Episode 10: Alan Schwartz - Executive Chairman of Guggenheim Partners

0:00Before we start this podcast, I just want to thank you to the podcast.

0:30Wall Street. He's one of the most respected bankers on Wall Street, best known for his role as CEO of Bear Stearns. He was at the center of one of the most dramatic moments in financial history, the acquisition of the firm during the 2008 financial crisis. Yet Allen's career is far bigger than that one chapter. After starting out at First Boston, he joined Bear Stearns in 1976, working his way up to president and then ultimately to CEO in 2007. When the firm faced mounting pressure in early 2008, he played a pivotal role in its final days, ultimately negotiating its sale to JPMorgan Chase. In the years since, Allen has continued to shape the financial industry as the executive chairman of Guggenheim Partners, helping to build it into a major force in investment banking and asset management in the shape of the great investment banks and asset managers of the 80s.

1:23In this conversation, we will dive into Alan's early career, leadership philosophy, and the hard lessons learned from navigating crises. He shares his thoughts on risk management and the evolution of Wall Street, as well as advice for the next generation of finance professionals. Thank you for listening, and I hope you enjoy. What was your early childhood like, and where did you grow up? okay well i was born in brooklyn and then with the gi bill my father we moved to levittown when i was young uh levittown long island which was a blue collar town uh not many college graduates in the town but uh people that said we kids could go to public school and we better go to college which probably in Levittown, maybe 30 or 40 percent of us did.

2:12So it was a start. I grew up playing sports. I was football, basketball, baseball. I got recruited by college for all of them. But baseball was my better opportunity because I was also being drafted to play professionally. I was going to Stanford and was going to sign, though to play baseball. At the last minute, the coach at Duke talked me out of that. He got me to switch from Stanford to Duke, but also convinced me not to turn pro, but to come and play for him at Duke, which I did. I then went through a whole bunch of injuries. And so I was, you know, thinking I was really dumb because I had turned down a bonus that was about, I don't know what my dad might have made in five years or so for one time.

3:10And I thought it would make me rich, but it turns out it probably wouldn't. And I was better off getting a college education. When I was in school, I never really thought hard about what else I would do because I was always staying focused on. I would play professionally. And when it finally came through that, I couldn't. I talked to some of my friends who had gone on interviews and I asked them what they liked and they said, gee, Wall Street looked interesting for a guy like me. So I went down to Wall Street. I tried to get into places. I got introduced to a partner at a place called R.W. Pressbridge and Company, a company run by Ken Langone.

3:52And I kind of faked my way in. They didn't hire people without experience. But I kind of talked him into hiring me without experience because it was institutional. And so I got into there. And just as I got there, the market collapsed. And so Ken Langone wrote in his book that he had this kid who wouldn't quit, would work for minimum wage, which I actually did, and waited tables and tended bar at night. But that kept me in the industry, and it was a great opportunity. So from there, I went to Wertheim, long story, and then I ended up moving to Dallas to join Bear Stearns, and I was there a long time.

4:33So that's the quick trajectory. Yeah. And you developed a relationship with Ace Greenberg, the legendary CEO and chairman of Bear Stearns for many years. So how did that relationship start, and how did it shape your career? Well, Ace was a great role model. I've talked to many people that it's great to have mentors, people who actually take an interest in you and decide to help you develop. But I said, there's as much opportunity through role models as mentors, like seeing what it is about somebody that makes them successful and adapting it to who you are. So Ace Greenberg was a person who was not anything like me, very, very, very different personality, but I could see in him the things that he did that make total sense.

5:26So I had started in Dallas with my best friend and I came to see Ace and told him that the way the world was changing, we needed to get better at research, but it wouldn't happen unless he focused on it. And so he called me back, said, you're moving to New York, you're taking over research. I said, no, no, that's not what I said. He said, you told me to focus on it. That's what I'm doing. And so, you know, I learned then from there, took over investment banking and then, you know, I was there a long time. But Ace was a great role model in that one of the things I always quoted from him, he said, everybody's greedy, but you either have to decide to be short term greedy or long term greedy.

6:06and long-term greedy man if we focus on our clients and we focus on their needs we will end up winning long-term instead of trying to get something that we want short-term that's not in the best interest of clients the other thing that ace was great about is he believed very strongly in entrepreneurship so he gave me the opportunity to try new things but he always made it very clear you could be on the field and try new things, but make sure you never go across the line. Let me say, don't cross the line on ethics or anything else, but it's not as easy as it sounds, but it was black and white. You get shot if you do.

6:46And therefore make your mistakes inside where don't put the franchise at risk and make your mistakes while we're small or while it's small until you figure it out. And so focusing on clients, starting new things, but making sure you figured them out before you expand them, things like that were things that I learned from Ace. Yeah, and you talked a little bit about the kind of entrepreneurial culture at Bayer, but you stayed at Bayer for a long time, so I'm assuming you liked it. What was the culture like during your career there and why did you like it? Well, I liked it because of Aces Drive to focus on clients and for us to continue to think about how to shift our business.

7:31So there were a bunch of things. Look, in the 1970s, when I was starting there, there were probably, you know, 50, 60, 70 firms that were all relatively the same side and a few bigger ones. And then by the 80s, it had gone down to like five big ones and a few others. So to survive that environment, you had to be fairly nimble and entrepreneurial. It was a people oriented culture. One of Ace's words was, you know, I know we're getting some PhDs that come into our business, but I like PSDs, poor, smart, and the deep desire to get rich. And so we always, you know, as a people-driven business, what I had to focus on is as we got much bigger in trading, the culture of trading and banking are very different.

8:23And, you know, there was always this view of trading houses being a certain way. So I had to work really hard to work with my partners on the trading side as that got big and we were starting investment banking from basically nothing to convince them that we had to do things somewhat differently in each side of the house and what fit the needs of each side of the business. And my partners worked with me on that. Yeah. And during your time at Bear Stearns, you moved up. You were CEO at one point, president and CEO. So what was your leadership approach in those roles? Well, leadership to me is about, one, making sure that your standards, that's one thing, Ace, is very clear.

9:11Never cross the line. Be certain ethics that matter no matter what. Client comes first. Those things, you have to be very clear, but you have to do more than say it. You have to know that, you know, not everybody in your organization gets to spend a lot of time with you. So every time you're being seen, you have to make sure you're living it and making it clear to people what we believe in. The second and probably most important thing to me is I think anybody to be a leader has to know what they're good at and know what they like to do. And they have to find people that are really good at the things they're not good at and or don't like to spend their time on and empower them to do those things.

9:55and it's harder than it sounds delegating responsibility to people and really letting them run with it and finding the people that are you know to say hey you're way better at this than I am and I was fortunate to find people in the organization that allowed me to grow because I I just couldn't have done a lot of the things that they did as as we grew but identifying those people and giving them the responsibility and making it clear to the organization that they have the responsibility. They can't come to you to go around them. It's very important. I really appreciate that point about delegation because we've, I've, and we've interviewed a lot of, um, my partner is at a, um, competition, but we've interviewed a lot of, um, successful leaders and a common theme we see through all of them is they're willing to delegate.

10:48Um, and sometimes you have to let go to delegate, but it's a necessary step towards greater success because you can't do everything yourself. But I want to kind of just brush on your leadership during the crisis a little bit before we get on to Guggenheim. So you were president and COO in 2007 before moving up to CEO, and you saw some warning signs. Can you tell us a little bit about those warning signs. You talked a little bit about the repo market slowing. So yeah, talk a little bit about the warning signs you saw during your time as CEO. The interesting thing was the warning signs I saw for the overall markets, I thought we were pretty good shape to deal with it.

11:34So shame on me. But as it related to the warning signs, it was really seeing that the rise in structured product and structured product underwriting, mortgage securities, etc. I didn't know the answer, but I saw the risk was that as the originators of those mortgages, and the original way to do it was to get all the risk out of the savings and loans and getting out and, like we said, democratize the credit risk. But the question was, if the originators don't have the loss exposure, then what's going to happen to the quality of the originations, number one? Number two, my concern was if you looked at the fact that structured products were being called structured product AAA, AA, single A, I was saying, you know, a lot of people said I can only own AAAs.

12:26Well, if you looked at the rating agencies, what they call the AAA corporate, and if you looked at what they said was the qualities of a AAA structured product, they were totally different. But they used the same definition, and it got crisscrossed. People said, oh, I'm buying a AAA. And then the last piece, as things started to move through the system, as we got into 07-ish, you started to see liquidity really drying up in those markets. and one of the first places to see it was in repo. So, you know, I was going to the Fed and saying, hey, you really ought to open the window to non-commercial banks because the reason you have the window is if there's a freeze in the market and there's good assets being held, you want to support them.

13:18And a lot of those assets are now being held by the non-commercial banks. And they all said, that's a good point, but we don't have the authority to do it. We need, quote, exigent circumstances. So we were talking about it. And what was happening was what I was seeing is the repo market where we used to have 180 day repo line and 90 day repo line. You know, it was all of a sudden they were all as they came to say, no, we'll go overnight. And that was a bit scary. And but we never thought at least overnight would go away because all you were doing was saying, here's my treasury bond and you know, will you borrow, I'll borrow against it overnight.

13:59Um, there's no real risk. Um, and so we never imagined that going away. So we ran our balance sheet on never having to assume we could get any liquidity except against the assets we were holding to borrow against overnight, which were all double A, triple A type securities. Never dreaming. As I said, and I don't mean structured product, real treasuries and things like that. But what became clear later, and I ended up spending a lot of time on this in Washington later, was that the repo market, though, was, you know, if something happened and there was a problem with the lead, then you had to go sell it and reverse it.

14:40They say, why should I do that? I can just go do the exact same repo across the street. And so instead of there being a marketplace for repo, it was a one-on-one business. And so given Given some of the rumors and everything else, a bunch of people stopped doing repo. And then there was lots of stuff about margin calls and stuff, which I won't bore you with. And so we ran into a liquidity crisis, you know, pretty much overnight. As everybody knows, we went to the Treasury and the Fed. I had called Jamie Dimon because the reason I called Jamie is they were sitting there with our like 35 billion of assets in their back.

15:17They were the clearest. I figured they could see that they would be fine if they gave us a line. But he had to call in Treasury Fed and, you know, a lot of ins and outs, but we wrapped it up over the weekend. And that still didn't stop the markets. So we had to go do another, you know, the next day, next week. but ultimately it did. And it was just really the repo market was the equivalent of the run on the banks in the 30s. If you read, it's a wonderful life or you see it's a wonderful life. It's just that, you know, all of a sudden you have all these assets, but everybody wants their cash today.

16:01And I'm really interested in the role you think that the media played in the kind of run on the repo market, specifically for Bayer. Just yet, can you talk a little bit about the role you think the media played and if it could have been avoided if it weren't for the media? Yeah, and this was in that media environment, not this one. But yes, they did. I told, I actually called some of the guy because media clients are my, media comes to my clients. And after Bayer leading up to Lehman, I said, you know, you guys are running a real risk. being looked at later being the guys that are calling fire in the you know in the movie theater and so what they were doing was passing on rumors that were coming to them from short sellers about the financial media right it was cnbc but you know and bottom line that's what was happening it would be oh we we've heard in the market that this is bad that's bad I had actually told the SEC when they were investigating, they said they were going to do it.

17:05So if you really want to find out where the short sellers that were spreading these rumors were, because there's too many trades, go get the cell phones of the major reporters, see who was calling them, and find out how many of those were hedge funds that were short, our credit or Lehman's or what have you. So they actually started to back away when I when I pointed it out to them that, you know, they were really it was it was the way for short sellers to yell fire. And, you know, if you call a reporter and say, hey, you should see how bad this is. They were passing that on. Yeah. And will their positions into reality that way.

17:47So during that time, you were under a lot of pressure and I assume a lot of stress. How did you stay clear headed and make what you thought were coming or what are objectively good decisions during that time? Well, I was fortunate in one way that as I'd been an advisor to many people in very stressful situations. And I always had one formula that I always used with them, which I said to my clients, I will tell you that IQ plus emotional level equals 100 percent of IQ. So that whenever your emotional level goes up, the percentage of your brain you can you can utilize goes down. so I would say to clients if I see in this situation that you're the other side is getting you you know agitated or aggravated I will find a way to call a halt to any discussion go off to the other room wait till you calm down and then decide what we're going to do because I don't care I don't know what dumb decision we'll make when you're emotional but if you think about any dumb decision you ever make, you already say, but I was so mad at the time.

18:59I was so scared at the time, whatever it is. So having spent a career advising people that way, I said, well, okay, now I've got to, we're going to get through this. I have got to get rid of the emotion, deal with it later, stay level-headed and use advisors that I knew I needed because I wasn't sitting in that role anymore. And so I had, you know, an internal guy, lawyer that I would always turn to before making a decision, look him in the eye, anything I'm missing here, and not react quickly, which you want to do. Sitting in a room, waiting, waiting, waiting, somebody comes in with a response, and you want to go right back and say, nope, time out, everybody sit down, let's think about it.

19:44So that's how I handled that. And as I said, I guess I was fortunate to have a career where that was a big focus of mine. And I want to shift gears a little bit to Guggenheim, which you're currently the executive chairman of. After Bayer, what made Guggenheim the right place for your next chapter? Well, I had to think long and hard about it. After 30-something years of building at Bayer, it was starting over. and I had to think about whether to move in at you know office of the chairman or whatever at one of the major firms and use my experience and relationships to you know do some really interesting things off of big platforms or decide to start over and build something from scratch and I say now a lot of my partners thank me for doing it I say you're thanking me for being dumb enough to think at a time when most people are looking to retire that I could start from scratch and build a business.

20:51But the main thing that drove me was I really believed we had built something. And if you'd listen to the team, if you look at where the people from Bear Stearns are today, they ended up moving up, whether it was mentees of mine like David Solomon and John Walter and running Goldman and other people were running things. You felt like you'd built a great team and it was going to last a long time. And that was very important to me. That was always about having young people come in and want to work for us because we were the right place to be. And so I thought about it and I said, if I go and sit at the top of one of the organizations, it'll be like, basically, I'm not anymore building something for the future and to pass on.

21:37But if we could start something with the same and even the best parts of the bear culture, because we could start from scratch. I thought we could build something that would be a foundation for another generation to go with. And that's what drove me. Yeah. And you talked a little bit about with a kind of a foundation of Bayer. So how did you, you came into Guggenheim and you built up the investment banking division of it pretty heavily. So how did you approach building that division with the mold of, I'm pretty sure you mentioned Bayer-Stearns and also Goldman in the 80s and a bunch of those banks in the 80s in mind?

22:11Right. Right. Well, what I said about Goldman in the past was that in my going back in the career, that all of the firms that ended up being successful all look the same on a spreadsheet. I had this much sales, this much trading, this much this. But they were all kind of known. Culture wise by where they grew up. So Morgan Stanley had a big trading business, but people thought of them as a white shoe firm from their background. Solomon Brothers had a big investment bank, but people thought of them as a sales and trading firm. The only firm that didn't back in those days was Goldman Sachs because they had co-CEOs.

22:51They had both businesses starting at the same time, and the culture was built around the total Goldman Sachs. So I said, not that we're going to be Goldman Sachs, but that aspect of what Goldman had been, we're going to start day one. at Guggenheim as a full service firm, which is very different from the rest of the non-balance sheet bank businesses, most more monolines. I don't believe in monolines. So I said we were going to build investment banking, but also sales, trading, research, capital markets in fixed income and equities. And that's hard to do, but we said that's what we're going to do.

23:34And therefore, it's not like we built this business and we're tacking on this one. Culturally, we're one firm from day one. And investment bankers, you got to help us build the trading business because until it gets built, that kind of thing. And that's been great. I'm very proud of that, that today we have a pretty large, you know, sales and trading and capital markets underwriting business as well as. So we weren't just like a lot of my contemporaries went over and said, okay, I'll take my M &A franchise and plant it over here. We're full service and one culture and a very team-oriented culture.

24:16Yeah. And when people work across teams like that, I think it aids a lot of, there's a lot of more perspectives that come into play and it can aid in more successful business building or building up those verticals within Guggenheim. But I want to move a little bit on to your advice to the younger generation and kind of the changes you've seen before that, some changes you've seen. So what are the biggest changes you've seen in investment banking? There have been many big changes, but in the last 30 years, let's say. Well, look, I always say things always change and you have to embrace change.

24:52And it's very, very important. and I was for I grew up in an industry that's changed more than most so say not the last 30s go back to when I started you know bottom line back when I started as I said you know look um there was almost no fixed income business you know to speak of so fixed income was a small piece of uh it was basically an equity business um and the equity business um there were no balance sheets. I mean, the provider of backstop liquidity when there was a run on the market was the specialist on the floor of the New York Stock Exchange. So if there was a panic, they'd say, here's a bid at this price to take out anybody.

25:38Those people had total capital of maybe$15 or $20 million. It's hard to fathom that the stock would be$15 or$20 million. But stocks traded maybe in the bear market they traded nine or ten million shares a day and total day was nine or ten million shares so the over-the-counter trading business everything has changed we created you know the fixed income trading and then went into structure but the whole high yield market was created with mike milken starting it and everything else so there's been enormous changes but the one thing is that the one thing I've learned early on about adapting to change is that it's not human nature to change.

26:24Humans are bred to habituate. That's why cavemen found caves. That's their safe place is you find your safe place and that's where you go. And so when you look at large organizations, they start out with, sure, the young people coming into a brand new organization are more than open to change, because maybe that change will give them a better chance to move up than the people in front of them. But every layer you move up, the more people have found their place, what they're good at and what drives them, they're bred to habituate. And so if you're running an organization, it's very important to understand that and figure out how to get people to not resist change.

27:12especially at the top. So one of the ways I say doing that is what I learned again from Ken Langone, from Ace Greenberg and John Rosenwald and others is that the certain, there are, there were principles that they taught me that many years ago that have never changed. The customer comes first. You're completely transparent and open, you know, and, and ethically, et cetera, et cetera. So that, And you convince people that doing what the clients need got us to create the products the clients needed. That product wasn't what made us successful. Solving the problem was. So now we have to change if there's a new problem.

27:56And so that's the way we've tried to drive change my whole career. For young people coming in, it's somewhat different. it's as you're coming in, you always have to listen to what you should be doing. But think about whether there's things that you're seeing that, you know, the people above you should hear about in a respectful way. And, you know, don't assume that anything you're seeing is wrong, and don't assume it's right. But it allows you to have discussions and open up a dialogue. As I said, Ace Greenberg, how'd we start out? I started by saying, Ace, things are changing. We need research.

28:39You're going to have to do it. At first, he thought I was crazy, but then he stepped in to do it, and that's how he asked me to go do it. So, you know, had I not said, hey, something's changing, I could be wrong, but do you want to look at it? You know, I could have just sat there and waited for them to figure out how to change things. Right. And so you can't drive change from the bottom. But you can pay attention to what should change. Try to get your organization to adopt it. And if not, keep an eye on maybe there's another big opportunity somewhere. And I would always say as young people, don't hop from job to job because you see something only when you see something really compelling.

29:31As long as you're learning and you like the people you're with, stay where you are in your early. First 10 years should all be about learning. But as you're learning, put it into the picture. don't just learn what you learn and repeat it back to the professor learn what you learn but see what's changing out there that could you know you could take what you're learning and apply it to something that you see and i think i think all those things you mentioned kind of fall under even if you're lower level at a big bank or at a big institution kind of having in mind the big picture and what you're doing that affects the big picture of the bank because if they're only if people are really closed-minded, only noticing what they're doing, the assignments they're getting given, and not realizing the big picture, how it affects the big picture, where the bank's going.

30:20Totally. I say to all our people, coming in, like I say, first of all, if you come into a bank and you get a job as an analyst associate, it means you were very successful in school, which is great. You were asked to be successful, and you were. And I say, now I want you to take what you learned in school and throw it away because it's totally different in business. In school, you're told what to know. If you can repeat it back very well, you get an A. But in business, you can't go to clients, for example, and say, well, tell us what you need and I'll repeat it back to you. You got to be putting the pieces together.