耶鲁大学金融市场英文文本Financial-MarketsLecture-15-Transcript.doc

Financial Markets: Lecture 15 Transcript Professor Robert Shiller: If we may begin. Today we have a very special lecture. I am very pleased to introduce Carl Icahn as our lecturer. Mr. Icahn has a career that is really relevant to some of the topics we have talked about in this course. One theme that weve talked about in this course is corporate democracy. Weve talked about a book written by Berle and Means Adolf A. Berle and Gardiner C. Means, Modern Corporation and Private Property, New York: Commerce Clearing House, 1932. who said that shareholders are so dispersed that they have really no control over a company and boards of directors are self-perpetuating. Well Carl Icahn has made a career of really opposing that tendency in American business of self-perpetuating boards. Carl Icahn graduated from Princeton University, pre-med in 1957. In 1968, he founded Icahn and Company. This company, Icahn and Company, has taken substantial shareholder positions in a number of major corporations, including: RJR Nabisco, TWA, Texaco, Phillips Petroleum, Time Warner, Motorola. And when Icahn and Company takes a position in a company it then becomes active in the management of this company and in changing the way they do business. And they have done this with enormous success. So, Carl, Im very pleased that you could come and do this today. Mr. Carl Icahn: Good to see you, Bob. Professor Robert Shiller: It would be really nice if you can give some clues to our students here, who many of them are themselves launching out on careers, of how you got started on this and what your philosophy is and what you would recommend to them. Mr. Carl Icahn: The career youre asking about-I went down to Wall Street back in-way back in the 60s and I thought I was really-I had gone to Princeton, a really good school. I had gotten in there from a tough high school; I was the first to go from my high school. Nobody believed I could do it-they never took an Ivy League-the Ivy League never took anybody from this school I went to. But anyway, I went; got in and left there and I thought I was a real smart guy. Cut it short-went down to Wall Street and worked with Jack Dreyfus and then I was playing the market in 1961. That shows how old I am. And in a bull market you make a great deal of money by doing leverage. Its a little bit like today with all the leverage that we had and now might be coming to fruition. I was borrowing money and bought all these convertibles and I thought I was a genius and Jack Dreyfus said, youre going to lose all your money. I had made a few bucks playing poker and thats how I started with about eight, ten thousand dollars and I made all this money by borrowing at 90%. I would go out and I was making a lot more in two weeks than my father made in two years. My father said, well you know, put the money away. I said, no Dad, Im really going to make a fortune here. So, I went out-I remember once-and bought a Galaxy convertible. It was a beautiful car. I had a beautiful girlfriend; she was a model-it was just pretty nice. What happened? The crash came in 1962. I was wiped out in one day; I didnt even have the poker winnings left. I tell you, I cant recall if the car left first or the girl left first, but it was pretty close-maybe the same day actually. After that, I learned you have to learn something and I became an expert in options. After that, I built a following and built a big following and a big commission base by just learning one area very well. Probably, I knew that area better than almost anyone on Wall Street. Not to sound too presumptuous, but very few people knew it, so it doesnt mean very much. But in any event, I built up a big following and in 1968 bought a seat on the stock exchange with the help of a one of my uncles. By that time, I had saved a pretty big amount of money for those days. Then, I got into arbitrage-but not merger, bona fide. Thats something else you could-you can still do it today, but its much tougher with all these computers. So, I dont do it because I dont understand the computers; theyre beyond me, so I dont work with them too well. Im being a little facetious, but not too facetious. You could buy different convertible bonds and short the stocks against them. You had no risk, but you could make a lot of money and eventually we did real well with that. What I do today still is pretty much the same idea. You buy stocks in a company that is cheap and you look at the asset value of the companies that you buy the stocks in and it becomes a little more complex. Basically, you look for the reason that theyre really cheap and the major reason is often-and usually-very poor management. In a sense, its like an arbitrage. You go in; you buy a lot of stock in a company; and you then try to make changes at the company. Today, if you read the newspapers tomorrow, youll read-were trying to do the same thing at Motorola and if you bother to read The Wall Street Journal tomorrow-or maybe The Times, I dont know-youll see a little bit of what were trying to do there. Were trying to get them to change the structure of the company. We think the board is a very poor board there and were trying to change what happens. The thing about corporate America-few people that go to college, like where you are now, and most people in America dont realize how poorly most of our companies are run in this country, with many exceptions. Theyre really very poor and when you get inside the company you realize this. The real reason is theres no accountability; theres no corporate democracy and Ive been saying that, prophesying it, writing about it. The reason that we can make so much money when we go into one of these is-Im not even a manager; I never took a course in management and I wouldnt profess to really know much but I dont micromanage-I put in a very good manager. They cut the heck out of our costs, but they change the structure of the companies. This is the problem in America today, in my opinion-that we are basically undermanaged. We cant compete because the best and the brightest dont get to be at the top of the corporate ladder. I have a sort of a metaphor thats a little facetious, but not completely, about it. I call it anti-Darwinian; its anti-Darwinian in Americas corporations. That means, a guy goes to college and this is the guy that gets to be the CEO and, yet, hes in college and hes the kind of guy that was the president of the fraternity. Now, all these presidents of fraternities arent bad guys, but basically the normal guy that I remember at college was-hes always there at the fraternity or the eating club. Hes always there to be there. If you have a bad day, you walk over to the club and youre feeling bad-your girlfriend left you; you did bad on a test score or whatever-and you go over there; hes always there. He buys you a drink and you sit around with him; he commiserates with you; you play a little pool or whatever and he tells you whatever it is. Yeah, my girl left me; yeah well, theyre all no good-usual conversation back and forth. What would happen would be-youd like the guy. You cant help but like him; you used to wonder a little bit, when the hell did he do any work? But, he was always there for you. He never made many waves; he never said anything too obtrusive; or, he never showed too much intelligence. But, he was a good guy. He goes-that same guy goes out into corporate America and politically hes astute. He knows how to get along with people and he never really rocks the boat. He never comes up with any great idea; hes not a threat to his superior and, as a result, he moves up the ladder because, really, in corporate America, theres really very little accountability. What happens in corporate America-he moves up that ladder. Theres a good show, How to Succeed in Business, that was out many years ago that sort of sums it up. If you say-if a genius has an idea in corporate America-the genius has an idea; the next idea is, they give him an idea to resign. So, he moves along the ladder and he gets up slowly up to the top. Now he has two attributes: hes likeable, hes politically astute and hes a survivor-hes not really a threat and he gets to the top. These are the attributes of todays CEOs for the most part, with exceptions. He doesnt ruffle feathers; he doesnt get the board upset; and as he moves up the ladder, he finally gets to be number two to the CEO. Now, the CEO has the same attributes-where he doesnt want to be threatened and hes a survivor. The CEO will never let anybody be number two whos smarter than he is. So, by definition, the assistant to the CEO is a little dumber than the CEO; now this guy now is the assistant. The board likes him; the CEO eventually retires and they make this guy the CEO-the fraternity president were talking about. Now hes now the head guy-the CEO-and hell bring in a number two guy thats a little dumber than he is because he doesnt want to be threatened. So, by definition, well be run by morons pretty soon. Were not too far from that right now-from that point in our economic history. This is a problem that we have. Now, weve been able to do okay in this country and pretty well even with the fact that were badly managed because over the last twenty years weve had a pretty free ride. Weve gotten from all over the world-the whole global economy has been booming and weve been able to get cheap goods and these cheap goods kept us from having inflation. Very simply put-if you dont have inflation, its easy for the Federal Reserve to keep pumping money into an economy; so, money kept flowing. You were sort of in a punchbowl. The country was at a party and we kept drinking from this punchbowl, enjoying ourselves, and the rest of the world would take our dollars. They would take our dollars because everybody thought, oh, America-its great. Its a little bit like you came from some town and theres one family in the town that doesnt do much work-sort of propagates. Well all lie around the pool; have fun; party; eat a lot; have the big cars and have the good times. The rest of the town works hard on the farms or wherever they are and they keep bringing stuff to this rich familys estate. They give them whatever they want; they give them food; they give them clothing, but, you know, anything. The rich family just gives them IOUs and they keep taking the IOUs, so the rich family doesnt do anything-just lie around the pool and have fun and travel or whatever-and everybodys working. Well, one day a few of these people are going to say, I dont want your IOUs anymore. What the hell am I going to take your IOUs? Theyre worthless because you lost all your money. Well, our country-think about it-is a bit in that situation. Weve been giving our IOUs, which are dollar bills, to the rest of the world and taking their cheap goods. However, were reaching a point now where the dollar-as youve been reading if youre attuned to it-the dollars devaluating as we speak. Weve got, I believe, a real problem on our hands in the economy. The other thing weve done in the last five, ten years-and I know Bob Shillers been talking to you about this-is housing. Housing is like tulip bulbs, almost. There was a big crisis in Holland in the 1600s on tulip bulbs-but I like reading about this crisis, because everybody bought tulip bulbs-thought it was the greatest until one guy looked and says, hey what the hell am I doing with this tulip bulb? And all of a sudden he had a crisis. Well, Im not going to get into the depth of it, but our banks, because they wanted to make more and more money-and our investment bank, Wall Street-kept issuing different paper against mortgages so it made it simple to give a mortgage. These mortgages were given out to people that couldnt afford them and today you have what you call subprime mortgages-subprime paper. They issued against this paper stuff called mortgage-backed security. They securitized them and these things are all floating around now. Theres maybe about three trillion dollars worth of stuff backed by mortgages out there. Well, as youve seen, these have produced crisis of confidence and I dont think weve heard the last of it. The government sort of bailed out the situation by having JP Morgan take over Bear Stearns and Im not going to get into the depth of it here, but its a real fascinating story. In any event, we have problems in our economy and I think that we are going to see more of these problems in the next year or so. I think Bob can talk to you more about whats going to happen in housing, but a lot of it depends on that because if you cant have your housing prices go back up, a lot of people that bought them cant afford to pay the mortgages; nor will they want to. If they see the homes go down in value, theyre going to just say-theyre going to walk away. Now, if that happens, these homes are the collateral to the banks for all these mortgages and were going to have-and probably do have already-a recession. That recession could become a lot more acute because today-Im not going-Im going to open it for questions soon-but today, there are six trillion dollars more of debt in this economy than I believe it can sustain because everyone-the middle class went on a borrowing binge over the last few years to buy these homes and to buy for any-with the credit cards and go buy anything they felt like buying. As a result, Im not certain that they can pay that six trillion back. But, even if they can, theyre not going to be willing to go buy more things. As you have that happening and you have inflation, the earnings of our corporations will go down. They estimate-Ive talked to one or two very good economists in the last few weeks. They estimate that earnings of the S&P averages will go down about 20% in the next year. With that, the stock market is at, I would say, a precipice; you dont know which way its going to go. With all that said, you have to worry about all these things and I know youre studying this and youre learning about it. But, I think there will be great opportunities ahead for you and the ability for Wall Street to again securitize and buy a lot of these companies. If you have capital, youll be able to buy these bonds. So, I do tell you that I think Wall Street is certainly a good area if youre thinking about a career. I still think its a very good area, but Im not going to tell you if you love to write or you love to play the cello to go and come to Wall Street. I do think its a good career. I think it makes sense. I think that corporate America is learning from this and I think were going to make our top management much more accountable in the years ahead. There are tremendous abuses in corporate America today. Your CEO makes 400 times what the average worker makes and hes just simply not worth it. The reason you have this is that you have no accountability-that shareholders simply dont vote; they dont care about voting and theres a whole reason for that. You have an interesting relation with the owners of a lot of our stocks, which are the mutual funds and institutions that dont like to vote against these managers. However, someone like me and a few other activists do get a vote now and we do get a proxy fight going and well see, for instance, what happens to Motorola-thats what were doing as we speak. I think that that will give an opportunity for young people like yourselves to get into corporations in our country. While I think Princeton is the-might be a little better than Yale-I think Yale is a good school. I think that all of you are really probably the top, top, top of the student bodies in this country. Going ahead in your lives, I think that the corporations might be a good place to look or Wall Street for that matter because I think theres going to be a need for bright people. I think that youll be able to be rewarded for it in the fact that there will be accountability again. Well, when I say again-there never really was accountability. So, I think there will be a true corporate democracy that will have to evolve so that we can become competitive with the rest of the world again. With that, Ill just basically-I think, Bob, just leave it open to questions and see if anybody has any.Student: You mentioned in 1962 you kind of blew up. After that entire debacle ensued, how did you regain your confidence? I guess, most importantly, how did you regain-or gain-the confidence of future investors?Mr. Carl Icahn: Well, you asked a few questions. I mean, how did you gain confidence? I dont think I ever lost confidence in my ability to understand what was going on. I just learned that you have to really work at something and understand it and little by little-I mean, it was sort of interesting. Im a sort of an obsessive guy and I work real hard all my life. I really get into something and I really delve into it and when I came up with what is a letter there at that time to people who sold these options-they were wealthy people across the country. It was sort of interesting-its not around today-but they would sell options, calls on a stock. So, if you-if youre someone who traded the market, youd like to buy an option on XYZ stock and wealthier people across the country would sell these options-would you give you right. Today, you have the CBOE; its much more computerized. But then, you would do what these-over-the-counter transactions. I was really one of the first to come in and say to people across the country, rather than do it with your broker who doesnt really understand this business, rather than sell it, sell it with me. I was a broker-just sell with me. Little by little, people actually answered my ad. I would put