Why the Pentagon Is Hiring Wall Street Bankers

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2:08Show, show! Welcome to Prof G Markets. I'm Ed Elson. It is March 17th. Let's check in on yesterday's market vitals. The major indices climbed as Trump called on other nations to help secure traffic through the Strait of Hormuz. Oil prices declined on that news. The yield on 10-year treasuries also fell, and the dollar dropped the most in more than a month. Okay, what else is happening? The Pentagon is seeking unusual hires, specifically Wall Street bankers. The Defense Department is recruiting investment bankers for a new 30-person economic defense unit. The team would be tasked with identifying strategic investment opportunities and deploying as much as$200 billion over the next three years.

2:54And the money would be directed towards sectors considered vital to national security, including mineral extraction, drones, and energy. According to the government's presentation, the goal is to prevent China from gaining military superiority, to lure top talent. The Pentagon is offering high salaries, access to foreign contacts, and the chance to manage, quote, more capital than most investors deploy in their entire careers. Here to discuss this is the journalist who broke this story, Liz Hoffman, Semiford's business and finance editor and host of Compound Interest. Liz, welcome back to Prof G Markets.

3:30First, tell us, what do we know about this new investment banking recruiting operation that Trump has initiated here, what is interesting or striking to you about it?

3:42Liz Hoffman:Yeah, I mean, you know, through, you know, the military budget, through these trade deals that the Trump administration has been striking with foreign countries, and with a bunch of other things that they're working on to kind of, as the Treasury Secretary calls it, kind of monetize the national balance sheet. You know, the Trump administration is going to end up with a couple hundred billion dollars, maybe more than a trillion dollars, kind of to invest and has a lot of ideas kind of about its priorities, but its challenge is going to be finding things to buy and invest in. And, you know, it's one thing to say, we'll just take 10 % stake in Intel.

4:15Liz Hoffman:It's a pretty well-known company, pretty important to national security, but there's a long tail of things that they're going to want to go after and finding those deals is what Wall Street investment bankers do for a living. They are explicitly hiring what in Wall street is called coverage bankers, and every industry has them. So you might be a coverage banker covering industrials companies or energy companies or retailers. And there are coverage bankers for private equity firms. Their clients are the Blackstones and KKRs and Carlisles of the world. And their job is to know what these guys own, what they might be willing to sell, and then to try to find the money to put those deals together.

4:51Liz Hoffman:So that's the unit that's being put together here. And as you correctly know, it is the Pentagon correctly dangles. This is a jaw-dropping amount of money and could be a very fun playground for Wall Street investor bikers. And judging by kind of the inbound that I received saying, who do I call to get this job? It is a fairly juicy opportunity, I think. And so what is actually the point of this? It's for the U.S. government to continue to buy up stakes in private companies. I mean, is that essentially what is happening here? I think so. I mean, we published what we know. So, you know, I've been calling around and not gotten a lot more detail, but I think that's the idea.

5:27Liz Hoffman:I mean, the government through the Defense Department and the Department of Commerce probably have stakes in 12 or 15 private companies right now. And, you know, they are a way to ensure domestic supply of really important things. They can be a way to provide financing that for whatever reason the private sector won't. You know, there's sort of early stage mining things that are pretty hard to finance that the government might say, yeah, we'll do that. And then they are obviously politically a thing that Donald Trump really likes. He likes doing deals. And, you know, huge parts of the government have kind of retrofitted themselves and huge parts of the corporate world to kind of, you know, retrofitted themselves around satisfying that impulse.

6:14What do you make of the crossover here that we're seeing between the public sector and the private sector, which is usually the kind of thing that people are worried that a socialist or a communist would be responsible for, this idea that we will go in and seize the means. We will buy up stakes in private companies. Now we own the private company. Now we control it. We're going to have golden shares in U.S. steel to give government more control. And now the plan is to deploy$200 billion, pay these bankers huge amounts of money to essentially, I mean, I don't think I'm saying this incorrectly, give the U.S.

6:52government control of critical infrastructure and private companies that have historically been owned by the private sector.

7:01Liz Hoffman:Yeah, I should say, sadly, I did not see an employment term sheet for this job. I guess it's actually probably not going to pay them huge sums of money. You know, and again, I'm not a lawyer, this is not legal advice, but I do think that if you go into government for a term of service, you can sell a lot of your stock on a tax-deferred basis, which is very attractive to these people. And then the other thing they're dangling is you will make connections in government that you can then turn around and go back to the private sector and monetize. So my guess is that this is probably not hugely expensive for the taxpayer on the personnel side.

7:32Liz Hoffman:I mean, the concern you have in this situation, if you go back, what was this, 15 years to the Obama administration. There was a deal that they did to the Department of Energy. They lent money to a company called Solyndra. It's a green energy company and it fell down and it became just an albatross around the neck of the Obama administration. And the lesson out of that, which is sort of a textbook lesson, which is that you don't want government picking winners and losers because A, it's not very good at it. And B, even if it is good at it, like to whom does that benefit a crew? It's not clear that if they buy, by the way, they're up on their stake in intel, but like, I'm not getting a check as a as a taxpayer, right?

8:11Liz Hoffman:And so you have to think about what you're trying to solve for. And so generally, it's the places where you might be able to justify it sort of in a more academic setting is things that for whatever reason, the market just isn't willing to finance. No, the government has lots of ways to help that happen. Anyway, think about like, no one would build missile systems if the Pentagon didn't have a huge contract to buy them, right? They, you know, the government spends money in ways that make things financeable. So I don't know. You know, when I talked to some folks about this, I said, is this interesting to you?

8:42Liz Hoffman:And the answer is, yeah, it sounds fun. But you do have to worry about adverse selection. And the other thing I would note is that private equity firms are sitting on an epic, historic backlog of companies that they have been unable to sell, like something like$3 or$4 trillion worth of stuff sitting in their portfolios because the IPO market has been sluggish. The particular kinds of M &A have been sluggish. And they are desperate to offload this to somebody. And you'd have to worry a little bit if you're at the Pentagon that you become the dumb money here. And bringing in people who speak that language should probably help with that, I guess.

9:17Right. And ultimately, those investments, I mean, you mentioned that the taxpayers probably aren't paying the salaries of the bankers. But if we're deploying$200 billion of capital from the Treasury. I mean, that's taxpayers' money, or at least that's going to be funded by deficit spending. That's what's going to fund the investments in these companies ultimately. Is that right?

9:36Liz Hoffman:It certainly is. And, you know, I guess on the front end, it's not totally clear to me where the money is coming from. Perhaps the NDAA, the military authorization, you know, the appropriations to fund the U.S. military may have some money for this. You know, the Trump administration looks at these trade deals they're doing with Japan and Korea and Taiwan and saying It's another couple hundred billion dollars that will likely get funneled through commerce and not the Defense Department. I don't really know. I mean, I don't think the ideal outcome here is to have a profitable kind of constantly fundraising, self-sustaining private equity firm inside the Pentagon.

10:12Liz Hoffman:But the other thing I should note, by the way, is that, you know, the undersecretary at the Pentagon came from private equities, the former CEO of a co-founder of Cerberus. And there has been this really interesting tension actually inside the Pentagon between sort of two warring factions in finance and on Wall Street. And one is private equity and one is sort of Silicon Valley venture, which has been playing a huge role in the Defense Department and procurement. And actually, since you very graciously mentioned, we do have a new podcast. And our episode coming out Tuesday is with the partner at Andreessen Horowitz, who's been running their kind of America First investments.

10:47Liz Hoffman:And we talked a lot about why venture capital, which has this kind of very capital-like code DNA, like why is it playing in these like bombs and drones and really heavy CapEx businesses. And so there's a little bit of tension inside the Pentagon about this. And I think that their requests specifically for private equity, Wall Street's are really dyed-in-the-wool, you know, Wall Street finance guys, is probably, you know, telling to Deputy Undersecretary Feinberg's sort of personal experience. Well, it does seem that if you're in the investing game, if you're in Silicon Valley and then you learn that we're going to see$200 billion in capital inflows basically overnight because of what Trump has decided to do, you probably should get to investing in these companies.

11:30I mean,$50 billion invested in defense tech in the whole of last year. Now we've got$200 billion in the pipeline coming from the government alone. You have to think that this is a great time to be a defense tech company. And then on top of that, something that I also just wanted to bring up to you and see what you make of it. Trump's sons, Don Jr. and Eric, they recently invested in a drone company whose customers are one of its largest customers is the Pentagon, this company called Power Us, which they're now working on taking public. I read this headline, or I read this news that you reported here, that we're now planning to have$200 billion deployed at the direction of Trump that's going to go into defense companies, into defense tech companies, specifically drone companies.

12:17And it makes me think, well, is this money just going to go into the pockets of his sons?

12:21Liz Hoffman:I do not have a good answer for you on that. And I do not know, like, what level of outrage that would spark. My guess is like some for some period of time and then like everything else, it would kind of just be absorbed into the ether. Yeah. You know, it's interesting. We had a story a couple of months ago, actually, my colleague Rachel Jones wrote this great story about companies sort of particularly looking to go public via SPACs and kind of twist themselves into basically show a little leg for the Trump administration, trying, in fact, to get the government to buy five or 10 percent of their company.

12:52Liz Hoffman:The other thing you got to wonder is like a lot of these stakes are just kind of being given, right? It's not totally clear what the economics are. And the Intel stake, this was money that had already been authorized to be granted mostly or mostly granted to Intel under the CHIPS Act and the Biden administration. And, you know, Trump's Commerce Secretary, Howard Lettner, came along and said, well, what are we getting for that? And they got 10 percent of the company. So, you know, stocks up, you know, and that actually, I think, is sort of a textbook example of something. I was a little skeptical of that on the way in, but it seems to have marshaled private money followed.

13:24Liz Hoffman:Right. You know, government money is good when it sort of sets a floor under something and encourages the private sector to take the first steps and then kind of do its due diligence, which obviously the market does on Intel every day. Do you think this is the first step on the path towards a sovereign wealth fund in America? I do. And, you know, my personal view is that we don't need one. Like countries that have sovereign wealth funds, they have them because they don't have all of the things that we have, which is like a really thriving private sector and a lot of very dynamic price discovery.

13:58Liz Hoffman:And what they do have is like a lot of oil. And usually a big pile of money that they can rely on versus a giant pile of debt. Correct. Correct. And it doesn't usually end that well because they tend to entrench, you know, strongmen and other things. But I do think that if you look at, again, you've got money coming in from trade deals. We'll see how real that is. But the Japanese seem serious about about it. I think there's a meeting this week between the U.S. and South Korean officials to kind of hammer that one out. You have a lot of money coming in on trade deals. You've got whatever they get to keep on the tariffs.

14:31Liz Hoffman:You got whatever they raise by taking Fannie Mae and Freddie Mac public. You know, there's talk of privatizing the Postal Service. Like, I don't know exactly, but there are these national assets. And Treasury Secretary Scott Besant has talked about monetizing the asset side of the national balance sheet. I don't know if this ends with us selling the Grand Canyon or naming rights to Mount Rushmore or whatever, but you can start to see these piles of money. There's a$10 billion fee apparently coming to the U.S. government from the TikTok deal, a story in the Wall Street Journal the other day. So you start to put these things together, and it's a trillion dollars, which is the size of the largest sovereign wealth fund in the world, which depending on the day is either, I think, Saudi Arabia or Norway.

15:09Liz Hoffman:So I don't know. Again, I don't think that we need one because those exist generally to do things that the market does pretty efficiently here. But Donald Trump obviously wants one. And so you're starting to see the pieces get put together. Whether it gets like organized in some cohesive fashion, I don't know. It may end up being a bit of a tug of war between the Defense Department and Commerce and some various other agencies. Yeah, it seems like he likes the sound of it. And that's really what matters here. Or at least that's my view. That does seem to be the operating principle in Washington.

15:39Okay, Liz Hoffman, Semaphore's business and finance editor and host of Compound Interest. Liz, thank you very much.

15:46Liz Hoffman:Thanks, Ed. Always a pleasure. After the break, the Trump administration collects their TikTok bag. And for even more markets insights, you can subscribe to my weekly newsletter, Simply Put, at simplyput.profgmedia.com. Thank you. activities. Values including a competitive APY on savings and investment match for your IRA and access to one-on-one sessions with SoFi Wealth Financial Planners. You can get started for$10 a month. And if you join SoFi Plus between now and April 15th, you'll have a chance to win over$75 ,000 in cash. SoFi is also giving 20 individuals$1 ,000 in cash prizes and 50 winners free SoFi Plus memberships for a year.

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19:16We're back with Profity Markets. The Trump administration is set to collect one of the largest M &A fees in history. The government will reportedly pocket$10 billion for brokering the TikTok deal. That fee will be paid by the investors who took control of TikTok's U.S. operations, including Oracle, MGX, and Silver Lake. The group has already put$2.5 billion into the U.S. Treasury when the deal closed in January. Further payments will follow until the total hits$10 billion. To put that into perspective, the biggest M &A fee ever disclosed went to Bank of America for advising Norfolk Southern on its sale to Union Pacific last year.

19:55The total fee for that transaction was$130 million. So, here to break down what this$10 billion fee means for dealmaking under Trump, we're joined by Miriam Gottfried, Wall Street Journal reporter who broke this story. Miriam, let's get right into this. Right off the bat, the number is astounding, especially if TikTok is valued at$14 billion, around 70 % of the deal size. That's the broker fee. Have we ever seen anything like this before?

20:27Liz Hoffman:I would say it's pretty much unprecedented. I hate to say it's the biggest ever because I'm not a deal historian, but it's certainly among the biggest ever. It's all but unprecedented. This is strange that they're asking for money to be paid for brokering the deal as the government, right? Is that something that is new as well? It's certainly not something that I've heard of before. But you have to remember that the government, that Congress effectively banned TikTok in the U.S. So the situation was this app is going to go dark unless a sale to a U.S. investor group happens. It was a unique situation to begin with that needed the government's help to facilitate a transaction.

21:11Liz Hoffman:It needed government approval. The government had to say, this deal passes muster and satisfies our security concerns and will prevent the app from going dark. The way you describe that, that makes sense. It's like it's the government's job to decide whether it's secure, whether the deal makes sense, whether it's figured out all of its national security concerns. But then it almost sounds like they're getting paid to say yes. Yeah, I mean, and that's what we don't know, right? I'm not a security expert. I didn't dig into the TikTok algorithm. I don't know the level of the plan that was put in place.

21:49But it's sort of like, oh, we got this really valuable app here.