Book Review: Stephen Schwarzman's Spectacular 'What It Takes'
“If you ever do that to me again, I’m going to kill you.” The late Pete Peterson uttered those somewhat tongue-in-cheek words to Stephen Schwarzman in 1985, not long after they'd founded The Blackstone Group together. They had just exited yet another failed investor pitch for their then-boutique investment bank, and Peterson was frustrated.
Specifically, they’d just met with Delta Airlines. They’d flown to hot and humid Atlanta for the meeting, the walk from where a cab had dropped them to the Delta building had soaked them in sweat, only for their visit to pile insult onto injury. “Delta doesn’t invest in first-time funds” was what they were told.
Peterson was the former head of blue chip investment bank Lehman Brothers, where Schwarzman had been the firm’s M&A chief, and both masters-of-the-universe were understandably unhappy with the indignities they’d endured in getting Blackstone off the ground. This included having Delta shuffle them down to meeting rooms in the basement of the airline’s headquarters, well away from the executive floors.
Yet Schwarzman in particular was undaunted. The living, breathing definition of an entrepreneur, with enormous energy and brainpower to match, Schwarzman wouldn’t let what happened in Atlanta deter him, nor would he let a similar experience in Boston bring him down. No doubt it was agonizing to wait for a cab in the pouring rain after MIT’s Endowment representatives had neglected to show up for their scheduled meeting, but Schwarzman had enormous belief in himself. As he told a Harvard dean years before after the school’s undergrad wait list had closed without Schwarzman gaining admission, “That’s really a mistake. I’m going to be very successful.” He always knew.
All of the above and much more is in Schwarzman’s unputdownable new book, What It Takes: Lessons in the Pursuit of Excellence. Part memoir and part how-to when it comes to business, Schwarzman’s story of achievement, and his stories of the remarkable people he worked with along the way, never bores. Schwarzman seemingly knows all worth knowing from the business world, he’s known the last five U.S. presidents, plus the reach of his investment and philanthropic pursuits is now global.
Schwarzman’s story will fascinate the reader, while also educating those who want to know more about business and economics. As with all of my reviews, this one will focus on the myriad economic lessons within What It Takes; lessons that will be referenced for many years (and decades) to come in my opinion pieces and books. In short, Schwarzman’s memoir will be placed next to those of Phil Knight and Michael Ovitz in my personal book collection as essential economic reads.
Thinking more about Schwarzman and Peterson’s visits with investors to build Blackstone’s first private equity fund, Schwarzman wanted to raise $1 billion. The previous number is very large now, but in the 1980s it was massive. Perhaps more problematic, Schwarzman was an M&A expert, not someone with a track record to point to that included the purchase of and improvement of businesses that had previously been operated in sub-optimal fashion.
Fair enough, but Schwarzman was and is a doer. More on "doer" at review’s end. For now it’s most useful to reference a belief system that has long informed Schwarzman’s approach to life: “if you’re going to commit yourself to do something, it’s as easy to do something big as it is to do something small. Both will consume your time and energy, so make sure your fantasy is worthy of your pursuit, with rewards commensurate to your effort.”
Schwarzman would go big on Blackstone’s first fund. Despite being turned down 17 times for every time they were told yes, he and Peterson ultimately raised $880 million. A remarkable achievement to say the least. Crucial here is that Blackstone was just getting started. Fast forward to book’s publication, Blackstone presently owns companies that employ over 500,000 people, and these companies have combined revenues of over $100 billion. The firm also owns over $250 billion worth of real estate, not to mention other business lines that include leveraged credit, private wealth, and an alternative investment business with over $75 billion under management. It’s tiring to contemplate what Schwarzman has created, and it speaks to the importance of people like him. Without the vital few thinking big, and Schwarzman is the personification of what Canadian economist Reuven Brenner refers to as vital, the world would be a much bleaker place.
Crucial here is that confident as Schwarzman was and is, success was never foreordained. Schwarzman himself acknowledges that entrepreneurial pursuits are nothing less than “grueling.” The small minds focused on wealth inequality only see the end result whereby Schwarzman is one of the richest men in the world, yet they’re blinded to the past when this relentless visionary was hailing a cab in pounding rain after the representatives of a prominent endowment forgot they had a meeting with him and his co-founder. Rest assured no one stands up Blackstone today; now its size and scope means the firm frequently enjoys “first look” with deals. But the amount of work required to get to this point, the amount of vision, the amount of persistence, is something microscopically few possess.
As Schwarzman puts it early on, “Once you succeed, people only see the success.” So true. Few will ever know the nerve it took for Schwarzman and Peterson to go out on their own, few will know the endless effort it took just to keep Blackstone’s doors open in the early days; all they see now is that Schwarzman’s net worth is somewhere in the $20 billion range. They have no clue what it took for him to get to where he is. They don’t know how Schwarzman “began to feel dizzy” one night as he sat alone at a Japanese restaurant in Blackstone’s early days as a consequence of his fear that he was “failing on every count.” Around the same time, and as he looked around the office space he and Peterson had rented, “It felt like watching an hourglass, the money just draining out as the business never came.” The class warriors choose to ignore how Stephen Schwarzman, ex-Lehman partner, became Stephen Schwarzman, CEO of The Blackstone Group. And the mis-reads don’t stop there.
It’s regularly stated in this column that soaring wealth inequality is a sign of progress as the remarkably talented go about improving things all around them. An obvious example is Jeff Bezos. Imagine if he’d reached peak performance as a businessman in 1970. If so, it’s not unrealistic to bet that this creative mind would have created a business whose value would have made him the richest man in the world. Of course, in 1970 this would have meant Bezos was worth $500 million, or maybe $1 billion?
Yet today Bezos’s net worth exceeds $100 billion, and that’s after a divorce that lopped $35 billion off of his total. What’s the difference between 1970 and 2020? It’s very simple: technology largely developed by centimillionaires and a few billionaires shrunk the world in a figurative sense such that Bezos is now able to reach exponentially more people around the world with his genius. Few want to admit it, but the higher the net worth, the more people served.
This works well with Schwarzman. With Blackstone his focus fairly early on was getting into private equity investing. He sensed this would be a booming business, you could “earn income from recurring fees and investment profits whatever the investment climate,” plus “you could really improve the companies you bought.” [emphasis: mine]. Blackstone today is one of the world’s largest and most successful private equity investors. Translated, what makes Schwarzman highly unequal in a wealth sense is Blackstone’s great success over the decades when it’s come to improving the companies purchased. The world would be a cruel place without the unequal.
Schwarzman’s mantra, something long preached to Blackstone employees and referenced throughout What It Takes, is “Don’t.Lose.Money." Eager to not lose money, Blackstone has a very collegial investment process that involves Schwarzman and other senior partners frequently asking the most junior of junior analysts (these analysts are what Schwarzman would describe as ‘10s’ – more on that in a bit) to offer their opinions on the finances and potential of the companies purchased.
Looking at Blackstone's investment process more broadly, it interested this reviewer that Schwarzman didn’t talk too much about “carried interest” and the overdone controversy surrounding it. This reader’s guess is that he kept quiet as a favor to his partners desperate to avoid more in the way of ignorant scrutiny from Washington. My take is that Schwarzman is exactly the person to make the correct case that the proper tax on carried interest "income" is zero.
It should be zero simply because it’s not income. Income is salary. While nothing in life is guaranteed, income is what Blackstone gets for the investor money it oversees. The investors pay Blackstone an annual fee for investing their money. Carried interest is nothing like fee income; instead it’s a percentage of the return on investment enjoyed by Blackstone after its funds exceed a pre-set performance “hurdle rate.” In short, there’s nothing about it that resembles income. Blackstone only takes in “carried interest” insofar as its investments bear fruit; as in if Blackstone isn’t successfully improving companies, there’s no “carried interest” to speak of.
So when those who should know better call for taxing carried interest in the way that income is taxed, they’re saying that if Blackstone has the temerity to buy a sick company, improves it, and then sells it at a profit, its reward should be a big tax bill. Such a view isn’t serious. Furthermore, if the act of improving companies is going to come with a big tax penalty at conclusion, what’s to keep investors from just purchasing municipal bonds? Figure that the income from munis is tax free on city, state and federal levels.
All of the above rates particular stress when Schwarzman’s “Don’t.Lose.Money” mantra is properly internalized. Implicit in what Schwarzman preaches inside Blackstone is that it’s very difficult to not lose money, that it takes quite a keen investment mind to find companies with the potential for improvement, only for the improvement to take place.
Let’s never forget why Schwarzman is so rich. He is precisely because he and Blackstone are primarily in the business of greatly enhancing companies invested in. Because they are, the economic implications of excessive tax on carried interest cannot be minimized. As is, anything above zero is too much. Scary is that some in the political arena are calling for 40% taxes or more. They flamboyantly advertise their cluelessness.
Thinking more about the talent within Blackstone, what Schwarzman refers to as ‘10s’, he recalls that “For our 2018 class of junior investment analysts, we received 14,906 applicants for 86 spots. Our acceptance rate is 0.6 percent, much lower by far than the most selective universities in the world.” Schwarzman plainly puts the investors in Blackstone’s funds and its various lines of business on a very high pedestal, and because he does, he knows his firm must hire the best of the best to do well by those investors.
In reading about Blackstone’s extraordinarily selective hiring practices, the obnoxious conceit of regulation came to mind. About it, it’s worth stressing yet again what Schwarzman preaches along the lines of “Don’t. Lose. Money.” This is serious to him. After a failed deal from decades ago (Edgecomb), Schwarzman felt so guilty when the purchase proved a loser that he wrote investors checks. He hates to fail, and a major reason he does is because he hates to fail his investors.
Which raises an obvious question: why regulation? What could regulators do to improve Blackstone, and more pointedly, what controls could regulators implement that Schwarzman et al haven’t already implemented? Regulators are often charged with detecting trouble spots within companies or industries ahead of time, but does anyone seriously think someone as maniacally devoted to achievement as Schwarzman doesn’t already have internal “regulations” in place meant to detect problems well ahead of them becoming money losers? On its own, the very notion of regulation fails when matched to a company like Blackstone that is built around relentless analysis of every investment, in 360 degree fashion, and that includes participation from junior analysts all the way to Schwarzman at the top of the chain.
After that, please stop and consider Blackstone’s hiring practices. It’s harder to get a job there than it is to be admitted to Harvard, Yale or Princeton. Imagine then, what it looks like when regulators show up to “police” this global financial behemoth. The very people who would most likely never rate so much as an interview at Blackstone are given the power to police those who not only interviewed, but who were hired! The superfluous, but also incredibly costly nature of regulation cannot be stressed enough. Here Blackstone’s creators have worked endlessly to staff the business with 10s, only for government to force much less than 10s inside its walls. Shameful.
Interesting about Blackstone’s first fund is that $325 million of the $880 million came from Japan after Nikko made an initial $100 million commitment. It’s firstly a reminder that this odd investor focus on the Fed “easing” or “tightening” credit is much ado about nothing since, per Schwarzman later in the book, credit is “now virtually borderless, flowing around the world in pursuit of opportunity.” What the Fed allegedly “taketh” will be made up for by opportunistic investors if the prospects are good. Just the same, what the Fed allegedly giveth in terms of rate cuts will be reversed by market forces if investment prospects for a certain country, region or company are bad.
After that, the globalized nature of Blackstone’s investors is a reminder of how foolish are attempts to weaken “China,” Japan and other countries through the imposition of tariffs. For politicians to put a bull’s eye on increasingly prosperous countries is for them to put a bull’s eye on American companies that are most certainly benefiting from that prosperity through increased sales, and in Blackstone's case, investment. And then with Blackstone, it wasn’t just the Japanese. When the firm went public in 2010, China's sovereign wealth fund purchased a $3 billion stake in Blackstone. What a triumph! A country that not too long ago was quite literally committing suicide with its tragic embrace of communism was now investing in one of the U.S.’s foremost symbols of capitalism.
And for those convinced China remains a “communist” country, try to be serious. Schwarzman plainly disagrees. He knows intimately how very much the Chinese take their investment in Blackstone seriously, how very much it was a story in China. No country is perfect, politicians surely aren’t, and looked at through the prism of China, there’s obvious room for improvement. But the communist line is trite, tired, and divorced from reality. As Schwarzman puts it, China is now “a market economy overseen by the Communist Party,” and the members of the Party are no longer collectivist.
Looking ahead, efforts to separate American producers from those in China run counter to economic progress, and worse, they’re anti-peace. For those who oddly say China is the “enemy” (something few who’ve visited would agree with given the ongoing love affair between the Chinese people and American goods), all the more reason to maintain growing economic ties between the capitalist classes in each country. The more the two countries are economically connected, the more that war between the two would be incredibly expensive.
In Schwarzman’s case he’s part of the solution. Not only is Blackstone vested economically in what’s happening in China, not only is Blackstone know-how improving companies on the Mainland, Schwarzman is putting substantial money of his own behind better understanding between the U.S. and China, along with better understanding of the world’s talented about China. Indeed, he’s created Schwarzman Scholars, and a beautiful Schwarzman College campus within prestigious Tsinghua University in Beijing, to foster better global understanding that will hopefully reduce the likelihood of armed conflict down the line. Schwarzman is a realist. China is happening, and the fact that it’s happening promises soaring living standards stateside. China’s growth promises to redound to the west in amazing ways, but history indicates that conflict can arise out of prosperous times. Ideally the existence of Schwarzman Scholars, and longstanding ties between the best and brightest of both countries, will prove a barrier to conflict of the shooting kind.
All of which brings us to the 2006-2008 period that ends with what is most commonly referred to as the “financial crisis.” About this, Schwarzman witnessed what took place up close. He did so while taking Blackstone public, and while in many ways operating in the proverbial center of the financial universe. What he says carries weight, even if there’s disagreement. About the latter, it’s hard to disagree with someone who knows so much. Still, a review is a review. Here’s my assessment.
Up front, Blackstone is as previously mentioned one of the biggest real estate players in the world, with over $250 billion worth of investments. In 2006 Schwarzman recalls a Mumbai-based Blackstone employee by the name of Tuhin Parikh telling Schwarzman et al that “In the past eighteen months, we’ve seen land prices multiply ten times” in India. In Spain, Schwarzman and his partners similarly noticed frenzied building of houses that outpaced population growth in eerie ways. Blackstone started to pull back as those in its employ began noticing the firm not just losing out on real estate deals, but losing by 15 to 20%. Something was amiss.
And while Blackstone purchased Sam Zell’s Equity Office Properties for $39 billion in 2007, Schwarzman “insisted on no daylight between closing and selling a significant portion of the portfolio.” Blackstone would remain a size investor, but one feverishly drawing down its exposure at the same time. It would be simply because the firm's "Don't.Lose.Money" ethos called for caution.
Where there’s potential disagreement is that in assessing the U.S. housing market, Schwarzman notes that “financial innovation and political pressure led to new kinds of mortgages requiring low to zero down payments,” and that these false economies essentially pushed housing prices up. Ok, that was and is the consensus view about the frothy U.S. housing market from the 2000s, but then the rush into hard assets in the first decade of the 21st century was global in nature. Per Schwarzman, land in India had soared 10 times previous values, while in southern Spain there was so much condominium construction going on “that you could move most of Germany there and still have units to spare.”
So without defending bipartisan political pressure to get Americans into houses, this was once again a global phenomenon. That it was calls into question the consensus opinions offered up about what happened, and that Schwarzman seems to agree with. No doubt credit is borderless as Schwarzman so articulately states it, so why a global housing boom if the policy errors were made in the U.S.? Furthermore, what explains the raging housing boom that took place in the U.S. in the 1970s, and when the Fed was aggressively jacking up interest rates?
It’s all a long way of saying that while Schwarzman plainly saw what was happening in housing and commercial property up close, his explanation for the why behind the property frenzy was less compelling. My own take is that the common denominator between the ‘70s and ‘00s is that the dollar was in serious decline in both decades versus most major currencies, along with commodities historically most sensitive to currency movements. And when the dollar is falling, its decline brings other currencies down with it, and that are only "strong" insofar as the dollar is even weaker. The global nature of the property boom was a rational global response to falling currencies. Housing, land and other hard assets are safe havens when currencies are in decline.
Schwarzman goes on to make a case against mark-to-market accounting. He contends that the latter “was leading to the market’s hysteria and driving banks to insolvency.” Even though default rates on mortgages were less than 10%, the market for mortgages had essentially frozen; thus forcing sizable paper losses on investment banks like Morgan Stanley. Schwarzman decries the accounting rule for it forcing the near-term realization of losses by financial institutions even though these mortgage securities had been purchased by those institutions with the long-term very much in mind. Schwarzman’s view was and is that eventually the market value of these mortgages would recover, so why the stringent FAS 157 accounting rules that forced major realization of losses by financial institutions?
About accounting rules, my own take is that there should be none. Let investors decide how businesses of all stripes should account for profits and losses, asset valuation, and anything else.
At the same time, I found myself wanting to ask Schwarzman how different – if at all – the situation would have been in 2008 without FAS 157. More specifically, does he think a lack of mark-to-market would have meant that Lehman Brothers survives? It’s worth asking because as he recalls in What It Takes, the real estate team at Blackstone saw in the spring of 2008 “that Lehman’s real estate portfolio was a mess.” Thinking about Lehman, if accounting rules don’t enforce mark-to-market, won’t investors? As in won’t they try to assess the real value of a company’s assets, accounting theory be damned?
Isn’t the point about 2008 not one of insolvency (as Schwarzman indicates, most mortgages were performing even amid the worst of times), but more one of financial institutions suffering illiquidity? Accounting theories aside, investors no longer trusted the assets on bank and investment bank books, which has me wanting to ask Schwarzman how a lack of mark-to-market softens what proved a brutal outcome.
During the crisis, Schwarzman had a lot of communication with Treasury secretary Henry Paulson. He explained to him how it would be impossible for TARP to be used to buy actual assets, and this led to banks being forced to take federal funds even when they very much didn't want or need them. Schwarzman makes a case that this wasn’t a bailout scenario since the funds were paid back, but what happens if there is no TARP? We’ll never know the answer, but it would be interesting to ask Schwarzman about his prudent stockpiling of cash ahead of the meltdown. As he put it, “Before I hunkered down for what was bound to be a nuclear winter, I wanted all the cash we could lay our hands on. There would be a lot of people in trouble and trying to sell. I was determined that we would be ready to buy.” And isn’t that the point? Absent TARP, the institutions (financial and non-financial) that had kept their powder dry, stockpiled cash, or that had been careful amid the frenzy would have been able to pick up some amazing assets on the cheap. In a sense Blackstone did a version of the latter with its creation of Invitation Homes, which at its height was “buying $125 million worth of homes every week.”
So again, does the financial system as we know it really just collapse absent government intervention, or does it just change? Just as the meltdown existed as an opportunity for Blackstone, wouldn’t it have been an opportunity for countless others?
Notable here is that Citi was saved in 2008, and by insider accounts it was the fifth time it had been saved in a mere twenty years. How does this enhance the financial system? Notable here is that when JPM tightened up its lending post-crisis, Citi did for Blackstone what JPM couldn’t, or wouldn’t. But could it have absent the intervention?
And then Schwarzman recommended to Paulson that he ban short-selling on financial stocks. This seemed a very un-Schwarzman bit of advice. Price transparency in markets is so important, yet the ban at least on the surface signaled more opaque markets. It’s also surely not lost on someone with Schwarzman’s otherworldly intelligence and market knowledge that short sellers are ultimately buyers, and the ban of them at least in theory removed from the marketplace an essential floor for financial stocks in freefall. But the main question about Schwarzman’s advice is how it squares with his essential line about “borderless” credit “flowing around the world in pursuit of opportunity.” If Paulson could ban short-selling on financial stocks, does it really matter given the global nature of capital? If not in U.S. markets, won’t markets somewhere somehow render their verdict?
About my questions, statements and observations, Schwarzman is the unquestionably brilliant financial mind while I’m merely reviewing his book. It’s with more than a bit of discomfort that I register skepticism about some of what he wrote about 2008. At the same time, his recall of the perilous time, while vivid in its description of the terror that unfolded, ultimately raised a lot of questions. These are the ones I’d ask him if I could.
Indeed, Schwarzman is very up front that Tony James (retired Blackstone vice chairman) was instrumental in helping to transform Blackstone from a boutique investment firm into a global financial institution that will be around for generations. In one of his many passages about James, he recalls how the vice chairman believed that “success breeds arrogance and complacency,” and that “you only learn from your mistakes when the worst happens.” No doubt, which raises a basic question about why 2008 was different? Why was Japan able to come back from nuclear destruction such that 40 years later its financial firms were so flush as to invest in Blackstone, but the U.S. financial system couldn’t survive the failure of banks like Citi?
About these quibbles, it’s got to be stressed yet again that they’re just that. And they’re included with a hope that Schwarzman will eventually expand on what he saw in 2008.
The quibbles should in no way be construed as major critiques of what is once again an unputdownable book. What a read!
So why Schwarzman? Why is he so successful? Why in this reviewer’s opinion would he have been great at anything he tried? The answer is that he’s a doer. From finding a way to book Little Anthony & The Imperials at his high school dance, to creating the Davenport Ballet Society at Yale as a way to meet females at the Seven Sisters colleges, to starting Blackstone after ascending to head of M&A at Lehman Brothers, Stephen A. Schwarzman is a doer. He just gets things done, and the world is a much better place as a result. Readers of this excellent book will be much better off too.