I really enjoyed listening and watching Mr. Stephen Schwarzman’s lecture at Yale. Mr.Schwarzman discussed many topics such as the nature of private equity, real estate, successful and failed deals, and how the financial crisis occurred and evolved. I have read and heard so much of the financial crises by now, that I thought there was nothing new that I could learn. I was wrong.
I learned from Mr. Schwarzman’s lecture that government policies and laws can lead to unintended negative consequences in our society. Although this was not the main point of his discussion, he did refer to a few government actions that had clear and unintended negative consequences for our society.
The first was the start of the real estate bubble, which began with the US government’s policy to get more people into homes. Although this was a good policy, it wound up turning into a fiasco, with all the unintended consequences to come later. For example, Mr. Schwarzman stated that subprime mortgages at one point were 2-3% of all mortgages; and by the end they had become more than 30%. He also described how 87% of pooled mortgages which were securitized were given AAA ratings. This misled investors into thinking that these securities were safe and could not default. Mr. Schwarzman believes historians will look back at this time and wonder how AAA ratings were given to these securities in the first place. In addition, he wonders how so many investors believed in these ratings and were fooled by them. In my opinion it’s pretty simple; just like there is a fog of war and a fog of panic, there is also the fog of greed.
The second unintended negative consequence came from the passage of the Sarbanes-Oxley law. This law was passed after the Enron scandal and created fair value accounting, also known as FAS 157. Mr. Schwarzman described how FAS 157 forced financial institutions to take losses before defaults actually occurred. These losses, in turn, created a crisis of confidence in financial institutions which eventually morphed into the much bigger financial crisis.
His stories of successful deals, US Steel and Celanese, and unsuccessful ones, an Argentinian cell phone company, were also interesting. One point he stressed was that capital always comes back. Even though there is a credit crunch occurring, he is optimistic that credit and capital will come back. He mentioned the past credit crunches of 1975, 1982, 1987, and 1990-1991.
I also liked his discussion about failure. He stated how he hates failure and when it does occur that he tries to learn from it. Failure can be a blessing in disguise. Mr. Schwarzman is a winner because he does not like to fail. This was worth watching.