Blackstone boss Steve Schwarzman: the kid from Philly who climbed to the top of Wall Street

He sees plenty of risks in tech, where private equity firms have pushed up “unicorn” type firms by upping their valuation in round after round of investment (think: WeWork). “That’s the definition of a bubble. But the good news is it’s only a small, isolated sector.”

And what about Brexit? He chuckles: “It was an unexpected turn, with consequences which are difficult to predict, but we’re still investing here. Anglo Saxon, English language countries have always been good to invest in. They’re adaptable, and flexible and find a way to succeed.”

Blackstone just backed the £6 billion buyout of Alton Towers owner Merlin Entertainments and will be the biggest shareholder in the London Stock Exchange if it buys Blackstone’s Refinitiv group.

The latter deal could be derailed by the Hong Kong Exchange’s bid for the LSE, but, as with Trump, he refuses to comment on that.

Interest rates

The current super-low interest rates baffle him. In a world where Germany now has negative interest rates, central banks have no power to boost their economies with monetary policy any more.

“I don’t even understand what negative interest rates are,” he says. “I mean, why would anyone pay someone to lend them money? It is just not something I can imagine ever considering.”

He says the cutting has gone far enough. In Europe in particular, it is fiscal adjustment (economist-speak for lower taxes and correspondingly lower spending) that is needed. “If you don’t get that, monetary policy is not going to be able to carry the load.”

“Countries with these low rates are having enormous trouble growing.” The problem, he says, is banks find it hard to make money with low interest rates, meaning it is harder for them to lend to businesses.

“Making the interest rates even lower destroys savings returns, hurts the financial system. It’s a good thing to create growth at first, but there’s a certain corridor you go below it and you make matters worse.”

China and Trump

Schwarzman has been a big player in Trump’s trade negotiations with China. Not easy, even for this arch dealmaker. The book tells hilariously of how he repeatedly gets close to pulling off a deal, only for the Trump administration to move the goalposts and trash it.

He must have found the President infuriating, but you’ll never get him to admit it. “I just can’t say anything about that. My job isn’t to share what I tell people because then there’d be no confidentiality and no trust,” he says. In fact, while he’s happy to discuss China trade, he won’t talk Trump at all. The same goes for the recent controversy over Joe Biden, where Schwarzman’s spokesman denied the President’s claim that the pair of them talked about his political rival’s family.

But he does love talking about China in general.

China, he says, is a country that has had everything going in its favour in recent decades as it grew from being a state-controlled economy to a fast growing one with limited capitalism. To boost growth, it imposed high tariffs for people to export there, allowed huge amounts of overseas investment to flow in and permitted abuses of foreign copyrights. In many ways, he says, it’s like the early US economy in the 19^th century, where tariffs were high and markets only open where America wanted them to be.

That was fine when China was nurturing its small economy, he says.

“But now, they’re the second biggest economy in the world, and there is no third and fourth,” he says. “They have 15% of the global economy, the US somewhere around 22%.”

America and the west want to balance matters out a bit more, he says. But while there are reformists who want to be more adaptable in China, many want to retain the status quo because “it works very nicely for them.”

In the negotiations, he says, “What happens is you have these dynamic forces at work, and sometimes you get closer to having a match, then one side or another decides [to change stance] and they just miss their coordination.”

“Over time that should be fixed. If we don’t, you’ll have a world that starts going through decoupling,” – where economies that were working together in some integrated harmony begin to separate from each other.

“In that case, everybody loses on a global basis. You can see already that happening in manufacturing where these trade issues are meaning everybody’s manufacturing numbers are going down – UK, US, China, Europe, everybody has slower growth.”

Sure, but isn’t Trump’s gunboat-style diplomacy about winning blue collar votes by demonising China for killing American jobs?

“Actually, no. It comes from a different place. It’s really about giving the US a fair shot of competition. That’s all. There’s no other agenda. Don’t make this into more than it is – you’re thinking too much.”

Banker bashing

The book recounts an episode during the financial crisis when he was trying to persuade the Obama administration to talk up the markets and stop sounding so gloomy. Rahm Emanuel, Obama’s chief of staff, yelled at him: “You’re everything we hate: rich, Republican businessman”.

I put it to Schwarzman that much of that feeling remains at large in the world, giving rise to dangerous populist political events such as Brexit around the world. There’s a feeling that financiers like him both caused and benefited from the huge disparities of wealth people are suffering from.

He says: “I think the global financial crisis created enormous financial dislocations globally and in particular in the developed world.”

However, he says financiers are unfairly blamed. In fact, in Schwarzman’s view, it was the regulators and politicians who caused the crisis.

It’s a common version of events among Wall Streeters, and it goes like this: President Bill Clinton ordered mortgage companies to lend more to America’s poor so they could get on the housing ladder.

They did as they were told, spreading the extra risk through Wall Street by bundling up multiple loans into packages (a process known as securitisation) and selling them around the world.

But the poor people were too poor to repay their mortgages, which was why they weren’t getting them in the first place. Defaults were inevitable, but regulators allowed banks to take massive risks, this argument goes, and the banks blew themselves up.

But hang on, I say as Schwarzman finishes his history lesson. Clinton didn’t tell Wall Street to go and leverage up those mortgages, create totally fraudulent valuations and sell them to banks all around the world. He didn’t say: ‘go out and lend poor black people enough money to buy three houses when they could barely afford one.’ That was Wall Street. Not the government. Not regulators.

“Well, halt it,” Schwarzman interjects. “The regulators had all this stuff on the balance sheets. They permitted that. And the securitisation happened later, right? But the loans [to poor Americans] had to be made or you’d lose your licence.”

Don’t forget, he says, loans to that population were 2% historically. “Solid as a rock. And by the time the crisis happened that had gone up to 16%. An eight times increase in loans went to people who were never meant to get them, and never would have without the government requiring a change from that 2% level.”

What about the commercial property bubble, I counter. That was also done by banks lending daft amounts.

“You have to understand the purpose of the regulators is to stop that happening. That’s their job. They’re doing that now. But how could you regulate an industry that goes out of control and [say you] have nothing to do with it. That makes no sense, right?”

Banks past and present

One of the most striking features of Schwarzman’s early days is the chummy nature of Wall Street in the 1970s and 80s. When he joined DLJ straight from college, he was interviewed by the partners, and they remained friends and mentors for the rest of his career, always at the end of the phone to offer advice when he was in a jam. Likewise, he was introduced early on to the very top brass at Lehman and Lazard – even though he never joined the latter.

How can that possibly happen, I ask? Can you imagine a first year associate at JPMorgan shooting the breeze with Jamie Dimon today?

“You’re absolutely right,” says Schwarzman. “When I joined finance in ’69, there were hundreds of firms because we had fixed commissions, so anybody could be in broking.”

It was a cosy cartel. But in 1975, regulators liberalised the market and the big, more efficient brokers began charging half of what the smaller ones asked. Soon the tiddlers were snapped up and the giant firms emerged.

“When I started working at Lehman, they had 500 people. When it went down, it had something like 30,000. So, when you grew up in a firm back when I did, you knew everybody, at least by sight. That is a community. If you’re working at a firm with 30,000, you can be guaranteed you’ll know very few.”

He says: “When we started Blackstone, we figured there would be a lot of very talented individuals who don’t want to be part of a 30,000 group. We could attract them with that same sort of firm we grew up in, where everyone knows the top few people and everyone is accessible.”

That’s how Blackstone, now with 2500 employees, still tries to operate, he claims.

His brain

One of the niggling irritations in the book is Schwarzman’s tendency to brag. Often.

Where does such self-confidence come from, I wonder? It’s not normal.

He looks surprised and says: “I’m not overly confident as a person. I just think logically and orderly.”

“The way my mind works, it’s really about pattern recognition. I tend to focus on things that don’t make sense.

“It’s like, say you’re single, you’re at a cocktail party and you meet a woman. She’s got a black dress on with one tiny piece of white lint on the shoulder. I’d be focusing on the piece of white lint: ‘why is that there?’ In the world itself, if something doesn’t fit right, something isn’t working right, I’ll try and figure out: why is that happening and how do you change that to make it, you know, complete?”

He uses the US real estate market in recession-bound 1991 as a real example. “Nobody was buying it, nobody was selling it. We had a huge pool of capital for another purpose, to buy companies. But then someone brought us a real estate deal at 16% yield.

“I figured, put in some leverage and it’s 23%.

“It had 20% vacant units so I figured if they filled up when we recovered there’d be a 40% annual return.

“Then, as part of a recovery you increase the rents so that was, like 55%. So I realised I was looking at something that was completely hanging around, but with a 55% return.”

He asked the deal introducer how many other properties like that were out there: “It’s across the whole of America,” came the reply.

Once he’d figured out the potential of this anomaly, he says, he did what you always have to do: “Go! You get the best people in the world, mobilise massive capital, and you just go and you never stop, right?”

Blackstone’s annualised returns on that first property deal turned out at 62%. The firm made billions.

He muses: “Anyone can do it, except human beings are so odd. They don’t like change. You can explain this exact thing, which I did, and nobody else did it.

“To this day, I can’t figure out why. Everything I figure out is totally logical. There’s no,” he rubs his forefinger and thumb together like a magician conjuring up a coin, “‘hunch’, right?

“But you display it to other people and the best they do is say: (he puts on a flat monotone voice) ‘That’s interesting.’

“Because humans like to stay on the course that they’re on. Even if they’re not optimising.”

So, billionaires are different from the rest of us, after all.