- Capital, Fidelity, Wellington-- you will see T Rowe Price. You will see they have anywhere from two to five $50 billion or bigger funds. That is 100% of their profitability. All the rest are options. So everybody is striving to get this big scalable thing, because that's what the profits are. Nothing could be less valuable to the investor. Nothing could be less valuable.
GRANT WILLIAMS: I'm the offices of Aperture Investors to talk to Peter Kraus. Peter has had a phenomenal career in finance, and this new project of his is fascinating to me. It's right in the middle of active and passive, and he's doing some extraordinarily disrupting things. So let's sit down and talk with Peter and see what he has to say.
Peter, welcome to Real Vision. Thanks for having us here.
PETER KRAUS: Well, thanks for coming.
GRANT WILLIAMS: In this beautiful office with some amazing artwork around us. But I want to start and go back to the very beginning, because as anyone watching this knows, I love to go through people's careers and find interesting places to jump out and talk about stuff. So if you wouldn't mind, take us all the way back, as far as you can go.
PETER KRAUS: Sure. Well, I started in New York City in 1974. I was working for what was then known as Peat Marwick Mitchell. It was an accounting firm. I didn't have an accounting background. I was hired into a program that they called the program for liberal arts. It was called the Place Program. They had very innovative ideas amongst the all the eight firms. They hired people without accounting degrees, and they gave them the opportunity go to NYU at night. Within 15 months, I got an MBA at NYU and my CPA. And I worked with Peat Marwick. And it was quite interesting.
And half the time I spent in the consulting part of the business, and half the time I spent in the audit part of the business. And I liked it.
GRANT WILLIAMS: So what was it-- you didn't have an accounting degree. What took you into that world in the first place?
PETER KRAUS: I liked finance. And in 1974, Wall Street was not what it was today. It was a very different place. I mean, if you were talking about the bond trading business, that meant actually cutting out the coupons on the bonds, and taking it down to the trust department to get your cash payment. It wasn't exactly the same kind of bond world that you have today. And equities were certainly traded, but at $0.05 in commissions-- commissions I think, were deregulated in 1973.
It was a very different world. Banks were interesting, but not very exciting. And so the investment banking world existed. I didn't really know it that much. And accounting was an interesting profession. You know people, don't necessarily think about accounting that way today, but in the '60s, accounting grew dramatically because the SEC actually required all public firms to actually have audits. And that meant that the business grew dramatically in that time period. So you were at sort of the tail end of a big growth spurt in accounting. And that's why it looked like an interesting profession.
GRANT WILLIAMS: Yeah. So from the accounting world, there must come a point where you figured there was something bigger and broader.
PETER KRAUS: Well, no. I loved Peat Marwick. I thought accounting was great. I was interested in tax. I was interested in auditing. I was interested in consulting. And they had all those different capabilities. I like numbers. I like clients. I like people. There were a lot of good things.
But the business began to slow down and inflation actually, began to eat away at the cost structure. And I came up with a new idea at Peat Marwick, or a business to build. And I went to my boss and I said, either I'm going to build this new business or I'm going to leave, because I don't really want to keep doing what I'm doing. And he said, well, OK, go build a new business. And you know, we tried to do that, and my first client was Goldman Sachs. And little did I know, Goldman Sachs decided to offer me a job.
GRANT WILLIAMS: Doing that, did they see the business like it? Or it was just--
PETER KRAUS: No. Goldman had announced to the world that it was going to build a mortgage business.
GRANT WILLIAMS: Oh yeah.
PETER KRAUS: This is 1985. And they were behind Credit Suisse and Salomon Brothers. And they wanted to catch up. And so their idea was they were going to start this mortgage business and they took two partners, Joel Kirschbaum was one and Gene Mercy was the other. And they co-headed this mortgage securities business, and they went and hire 100 people. And I think I was employee number two or three.
But I was a partner at Peat Marwick, and they were going to hire me as a vice president and that was a little challenging. Not so much for me, but my wife was not particularly happy about that. And I remember my father said to me, he said, wow, you're going to go down to Goldman Sachs? You're a big fish in a small pond. There you'll be a small fish in a big pond, which I didn't think was very motivational.
GRANT WILLIAMS: Yeah.
PETER KRAUS: My mother said to me something that stuck with me my entire career. She said, don't do something you would regret. And I would regret not taking up the job. So I took the job.
GRANT WILLIAMS: It's funny, the first big career move I made when I went from Robert Fleming, which is a small independent investment merchant bank in the UK to UBS, and my first six, eight months there, I felt like that. I was out of my depth completely and thinking, what the hell did I do here? You just feel so small, and it ended up being probably the best decision I ever made, because it was a new business, you didn't have that--
PETER KRAUS: It was a new business, I had that opportunity. But the one thing about Goldman that I thought was really unique-- Peat Marwick was a governance structure where you sort of had to be a jack of all trades. You had to be a technician, you had to be a client person, you had to be a manager, you had to operate your business, you had to go get new clients. You know, nobody is good at all those things.
And what was really interesting about Goldman Sachs they had sort of an ability where if you were a technically strong person or you were a very good client person or you were a good trader, everybody could actually execute on their skill set and just on their skill set. And yet the compensation levels were consistent. So you didn't have people trying to be managers because you got paid more. You know, you could be a really good merger guy and get paid as well as the really good investment banking guy as well as the really good trader.
GRANT WILLIAMS: Yeah.
PETER KRAUS: That created a really interesting dynamic, I thought, to attract talent and to allow people to specialize and be much more effective in their roles. So that was the thing that actually I thought was special about the firm, and made me feel like, OK, it's worth the risk.
GRANT WILLIAMS: So where did you go-- what was your chosen skill that you decide to focus on at Goldman?
PETER KRAUS: Basically, I'm a salesman at the end of the day. I'm really good with people, and I'm willing to ask for the business, and I'm willing to put myself out there. I'd say that over my time there, I was able to build both technical skills, and trading skills, and investing skills. And today, I'm probably more multi-dimensional than I was when I first started. But that was the core skill at the time.
GRANT WILLIAMS: So walk us through building that business, because Salomon was a behemoth back then. I mean, anyone that wanted to challenge Goldman, probably the only people that could have done it with any reasonable expectation of success. What was it like to see Goliath there and coming into day, how do we knock this guy down?
PETER KRAUS: Well, I think ignorance is bliss a little bit. So you know, I'm not sure we necessarily appreciated the size, and skill, and sophistication. But it was also a great time of innovation. I think of money sort of like water. It finds the lowest level. It always moves to that level. Cash flows are similar. And so if you think of finance as just a series of cash flows, well, how do you structure the cash flows, and how do you think about the cash flows? How to optimize the cash flows?
Well, that really hadn't been done very much until the mid '80s. And collateralized mortgage obligations and interest rate swaps and things like that-- they were all new. And one of the reasons why I ended up at Goldman Sachs was the accounting profession was reacting readily or actually, quite frequently to changes in finance. So for example, in the early '80s, there were no interest rate swaps. In the early '80s, you started to actually create these collateralized mortgage obligations. How did you account for these things? What were the accounting methodologies that you used?
And so actually, it was quite innovative. And so even though we were starting something new, we were in a space where we thought innovation would actually work. And in fact, we did. We innovated a lot of things. And so did the whole Street, but Goldman was part of that. And that's really how we competed.
GRANT WILLIAMS: It's funny. When you think about mortgage bonds today, they seem like such a plain vanilla asset. But back when Lou Ranieri and these guys created that market out of thin air, essentially.
PETER KRAUS: Out of thin air. You know, you traded a Ginnie Mae security and a whole loan, meaning an actual loan, and the bid ask spread was sometimes a point or even more. We didn't have securities that we have today. Freddie Mac and Fannie Mae existed, and they were-- I don't think Fannie Mae and Freddie Mac securities until the early '80s. And that government securities market exploded over time and got enormously large.
But even the bond market, even the corporate bond market, if you wanted to actually underwrite a bond for Procter and Gamble, you literally had to file a document with the SEC, it had to go effective I mean, you don't do those things today. We buy the bonds right off the shelf and trade them immediately. And sometimes, the asset managers are actually driving the price as opposed to the Street. So the world's changed dramatically from that time period.
GRANT WILLIAMS: Well, I mean, the other thing to obviously remember when we think back about that time is the direction of interest rates. You'd come in, and you'd start this business just after they peaked. Was there any sense back then that--
PETER KRAUS: The poorest investment decision ever made in my life was not buying in 1983, 30 year government bonds at 13%.
GRANT WILLIAMS: You and everybody else.
PETER KRAUS: That was a very bad decision that I made. Now I didn't have a lot of money, but it would have still been a good investment.
GRANT WILLIAMS: No kidding. But there wasn't any sense of that? Because we look at it now, we look at that chart of 10 year of US government bonds, and we see it's just a one way ticket for 35 years. And I'm always interested in what it felt like at the time, because no one could have known, but was there a sense that this was a secular shift once we got through the early '80s period when they peaked and started heading that way?
PETER KRAUS: Not really. I mean, there are some prescient investors, some very good investors in that time period that did buy that 30 year bond, and held it, and made enormous gains as a result of it-- at a risk free rate, I wold add. But most of the market looked at the shorter rates which were 16% or 17% and saying, well, I get paid 16% or 17% or 18 months, why wouldn't I do that. And the yield curve is significantly inverted at the time. Volcker came in and basically put in place tough fiscal or tough monetary policies in order to actually change that. He was successful. But the world didn't see that bull market in bonds until it was well established.
GRANT WILLIAMS: So that's what always fascinates me, because we look at it now, and it seems like the most obvious trade of the last 40, 50 years. So I'm interested at the time, how what did it take to convince people that this is a train we can get on. Even though we've gone from high teens to low teens, we're not fearing the bounce back to 20. This ship is going all the way to single digits.
PETER KRAUS: I think the interesting question today is, why aren't people fearing inflation?
GRANT WILLIAMS: Yeah.
PETER KRAUS: You know, why do people think that interest rates are going to stay low for the next 20 years? I mean, people are willing to buy the 10 year bond at almost 2% today. Why are they willing to do that? You just have the inverse.
GRANT WILLIAMS: Exactly. That's why I find it so fascinating. Because it is literally the opposite of where we are today. And yes, the mindset is the same. But back in the '80s, we had no experience, certainly not in recent memory, of bonds going down to these kind of levels. And now, there are people around like yourself that have experienced that. So I'm always surprised it's not an easier mindset change for people than it was going the other way. Because I agree with you-- people now should be looking at this thing and saying, why are we not fearing inflation?
PETER KRAUS: Well, I mean, it's the pain trade. So I'm going to be short the 10 year, Pay the carry, because I think the next five to seven years, that 10 year is going to go to 6%. I should do that if I believe that. But I have to make decisions today with the capital I have today. And it's hard to actually pay that carry over a long period of time, waiting for the bond to actually deteriorate in value.
So people don't do it. And only a very few do it. And when you get on the other side of that, there will be people who actually put that trade on for sure, and there will be the prescient ones. But the large scale of the money never goes in that direction. And if it did, of course, the rates would change.
GRANT WILLIAMS: Yes. At some point, they will. But for now-- I'm going to get back to your career in a second, but I want to stick with this for a moment, if we can, and just get your thoughts on the very recent activity in the bond markets. We've had head fakes in both directions in the last sort of six to 12 months. What do