Ep 90: Ethan Penner on Choosing Greatness & Pioneering New Markets on Wall Street

0:00Not everyone was born attractive or equally attractive. Not everyone was born equally smart. Not everyone was born to parents who were good parents or situations that are equally good. You know, birth happens and there's inequality at birth. Well, they're probably a good clue that inequality is part and parcel of life on earth and that each human journey is meant to be different, not equal, not the same.

0:30Ethan Penner has the mindset of a scholar and a philosopher. In his 20s, in the 1990s, he completely changed how real estate finance worked and reached great heights of success, got to learn from some of the most successful people in the world. Ethan's written a book, Greatness is a Choice, to inspire the next generation to choose greatness. He also writes about what our society needs in order to remain a place where people can be great and where our civilization can thrive. I'm excited for you to meet him. Ethan, wonderful to have you here today. Couldn't be more excited. Before we dive into your book, which I want to ask you about, you grew up in a blue-collar city of Yonkers.

1:02Is that right? Tell us about your journey to Wall Street from there. What was your life like at the early on? I mean, it was very, I would say, an inadvertent path to Wall Street. No one in my neighborhood wore a suit and tie. There was not a single suit and tie in my field of vision as a young man. I had the very great good fortune, however, to have two scholars as parents, although my parents were divorced, both influenced me. And I had a Jewish upbringing and was sent on scholarship, even though we were quite poor, to an extremely affluent private school that was a yeshiva. So I had learned half the day in Hebrew and ultimately in Aramaic as well, and had just the most incredible intellectual challenge as a young man in that school.

1:51In fact, I would say to this day, and I've been around many of the smartest, so-called smartest people in the world, I've never been in a more intimidating room than my seventh and eighth grade classes. Aramaic is interesting. I didn't realize that was studied in the U.S. very often. Well, in my school, we had to study the Talmud in seventh and eighth grade, and it's written in Aramaic. And so we had to become competent in Aramaic in order to study the Talmud. That was the language, I guess, that was spoken at the time of Jesus. Jesus spoke Aramaic, apparently, yes. Very cool. I've also studied the Talmud, but not in Aramaic.

2:25I need to up my game. I'm happy to work with you on that. I need to review it. It's been a long time. My wife would be into that. We have the Hebrew Emergence School. You know, so for our audience who don't follow finance closely, can you explain how you helped reshape the real estate industry in the 1990s? What you did was something that really changed a lot of how finance and real estate worked that decade. Like, what did you do? Well, I came around through structured finance. Like, the world of structured finance and securitization happened to the development of that coincided with my career.

2:56And so I kind of became a pioneer and a leading figure on Wall Street in my 20s, which is very odd for a young man to do that in a field like that. But because there was no, it was a new business, there was no one with any relevant expertise. So I kind of came in and I had as much as anybody. It's a little bit like in the tech world when you do something totally new, you get to be in charge, even if you're a kid. No matter how young you are. Yeah. No one had more expertise than me or experience. So from that kind of application of securitization on single family mortgages, I had standing on Wall Street, having built that business at Morgan Stanley and run it, I had big standing on Wall Street.

3:36And I saw in the early 90s when all the lenders, which had been regulated, all regulated lenders abandoned the real estate market simultaneously. Basically, everyone's blowing up after the crisis. And you know what happens, as you probably know, in the regulated financial world, it's a light switch on and off because regulators say, do this and everyone does it or don't do this and everyone has to not do it. And when an industry is dependent upon that group of lenders, when the light switch goes off, it's pretty bad. You know, there's nowhere to go. And so in 1991, when the light switch went off for real estate, the real estate industry found itself completely without a lending community to service it.

4:16For what type of real estate? All real estate, all commercial real estate. So it didn't matter whether you had an apartment, a shopping center, a hotel, an office building. It didn't matter whether it was highly occupied, wonderful piece of real estate with tremendous stability and income. You could not get a lender to quote a loan. And in that moment, I thought, well, securitization and the introduction of the bond market to this business seemed like a natural. Can you teach our listeners what is securitization in this context? So securitization is simply the packaging of loans, let's say in this case, making loans to borrowers, packaging those loans, transferring them into a trust, and have the trust issue securities or bonds backed by those loans.

5:03So the collateral for the securities is the loan. And this is where you take a bunch of loans together and you can sell off different tranches. Different levels of seniority. So the senior most are collateralized by all those loans in a senior fashion. And the junior most essentially insure the senior bonds for credit risk. And different risk gets different payments. Very safe debt, riskier debt, and then something that functions more like equity on the very top of the set. Yeah, or highest yield, right. Like junk bonds, really. And so from a pool of loans, you issue bonds that could be rated anywhere from, and will be from AAA all the way down to unrated.

5:37So you transform this industry by creating this ability to fund all these things that couldn't be funded. Through the bond market, right? Up until that moment, the bond market had no active or access points, active participation or access points into real estate. And I kind of opened that door or built that bridge for that wealth of money to kind of come in and express itself into real estate. Kind of like how Michael Milken had a little bit in the 1980s. Exactly. I was the Mike Milken of real estate, as they said. And so you did this, you had a lot of financial success in the nineties. What was next?

6:10I mean, you've always had a unique approach, you know, where you're a student of you in behavior, you're interested in philosophy. What'd you do after that? Well, I think that, you know, as I've come to learn about myself in life, you know, at the issue, at the outset of my life, I was driven like all poor kids. I just want to solve for financial stability. I don't want to be poor anymore, you know? And I don't, I really want to make sure my mother who's a single mother was not going to grow up and grow old in poverty. Right. So, I mean, I had a, I had a kind of like, let's solve financial issues first and foremost.

6:43And then by the time I was in my thirties, I had solved it according to my own vision of what that meant. And I, you know, I kind of learn a lot about myself, which is I love building businesses. I love really challenging markets and challenging situations. I love dislocations and I love, because it opens the door for creative solutions, which I enjoy being a part of bringing. I don't love rinse and repeat. Like, and that's really how you get very rich. I've learned in life, like rinse and repeat people, they get very rich. The pioneers like I am who create solutions to problems and then get bored as soon as they've kind of solved the problem, they get rich enough, but they're not really the richest people in the world.

7:28You got to hire someone who works for you to do the I didn't figure that out. I actually don't like the, I don't have the patience to talk to those people actually. I know. That's, that's, that's a tough part. You get a creative guy. I want to talk about the university in your book, but you're still doing stuff on the business side. You launched a REIT in January. Tell us about that. So I have, um, I have a couple of businesses that I decided Sam Zell was one of the kind of more influential people in my life. I got, because I had this meteoric success in touching real estate in a very young age, all the people in real estate were beating a door, a path to my door because I was the only lender in the town.

8:05Yeah. And my, you'd like this because I really didn't know much about real estate. So people like Sam's L would come in. There was no one else to borrow from. So they would be talking to this 31 or 32 year old kid saying, can you help basically save me? And I would say, listen, Mr. Zell. I'm 32. I really don't know anything about, let's say apartments, for example, but I do, I'm a pretty smart guy and I do make the decisions about whether I'm going to fund you or not. So here's the trade. You teach me enough about apartments so that I can understand the risk you're asking me to underwrite. And then if I like the risk, I'll lend you the money.

8:41So I got an education from people like Sam Zell pretty damn quickly. He was a real character. Oh, he was something else. He passed a year or two ago, right? About a year ago. Yeah. Oh yeah. What an amazing guy. What a loss for the world. What a creative man. I was really, I enjoyed his book too. I don't know if you ever saw it. Great book. No, no. It's fantastic. One of the funniest things there, of course, is his father who had saved them from the Holocaust and everyone was criticizing him. He said he was never able to tell his father he was wrong about anything else the rest of his life, which I thought that would be a pretty amusing context.

9:08Yeah. But so Sam, I remember the day he was sitting in my office and it was about 1996. I'm all of 35. and he's like slumped in a chair across from me. It's a dark wintry day in New York and he's exhausted. And I say, man, you look tired. And he said, oh, he goes, you have no idea how hard I work. And at the time he was probably 60-ish or something. And I was 35. And he said, how many hours did you fly this year? And I said, I don't know. I mean, I'm working like an animal. I think I flew 550 hours on my plane this year. And he said, I flew 750. 50. And I said, and he's, by the way, he was one of those guys who always had to top you, always had to top you.

9:52Right. So I said, I did the math quickly in my head. I said, I think you're flying every single day. He goes pretty much. And I said, well, explain to me, like, tell me about your life. And he said, well, I'm the chairman of nine different companies. Six of them are public. And I thought, what, what are you talking about? And, and then he explained to me that he's not the CEO of any of them. And what he does is he has CEOs running these companies who are effectively his partner and he's their mentor, their advisor. And he travels a lot. He has a great kind of world connectivity and he learns so much and has so much information from his world travels that he's able to bring incredible value to each of those nine companies because he's representing them all in the world.

10:41And I thought to myself, well, I like travel and I like people and I like collecting information. Maybe when I'm his age, I'll do some version of what he's doing. And I'd forgotten that. Of course, we all forget that. And then about six months ago, I was thinking about launching a new fund in my last company that I had started. And I just thought, you know what? I remembered the Sam Zell moment. I thought, I think it's time for, I'm like his age. It's time for me to be like a version of Sam. And now since he's passed, the world's kind of has a void. They need someone to act like Sam. Maybe I'll act a little bit like Sam.

11:15So I said, maybe I'll be non-executive chairman of a few companies. And then I don't have to like deal with people and build companies and go to work every day. You get the executor to be worked for you. Yeah. I could do what I like to do. And so I thought, well, what, what do I like in real estate today? And there are very few strategies I really like because I think the world of real estate is in, like the world, in a bit of turmoil and a lot of unpredictability. But the two that I liked very much were I liked owning apartments and operating apartments because people, no matter what the world turns out to be, you love to live in apartments.

11:50And I grew up in an apartment, so I understand that on a very fundamental level. And the other one is the office building finance business is desolate. There are no lenders for office at any level, at any attachment point. It's a mess right now because the occupancy is down so much. Right. Well, everyone's run away from it because it's the third rail and no one wants to even talk about it. So I thought, okay, I'm going to become chairman of companies that do those things. And now I got to find people who I trust to actually be the CEO. Well, one of them in the apartment side, my brother has a 22-year-old investment management business that owns and operates apartments.

12:28and I know and trust my brother quite well. So I called my brother and I said, you know, and he had wanted to grow and he'd been after me to be his partner and help him grow the business. I said, well, now's the time. I said, I'll be non-executive chairman of your company. And so that's my apartment expression. And then there was a guy in San Diego who I had known for about 25 years who had owned and operated office buildings. And he had a similar vision as the I did. And so I decided that I would kind of support him in an effort to build an office building specialty finance company. So I've got those two endeavors cooking, but the good news is it's cooking in Sam Zellian fashion.

13:07So it's cooking without me having to be there all the time every day. Well, that makes a lot of sense. I'm also the chairman of a few things is how I've structured stuff for the last decade. So I like the Sam Zell, Ethan Penner approach. We'll have to cite you guys. Let's jump into your book a little bit. Your book's called Greatness is a Choice. I really enjoy this book. I think you had about 69 short chapters. Yes. Elon would appreciate that number. Uh, you basically, sorry. You said some people will ask you to believe the greatest is a gift bestowed upon only a fortunate few. And that is a lie you shouldn't buy into greatness.

13:36This is not a gift, but an actual choice we can make every single day. Can you unpack that? Well, I just think that every minute of every day, we, if we're in an aware state, we know that we could bring all we have or something less than all we have. And I think that greatness isn't about like, you know, we tend to think about greatness in athletic endeavors, you know, and we see LeBron James as an incredible athlete and we go, I can never do that. So therefore he's great and I'm not. But I think that if, you know, I like to, I happen to like cheeseburgers. And so if you go and you have, let's say you go to a restaurant and you order a cheeseburger.

14:18It's a very Jewish thing to like, Ethan. Yeah. And let's say it's an incredible cheeseburger, right? And you go, well, you taste greatness. And if you're really in an aware state, you go like, whoever did this really brought their very best on my behalf. And we could do that for each other, you know, even in this moment, like we could be mailing in this conversation or any conversation, or we could be fully present and engaged in a great way. And I think that we all know when we, we touch someone who's trying to bring their best. Well, I also do appreciate great cheeseburgers, even though I shouldn't admit it with the rabbis listening.

14:50But, you know, if greatness is a choice, why aren't we always choosing all the time? Like, if it's something you could choose, why doesn't everyone choose it? Well, I think that not everyone, it's why I wrote a very simple and easy to read book, because I think that it's not an idea that is conventionally accepted. I think, again, most people have a self-defeating aspect to their kind of walk around, right? I think that they don't think of themselves as being great or capable of being great. Your chapter one was why you must admire yourself. I guess that's the first. That's why it's chapter one.

15:24You know, I was going to make chapter one, the, um, my, I think my favorite one and many people's favorite is the, um, bubble of joy concept. But I made self-esteem chapter one because without self-esteem. You're not going to choose greatness. You have no chance at anything. Really. You talk about, you know, you have a bunch of ones. One thing I like is, is life is hard for a reason. And you say our modern cultures try to eliminate hardship. Tell me about this one. Well, if you start with the premise that there's divine perfection to this journey we call life and this world that we happen to be living in, instead of saying, how could we correct the world or blame the bad on the devil or some bad luck or whatever, if we just start with the presumption that everything is meant to be and purposeful, well, you know, because you've achieved things.

16:16If you've achieved anything, you've known that in the path towards achievement, you've been punched in the nose many times. And it was in those moments that you failed and fumbled that those were your teaching moments that set you up to be better to succeed. If you're not struggling, you're not getting better. I think it's important wisdom. Like there's actually real benefits from adversity, which a lot of people don't realize. Well, people take those moments of failure as shameful moments rather than learning moments. And when you start to think of them as shameful moments, you hide them under the rug and you don't want anyone to know you've failed and fumbled.

16:53And you therefore don't really acknowledge it yourself. And I don't know how many biographies of a lot of times public figures. I don't know. I've read. There's one. I don't want to shame the guy. But there's a guy who I don't particularly like. And he wrote his biography. And it was as though he literally never made a mistake in his life. But how many books like that? And after about like third of the book, you just throw it away. You're like, this is bullshit. I don't, I'm just, it's just, it's just bullshit. It's, it's, you have to admit your mistakes to learn and get better, right? Otherwise it's ridiculous.

17:22Your life's not meaningful. And by the way, as I think I said in the book, the people who try the most are going to make the most mistakes. It's just math, you know? You're going to have more people angry at you and you're going to be making mistakes if you're trying a lot of things. I a hundred percent agree. Let's jump to chapter 24. It's the debilitating effect of the victim mentality. One thing you write that I thought was interesting is you said you learn not to show sympathy for anyone, but you do have empathy. Yes. Tell us about the victim mentality and what do you mean by that? What I've learned in my life is that when we experience bad things, whatever they are, you know, it could be like in my case, as I point out in the book, when I was eight years old and fell off my first bike and it was a quarter mile from my house and I had to walk home with bloody legs and pain.

18:08There wasn't anyone to feel sorry for me in that moment. And I felt fine. I mean, I got up and I dealt with the pain because I had to, and I had no choice but to walk home in pain. And I was strong. And then I walked into my apartment and my mother and grandmother saw this cute eight-year-old kid with blood pouring down his knees and they shrieked, oh my God, in horror. And I immediately started crying hysterically because they weakened me. So in moments of challenge, and I think it's played out in my life too, in moments of challenge and failure, you could react in many different ways. And one of them is you could feel victim.

18:45You could feel sorry for yourself. Like, oh man, this bad thing happened to me, or this person did this bad thing to me, or just bad luck, whatever it is. And that is a place of great weakness where you start crying for yourself. And you can never rebound from that, which most people, I think, unfortunately react to challenges that way. And I think the other way is, you know what? I had to walk home. You know what I mean? I'm a quarter mile from my apartment. I got to walk home. I'm going to suck it up and deal with it. And so what I've learned is when I see people who are in difficult situations that I care about, I don't want to be that person who weakens them or plays to their weakness.

19:29There's something strong about saying you can, you can handle this toughen up, stand back up again and keep fighting. You could be empathetic and say like, I mean, this sucks that, that it happened to you, but you know, you're strong and you'll figure out how to deal with this. Yeah. There's something in our society that's a little bit too focused on the victim. I think a lot of people who are not living the best lives right now, they're, they're constantly blaming everyone else. And rather than thinking, how am I going to be strong and get through this myself, but you know, improve things. Yeah.

19:56There's another thing that I learned too, which I think is at play in the society today. I remember when I was a kid and in camp and I was taking lifeguard instruction and the lifeguard that was giving instruction was like this monster is like six to third degree karate black belts. And I was this pudgy little nine-year-old kid, you know, and part of it was I had to go rescue him. And of course, when you go rescue someone who's drowning, they're very dangerous to you because their inclination is to put their hands on your head and get some leverage so they can breathe and use you as leverage and then you get drowned.

20:32And so what he did in the test is to make sure that he, I went out there to save him and he tried basically to drown me and he was twice as big as me and he succeeded pretty much. So I didn't pass that test of being a lifeguard that day, but I learned a very valuable lesson that people out there who see themselves weak, right? And too many people do, they see themselves as victims. They haven't been able to deal with their challenges because no one taught them how to deal with challenges in a strong way, in a way that's constructive. They want to drown other people, right? They're drowning. And so they want to drown other people.

21:11There's something about how therapy works today. I don't know if you've seen Albert Schreier's new book on this, but basically it's like causing this thing to, you're basically making them weaker based on how we're dealing with them rather than teaching them to be strong. Well, I mean, I just think about when I was a kid, how the therapy industry has ballooned since then. You know, if you compare like the therapy industry today versus the 1960s or 70s, the 1960s or 70s was all about just suck it up and deal with it, right? There's something very solipsistic about a lot of it. I do think therapy is important for some people.

21:42I don't disagree with that. But there's something very dangerous about how it works with the victim mentality. Well, there's a balance. Like there isn't everything else between the message of just suck it up and deal with it. you're good enough to do that versus run for help and become a permanent victim. It's probably important dialectic here. My family was all about just being strong and overcoming it, which I think it works until it doesn't, I suppose. Yeah. Chapter 34 for you was the best ideas survive open debate. Tell us about that. But it's just logical, right? I mean, I think that in the world of open competition, the best wins out.

22:18It just, whether it's about ideas or sports, right? Can you imagine in in the times when black people were not allowed to play in professional sports in America. Well, we weren't getting to watch the best players. We just weren't. And you let them in and then it was clear that they deserve to be there. Well, the people who deserve, deserves. And I think that when you create artificial barriers, whether it's not allowing certain people to participate in sports or not allowing certain ideas or certain people that have certain ideas to speak, the best doesn't win out. It seems like one way people don't allow certain debates is to say certain things are hateful or inappropriate or hurtful.

22:59And we're weaponizing weakness. We're just weaponizing weakness. It seems to me it's actually really important. We argue, actually, it's more important to have truth than to stop people from being offended. And I think this is something our universities in general are really weak on right now is it's so important not to offend people that we don't allow truth to win. There's no question about this. There's a lot of things like weakness has been used as a tool or a weapon to bludgeon other people with ideas that don't feel good. And I think it's just. I actually think it's so important that we get good at this.

23:33I think all of the kids coming to university should get practice being offended. I think it's actually healthy for them to, you know, we call it microaggressions. I think we should have all of them experience microaggressions. They need to learn that it's okay to be offended and deal with it. Look, when I was a kid, I remember when my parents were divorced and my mother went looking for a neighborhood to move to with two little kids. She was looking for a densely populated apartment community where there was kids playing in the street because she had to go to work. And she wanted to know that her kids could be okay with friends and playing in the street and all this stuff.

24:04And so she found this place. And I was eight and I was just kind of like timid and afraid to go out and just meet people. And she basically threw me out of the apartment one day and said, go out in the playground and just introduce yourself. So I did. And the first kid, I went up to a group of kids who were gathered in the playground playing some sports. And I started to introduce myself. And the first person saying the first thing to me was, are you Jewish? And I said, yeah, I am. And he said, so you killed Christ. And I thought to myself, this is not, this is not where I was hoping this would go, you know, like what the hell, right?