Stephen Schwarzman on The David Rubenstein Show:

You then went to Harvard Business School. Yes. And did you enjoy Harvard Business School. No. Did you want to drop out. Yes. He went out to raise a fund. And was that easy to do. I sort of looked at that. I went oh M.G. We are going to fail. In 2007 you decide maybe you should take the firm public. Well I took it public for a lot of different reasons. I had a sixth sense that something terrible was going to happen in the environment. Would you fix your tie please. Well people wouldn't recognize me if my tie was fixed. Just leave it this way. All right. I don't consider myself a journalist. Nobody else would consider myself a journalist. I began to take on the life of being an interviewer even though I have a day job running a private equity firm. How do you define leadership. What is it that makes somebody tick. Before we get into Blackstone I'd like to talk about a couple other things. You grew up in a middle class environment in Philadelphia and now you're one of the wealthiest men in the world. You're one of the biggest philanthropists in the world and you are an advisor to presidents. The last three presidents have asked your advice on various things and you're very close to President Trump. So when you're growing up in Philadelphia did you ever in your wildest dreams imagine this could possibly happen. No. Did you. Are you. Do you pinch yourself every day. Now you think about where you have achieved your status in life. Yeah. And frankly every day is an adventure and every day is a privilege. Now you come to know President Trump quite well in recent years since he's been president. Did you know him before he was president or know him very well then. I knew him before he was president. So when he told you I'm running thinking of running for president you tell him you have a good chance or do you tell him that's a tough thing to do. I thought that was a veritable impossibility. So when he got elected did he say Steve you were wrong and why don't you come in and serve in the administration. I can't tell you exactly what he said but it was very funny. And you know I didn't want to be part of the government. I have a wonderful life as it is. And I didn't want to disrupt that. So you've been an advisor off and on for the beginning ministration to the president and he's asked you to do a number of assignments. But I've never seen him tweet anything unfavorable about you. So you've managed to stay on his good side. What's the secret to staying on his good side. Well you tell people the truth. You know I don't work in the administration. I'm an independent person and I give my views. I find that he likes to listen. And that's I think a good thing. But let's suppose he's reelected and he said I'd like to be secretary of state secretary treasury. Would you ever consider that. But when I was younger I would do that. David I'm at a point in my life now where that's not where I want to spend my time. OK. So you have spent some time recently writing a new book. This is Steve Schwartzman. What it takes lessons in the pursuit of excellence. I read the book and it's quite fascinating. I know you quite well but I didn't know a lot about your background and I which I found quite interesting. Why don't we start with your background and take you through the creation of Blackstone. So you grew up in the Philadelphia suburbs. Is that right. That's right. And you were from a middle class family. Your father had a curtain store curtain store sort of as it would have been a bed bath and beyond type of store. And it was started by his father. That's right. And so he came into the business. And did they say Steve you're the oldest of the three sons that he had. Now it's time for you to come into the business. So that was sort of expected. And I found that standing up and waiting on people buying linen handkerchiefs was perhaps not my highest and best use. But you told your father according to the book that maybe he should expand that and do more than one store and maybe become bed bath and beyond. What did he say to that advice. He said Steve that's really interesting. I don't feel like doing that. And I said Dad why why don't you want to do it. We have lots of people in this store. I haven't seen another store like this. I think we could be national. And he just said not for him. He said I'm just not interested. So I said well why don't we open stores all over Pennsylvania because I was from Philadelphia. And he said I don't want to do that. So then I had a third option which is why don't we open stores all over Philadelphia. And he said I don't want to do that either. I said Dad why don't you want to do this. And he said I'm happy the way I am. I have a house. I have two cars. I have enough money to send you and your brothers to college. And that's really all I want. And I shook my head and I went I don't understand that. I just saw the opportunity to open stores all over the country and he just didn't want to do it. And what was surprising to me is he was very very intelligent. Well you say in your book that he was far more intelligent than you. That might be an exaggeration but he obviously was a very smart person. That was not an exaggeration because I would talk to him when I was starting my career on things. And no matter what I was working on he could always find the weakness in the argument or in the deal. And what about your mother. What did she do. She was just aggressive. She was a housewife. I was in 1950s and 60s and I have twin brothers and three of us were a handful. And that that was the paradigm at that time. So as I said I've known you for quite a while but honestly until I read this book I did not realize you were a track star. Were there a lot of you know white Jewish boys on the track team or were you a minority in that regard. I think I was a minority of one. You say in the book which obviously is true that you did something that's quite audacious. You applied to Harvard Yale and I think Princeton and Harvard did not accept you. So you then got out some coins and called the director of admissions at Harvard and said you made a mistake. What was that like. That was frightening. Actually you know we didn't have cell phones. So so I got some quarters and I found the phone number for the admissions office and some document and the pay phone was was outside the gym. And I stood there and put those quarters on in and you could hear the ringing when they dropped down. And I asked for the dean of admissions and I was put right through. And so he picks up the phone and I said hi I'm Steve Schwarzman from Abington High School in Abington Pennsylvania and I'm on the waiting list. And I'd really like to go to Harvard. So why don't you take me off the waiting list. And so he said how in the world did you get through to me. He said you're not allowed to talk to me. I don't talk to applicants. And I said but we're talking. And he said yes. He said he said you sound like a very nice young man but unfortunately we're not going to be taking anyone from the waiting list this year. Our yield was was higher than we thought. And where where else were you accepted. I said well I'm accepted at Yale. And he said well you'll have a very good time at Yale and you'll enjoy it. I said I'm sure I would. I said but that wasn't my objective for the phone call. He said well I understand that. I'm just so sorry. Did you ever see him again or hear from him again. Ironically it's really a great story. The CEO of McKinsey was in my office 25 years later and he was on the Harvard Corporation. And I told him this story. So he asked what year. And that dean of admissions was a close friend of his. He said do you mind if I told him that I ran into you. I said no that's fine. And so I got a letter two weeks later from that former dean of admissions. And he said I remember getting that phone call in 1964. And he said every time I see you in a newspaper I realized I blew it. And I wish I made all the right decisions. But as I told you at the time there were no see no beds at the end. So you interviewed with a number of firms and the one you decided to go with was Lehman Brothers. Yes. The people were fascinating. You had ex CIA agents. You had people who had worked on oil rigs. You then went to Harvard Business School. Yes. And did you enjoy Harvard Business School. No. Did you want to drop out. Yes. And what kept you from dropping out. I wrote a letter. There was no Internet. I wrote a letter to Dick Jenner who was president of a firm called Donaldson Lofton Jenner which is where I worked a bit right after I graduated before I went into the army. And I said Dick it's cold up here. The classes are highly repetitive and I'd like to come back to work. And if you don't want me to jail I'll do something else. What do you think. So. So he wrote me a six page letter and he said that's just the way I felt in December of my first year. And I was going to transfer to the economics school and get a Ph.D. and I didn't drop out. And you shouldn't either. You should complete what you're doing. And I was so dumbfound that he was so kind and thoughtful and had similar feelings and and basically said don't you do that. It's the wrong decision that I just listened to him and stayed. You stayed. You must have done pretty well because you had lots of offers afterwards. Yes. So you interviewed with a number of firms and the one you decided to go with was Lehman Brothers. Yes. Why did you pick Lehman Brothers. I thought it would be the most interesting cast of characters. You know that was before MBAs went to Wall Street. And so they just hired at random. And this was the first class of MBAs that Lehman was going to hire. And the people were fascinating. You had ex CIA agents. You had people who had worked on oil rigs. You had all kinds of unusual people working at the firm. So I thought for whatever the reason it was the right personality fit for me. And you became a partner at an early age. I think 31. Yeah I think like 31 31 years old you're a partner at Lehman Brothers and life is going well. But then there's a problem at Lehman Brothers and Lehman Brothers ultimately was sold. Is that right. Yes that's right. I sold it to American Express. And the problem was that in the trading side of the firm there was a position taken that really went wrong. So you then decided to join somebody who had been previously been the president of Lehman Brothers but he was eased out. Right. That's Pete Peterson previously also secretary of commerce in the Nixon administration. And you and he decided to start a new firm in 1985. Yes that's right. And that firm's name was Blackstone. So 1985 Blackstone starts two people you and Pete Peterson. Where did you have to get the money for the firm. Well it didn't require much. It was an advisory business. So you talk and people give you money but you each put in two hundred thousand dollars. The strategic plan for the business which we announced in a letter to everyone we knew was first you know the M&A advisory business because it required no capital. Right. The second was going into the private equity business. And you had never been you or Pete private equity investor before. And Pete said well since we haven't been we'll go out and raise a small fund a 50 million dollar fund. You said if I recall the book let's go raise a billion dollars billion dollars. So that's fairly audacious. Where were you going to get a billion dollars. So we went to our top 18 prospects. Everyone said no except Metropolitan Life and New York Life. One said I'll give you 50 million. The other one said I'll give you 25. But I don't want to be you know sort of a big part of the thing. So you have to raise at least 500 million dollars or else our commitments are worthless. And we'd already gone to everybody we knew who was the best targets. And I sort of looked at that and I went oh M.G. we are going to fail. And we just met one more company is called Prudential Life Insurance Company which was the number one financier in those days. And we're over at Newark on a Friday having lunch with the chief investment officer. And he was having a tuna on white bread cut across. And I'm busy pitching this private equity fund. And you can share part of our advisory profits as a merchant bank. And he keeps chewing his. Adams Apple's going up and down and I keep doing my thing. Finishes the first half of the sandwich gets through the other half halfway. He looks over at me and he says I think that's a good idea. Put me down for 100. And I just I can still remember that moment. Did he actually say he's going to give us 100 million dollars. The number one investor in the world. So if he gives us money other people will follow him. And I realized somehow in Newark on some dreary Friday and he gave us the money. I just didn't want him to choke on the rest of that sandwich. Make sure he lived to give you the money. Exactly. He did pretty well. And your business is booming. You decided to get into other businesses. The first one was ended up as BlackRock with Larry Fink and Larry brought people over and they were called Blackstone Financial Blackstone Financial. And so you actually own the firm or own part of the 50 50 50 50. OK. So you own 50 50 and now Blackstone Financial is now BlackRock which is managing six trillion dollars I guess or something like that. Six and a half six and a half trillion. OK. So how did they escape from Blackstone. Well they didn't really escape. You know we set up an economic arrangement which ended up being inappropriate for a business that was growing as rapidly needed to add as many people. And I made a mistake. You know I took the original agreement. I didn't want to change it which was advantageous you know for my side and BlackRock people Blackstone Blackstone Financial people were frustrated with that. And that was the the judgment of an amateur me. The real estate market crumbled right after the deal was done. So how did you survive with that deal. Just buying thirty nine billion dollars of real estate. I thought was dangerous. On 2007 you decide maybe you should take the firm public. It's a private company. Why did you take the firm public. Well I took it public for a lot of different reasons. I had a sixth sense that something terrible was going to happen in the environment. Money was so available. Money was cheap. Everybody was doing things. Prices were crazy. And I just had a sense this was going to come to a bad ending and we should have a lot of capital to make sure we were bomb proof. So that was one reason. A second reason is I thought it would be a great branding event for the firm on a global basis. Everybody would know who we were and that would make it easier to raise money as well as to have people sell us companies and other assets. So ultimately what happened was the China Chinese sovereign wealth fund was the process of being created. They heard about your going public and they threw an intermediary actually somebody working for you said can we buy a big stake in the IPO. And you ultimately decided to let them do that. The IPO was going to be four billion dollars. They offered to invest three billion which we didn't even ask them. And I hadn't been to China since 1990. So this was it was shocking because that China had not invested in another public company since since it was founded in 1949. So so this was a complete paradigm shift for for China. And we were chosen by them. It was pretty heady stuff. It worked out. And ultimately you did the IPO and Chinese invested. And then after you did the IPO. Let me mention two deals that you did. One was the biggest real estate deal in history. EOP real estate company built by Sam Zell. And you did a 40 billion dollar buyout in effect. Is that right. Yes. Thirty nine actually. All right. Thirty nine billion dollars. It was a bidding war. You won the bidding war. But the real estate market crumbled right after the deal was done. So how did you survive with that deal. Well we worried because the same reason we're going public. I sense we were a market top for real estate. So so just buying thirty nine billion dollars of real estate I thought was dangerous because you had to pay a pretty good price to get it because it was competitive. So as soon as we decided we were going to actually raise our price enough to be the winner. There were two or three of us sitting around saying this deal is potentially dangerous. We've got to reduce the leverage and we've got to take advantage of the crazy prices that people are paying. So we decided to sell half of what we bought the same day we bought it. So when I told people that they just sort of looked at me and and said the same day I said I don't want to take any risk that the world's going to change and we're going to be stuck with all of this. So we basically had every conference room at the firm active one buying. But then we broke it up into all these pieces. But if you hadn't done that you would have lost all your money. I think that's probably the real estate market cratered virtually the next day. Right. Because most of the people who bought from us basically got into enormous financial trouble or went insolvent. And so after we did that and closed everybody went home. They've been sleepless. Three days later they came back and we said let's sell half of what we got left now and be even more conservative. So everybody went back to work and we ended up with one quarter of what we bought very conservatively priced so we could survive any kind of nuclear winter. We ended up making three times our money buying this this giant thing at the top. And there's never been more than 10 billion dollars bought or sold by a group. We did 70 billion. So you also bought another company before the recession really hit. That was called Hilton and that was a leveraged buyout. And some people might say at the top of the market and that deal went down in terms of the debt and maybe the equity. But then you ultimately did things that made it the most profitable buyout in the history of buyouts. What did what did you do. Well that was pretty easy actually looked hard. But Hilton had not been integrated. They were running four different headquarters and there was a huge modernization and cost takeout. Ultimately you sold it at about a 14 billion dollar profit. Yes. Well if we had held it it would have been held it longer it would have been over 20. So so it was a good day because it's 14 billion. In recent years you've become one of the nation's biggest philanthropists. You gave three hundred and fifty million dollars to MIT for a computing center and relating to artificial intelligence. You never went to MIT. You had no connection there. How did that come about. Well that was that was really fascinating. I I'm not a technologist. I had met the president of MIT Raphael Rafe and we started talking and you know we were concerned that the U.S. was just not investing enough in these technologies. And I said do you have any interesting ideas. So he came back with a let's double the computer science faculty. Let's take our established new department. In fact a new school called it a college which is now going to be the MIT Schwarzman College of Computing. And let's connect AI to all the other departments at MIT. So MIT will become the first AI enabled university in the world. And I said now that's a vision I could buy in on. Final question I'd like to ask you which is deals with this. If somebody is watching or reading your book and they want to be a leader a leader in business or philanthropy or or in government what do you think is the key quality to be a leader. And what have you seen as your key quality enable you to be a leader. I think to be a leader you have to be a really good listener. You have to understand what's going on around you. You have to be measured and you have to realize that everything you do is amplified in the minds of the people who are listening to you. So so care nuance kindness but defining a culture what a leader does. Steve thanks very much for this time. Appreciate it. Thanks David.