On this Flash Back Friday Jason Hartman brings on author, former Wall Street senior banker, and best-selling investigative journalist, William (Bill) D. Cohan. The two discuss the events that led up to the current economic crisis. Bill and Jason also discuss the Occupy Wall Street Movement.
Welcome to this week’s edition of flashback Friday, your opportunity to get some good review by listening to episodes from the past that Jason is hand picked to help you today in the present, and propel you into the future. Enjoy.
Welcome to creating wealth with Jason Hartman. During this program, Jason is going to tell you some really exciting things that you probably haven’t thought of before and a new slant on investing fresh new approaches to America’s best investment that will enable you to create more wealth and happiness than you ever thought possible. Jason is a genuine self made multi millionaire who not only talks the talk but walks the walk. He’s been a successful investor for 20 years and currently owns properties and 11 states and 17 cities. This program will help you follow in Jason’s footsteps on the road to financial freedom, you really can do it. And now here’s your host, Jason Hartman with the complete solution for real estate investors.
Jason Hartman 1:07
Welcome to the creating wealth show. This is your host, Jason Hartman. And this is episode number 243. Thanks for joining me today as we talk about the House of Cards, our guest today we’ll be talking about some very interesting stuff when it comes to our financial system. And, you know, we kind of go back and forth on the creating wealth show where sometimes we talk about really practical things that are very much relevant to what you specifically as an investor want to do. For example, I think it’ll be our next episode number 244, where we’re going to have a case study from one of our clients and hear firsthand what our clients are doing. And we’ve got a few of those interviews recorded. So thank you so much. Those of you listeners out here who, who stepped forward when I asked if you would be interested in being on the show, and we appreciate you and we appreciate your willingness to give and to share your advice and your experience. says with other investors, so they can hear it really from the person who’s out there actually doing it not from a person who’s recommending it like myself or a person who’s has anything at stake, you’re just a totally neutral person who just wants to share their experience. And that’s just really great that you’re doing that. So we have we have some of those shows coming up. But we also have some more educational shows like today’s show where we’ll talk about with a guest expert and author on the house of cards that is our modern financial system. So we’ll get into that here in just a moment. But few things before that some interesting news articles, quotes, things I’ve received in my email box that I thought I would share with you and so forth. First of all, a couple quotes a couple good quotes, you know, I love quotes, do you like quotes? I think the reason quotes are so great is that they sum up in such a short sentence or two, they embody a lot of philosophy in them. So two quotes that I just want to share with you today. One Is this one and it goes, success means having the courage, the determination and the will to become the person you believe you were meant to be. George Sheehan. Now that one’s great. And I got another one that’s just from memory here that I’ve lived by for many years. And I remember it came out of Robert Allen’s old old creating wealth book where he had 52 quotes in the back one week forever, or one quote for every week of the year. And it goes something like this just from memory here, successful people make decisions quickly, as soon as all the facts are available, and change them very slowly, if ever unsuccessful people, on the other hand, make decisions quickly and change them often. And isn’t that the truth though? You know, people out there in your life who are constantly flitting from one deal to another, they’re doing this they’re doing that flavor of the month. And that just doesn’t build a lot of credibility among one sphere of influence. So Same is true in our own lives and with ourselves. We need to have the determination to make a decision. As soon as we see an opportunity, we evaluate it, we gather the facts, and then we actually execute on it. And we do something about it. Because success in life is not really ever so far as I know, except for a few lottery winners and things like that. But usually, actually, you read those studies about lottery winners, they usually end up broke just a couple of years later, even if they win a zillion dollars. So you never seem to hear any of those lottery winners, parlaying their winnings into big fortunes and becoming the next Donald Trump or Sam Zell or Sam Zell is a big real estate investor, or the next Bill Gates or anything like that and turning them into something big. You know, they usually just blow their money so life doesn’t come in those sudden breaks. It comes in the daily efforts. Doing things well and making good prudent decisions. Every single day we go along and sticking with those decisions, and following them and seeing them through. You know, one of the best things my mother ever said to me when I was growing up, and I used to hate it when she said this to me, as a kid, it used to really annoy me. But she always said, Jason, finish the job. finish the job, because you know, kids are kids will start something.
Jason Hartman 5:32
they’ll follow through for about 510 minutes, and then they get bored. If you have children. Or if you ever were a kid yourself, which of course everybody was, you know, you might remember maybe the example of getting a pet or getting a pet for your kids. And the common pet thing goes something like this. And you know, I don’t have kids, but I know how it works. As far as this goes, the kid says, Oh, you know, please get me a dog. Give me a dog. I want a dog, right. I’ll take care of the dog. I promise. I’ll do every Everything I’ll walk the dog I’ll feed the dog I’ll, I’ll give the dog baths and everything. And that happens for about two weeks. And then suddenly the parents are ending up taking care of the dog. Right, typical thing. finish the job. Okay, so that’s a great quote about what it really takes to be successful. It’s the simple daily progression toward a worthy goal and showing up every day and just doing the thing. Earl Nightingale I love Earl Nightingale such a classic he passed away back in 1989. But he was really one of my big mentors in life Denis waitley, Earl Nightingale, Jim roans, Zig Ziglar, all those sort of old motivational speakers that were really famous in their day but have since they’re not as well known nowadays. And what I love about those speakers is that they were about philosophy embodying a set of ideas, whereas Nowadays, most of the stuff you hear out there in the world marketplace. It’s very specific and technical. And on show number 150 when I interviewed, you know, one of my big mentors, Denis waitley, on episode number 150 of this show the creating wealth show, go back and listen to that, if you wish. I said that to them. You know, most of the education out there nowadays is very specific and technical in nature rather than philosophical. And I believe you need a balance of the two. But regardless of it, if you get all of the technical knowledge, if you don’t have the philosophy, which is the foundation, the belief system, which is the foundation or the context, in which the content of that philosophy of that the technical knowledge would be the content, the philosophy or the belief system would be the context, you put all the greatest content in the world into something. And if the context is not supportive of the content, the content will not flourish, or it will just completely die. So that’s what’s so important about philosophy and Earl Nightingale. If you don’t know who he is, go look them up. Nightingale Conan has a great website. You can buy all his old audio recordings. I mean, he’s before my time. Okay, but I just think he was awesome and Jim Rohn and Denis waitley Ziggler, too. So, just a thought there random thought there that quote we’d start out with so technically speaking on more of the technical side here today, interest rates. Wow, wow, I recorded an interview with Dan Ammerman. We’re gonna have him back on the show here soon. I recorded that this morning. And we were talking about how valuable the mortgage asset is. It’s just just incredibly valuable. And you look at this Associated Press article out. It says mortgage buyer Freddie Mac said Thursday that the rate on the 30 year home loan was unchanged at 3.87% with 3.87 10% that’s the lowest level since long term mortgages began back in the 1950s. I mean, folks, if you don’t stock up on long term fixed rate investment grade debt right now, you are missing the boat. So make sure you do that. Another article that was interesting. And this one Gosh, what what ds news.com. I don’t know where I even got this. I think it was one of the newsletters I clicked on. Anyway, this article is kind of interesting. It says housing. Now, what’s interesting about this before I go into this article, is that since we know income property is a multi dimensional asset class. We can play this either way. It does not matter to us as prudent income property investors because when we do it right, we’re going to benefit regardless of how this plays out. Now, this article is kind of optimistic, and optimistic or pessimistic either way, whether it gets easier to buy a property or harder to buy a property will make money because we know how to do it. Okay, we know how to adapt to the market and play the game. Regardless of the cards were dealt Voltaire, another great quote, something like this the English essay as a couple centuries ago, Voltaire said, one cannot choose the cards they’re dealt, but not must choose how to play the cards in order to win the game. And that’s exactly what we do. I have something that I talked about in the creating wealth seminar and the creating wealth home study course called the three dimensions of real estate and just showing how it’s a multi dimensional asset class. And they’re really more than three dimensions, but Heck, three dimensional, that sounds pretty good. It’s sort of catchy. And as a multi dimensional asset class, we know how to play it either way. So what’s interesting about this article is that it’s pretty optimistic. Right? It says housing crisis to end in 2012. As banks loosen credit standards. Capital economics expects the housing crisis to end This year, according to a report released Thursday, one of the reasons loosening credit, the analytics firms notes that the average credit score required to attain a mortgage is 700. So that’s a 700 FICO score, right? Well, this is higher than scores required prior to the financial crisis. It is constant. Actually, I think they meant to stay consistent with requirements one year ago. Additionally, a Fed senior loan officer survey found credit requirements in the fourth quarter or consistent with the past three quarters. However, the mortgage market indicators point not to just a stabilization of mortgage lending standards, but also a loosening of credit availability. Isn’t this what we’ve all been waiting for? Supposedly, Ben Bernanke he and TurboTax Timmy Geithner get up there and they keep saying the banks of God alone But of course, they give them a but this is my comedy. Obviously, they give them a bunch of bailout money a bunch of taxpayer money printed granted out of thin air that the government doesn’t even have into the trillions. And they have no actual technical legal requirement for them to loan money. They just give it to them trillions of dollars and hope that they will do the right thing and land. It’s unbelievably ridiculous. I mean, who in their right mind would do a business deal that way? Where there’s no requirement on the other party, right. Okay, enough of my rant and my frustration back to the article. Banks are now lending amounts up to 3.5 times borrower earnings. This is up from a low during the financial crisis of 3.2 times borrower earnings. Banks are also loosening loan to value ratios that otherwise known as LTV loan to value ratio, which capital economics denotes, as, quote, The clearest sign yet of an improvement in mortgage credit conditions, unquote in contract asked to a low of 74% reached in the mid 2010. Banks are now lending at an 82%. LTV or loan to value ratio. Well credit conditions may have loosened slightly potential homebuyers are still struggling with credit requirements. My comment here, folks 10s of millions of people have seen their own credit scores, either unintentionally or completely on purpose through strategic defaults. They have seen them decline and this I say benefits us as investors big time because well lots of people used to have credit scores above that 700 FICO score mark or 720 mark. Nowadays, not so many and a lot of it was purely by choice through strategic defaults Okay, so this benefits us why because it It forces more people into the renter pool. Remember the great thing about our asset class That we love so much income property, especially when it comes to housing related income property, single family homes, apartment complexes. The reason it’s so great is because people have so few choices. You can either buy, you can rent, you can be homeless, and jokingly, you can live with your parents. Okay. And so that obviously is good for us. Right when it’s harder to buy, rents increase, Dan Ammerman, and I talked about that this morning, by the way recorded another show today, you’re going to find very interesting when we publish it, which is about the solo 401k and breaking out of 401k jail. I know a lot of you listening are in 401k jail with your company in your retirement plan. And we have a show coming up on that very subject. And we’re also going to talk about it at meet the Masters in March. But anyway, just to finish this article off, it’s almost done. Well credit conditions may have loosened slightly. So Potential homebuyers are still struggling with credit requirements. In fact, capital economics points out that in November 8% of contract cancellations okay? In other words, or the property went under contract went into escrow when it was sold or cancelled, were a result of the potential buyer not qualifying for a loan. Additionally, capital economics says quote, any improvement in credit conditions won’t be significant enough to generate actual house price gains. Well, hey, fine with us as investors, nobody’s motivated by because they don’t think the prices are going up. They can rent from us. Either way, we understand it’s a multi dimensional asset class, we know how to play the game. So anyway, that’s enough on that article. Another thing I got interesting and this is actually a friends company, a friend of mine that I’ve known for many years back in Orange County. I will not say the name of his company, because I don’t think his deal was very good. You know, he’s been pitching me for a while to recommend his hard money loans or his private lending deals and listen to this deal, okay? This this compared to the private lending or hard money that I can introduce you to, I think is a terrible deal compared to our deals. Okay. So I’ll just tell you about this. This is a new second trustee, meaning you’re in second position is the lender. And you know what, when it comes to being a lien holder, a mortgage holder I do not like being in second position. I’ve done it many times. I lost money one time on it as a lender, that’s why I’m not nuts about being a lender. But you know, I didn’t really understand it as well as I do now. And I think my lending now I really liked the lending that I’m doing and, you know, a lot of your clients I know a lot of you listening are doing lending through the introductions that I’ve made for you. And many, many of you have expressed interest in it. And by the Wait a moment, I’m going to talk about some due diligence and some requirements I want you to put on your private lending, just to reduce your risk. But let me tell you about this deal first and why I think it’s a lame deal. So this is a second trustee don’t like being in second position. It only pays 10.875%, which is not very good, frankly. I mean, of course, that’s far better than anything, you’re probably going to get on Wall Street far better than the bank for sure. It’s a lot better than the bank by a multitude of thousands, but it’s still not that good. And here’s why this property is a single family home in Beverly Hills. It’s $14 million.
Jason Hartman 17:42
And they want you to loan a second loan, a second Trust Deed on this property of $980,000. So this is the big leagues, folks. This is big money we’re talking about right there’s a first on the property of 5,000,300 $45,000 bringing the loan to value ratio to 45.18%. Now that’s a good LTV. It’s very good. But on a property on a big property like this a single family home, these are highly risky deals, okay? Plus, you’re in second position. So here’s what happens when you’re in second position. If they default on the first loan, you don’t have the right to foreclose you to gain that right to buy that right. And again, I’m not a total expert in this Okay, and I’m not a lawyer. So this can vary from state to state, but just generally speaking, conceptually speaking, you’ve got to manage the default on the first loan. So you’ve got to pay the payments on the first loan to keep the first lender from foreclosing first because if they foreclose, first, you could be totally wiped out and get nothing. That’s why being in second position can be very, very risky and in second position for a bar with a They say good or fair credit on this 18 month long loan, you get 10.875%. And folks, I think that deals stinks. It’s not nearly as good as the 12 and an eighth that you can earn through our group on much smaller loans. So even if an investor came to us and said, Hey, I got a million bucks, I’d like to loan I would rather see them diversify to different providers, and different properties and different geographies, which is what we can do for you by referring you to our vendors, and they’re much smaller, much more saleable properties than one big property in Beverly Hills. I mean, folks, that deal, it may be fine, but I wouldn’t touch it with a 10 foot pole. So there you go. Now a couple things I want you to know about hard money lending and this will be a short thing here, but if you ever do hard money or private lending, I want to give you a few tips on that as a due diligence checklist and a and some more requirements you want to make of the borrower. Number one, always use an escrow company or an attorney, depending on the geography. Some places use attorneys, some places use escrow companies. So use one of those as a neutral third party number to get in evaluate comparable sales info or an actual appraisal. So you’re comfortable with the loan to value ratio or the LTV so that you feel you’ve got a good margin of safety in there, if possible. And by the way, I want to say this is not necessarily always possible to do this next one. But if you can, it doesn’t hurt to do it. And that is get a preliminary title report. Why is it not always possible? Because a lot of our vendors are buying these properties at foreclosure auctions, and they need to be funded almost instantly. So you can’t there’s not time to get a preliminary title report sometimes, but if you can get it, get it, try to get it. All right. Number four, require a closing question. Protection letter or a lender’s escrow instruction, showing you the lender in the first lien position. Again, I don’t like being second place in this mortgage lending, I want to be first lien but you need a closing protection letter. And a lot of people don’t know what that is. So just call it a lenders escrow instruction. And that should be signed by the attorney or the escrow officer showing you the lien holder in first position, okay? And require a lenders title policy. So that’s a title insurance policy that protects you the lender, so that you know, there are no other liens on the property. And then finally, only wire money to the attorney, the escrow or the title company who is doing the transaction, do not wire the money to the borrower directly. Okay, so a couple things there that can protect you and reduce your risk when doing private lending or hard money lending. But folks, the returns are phenomenal. It’s simpler than owning the real estate I do, like owning the real estate myself much better. I think income property is much better than being a lender. But for quick, easy, simple, scalable things. If you want to deploy a lot of money, and you want to deploy it quickly, and you want it to be simple, the lending is great for that, especially the short term lending. But even if it’s longer term lending, it can still be pretty good, you’re going to do a lot better than you’re going to do in the bank, for sure. And you’ll probably do a lot better than you do pretty much anywhere else except owning the property directly. Okay, a little sign here, that the economy maybe recovering, I don’t know that it really is I don’t sort of hard to really even address that issue. And you know, we sort of do that overall on the show with all the guests I talked to, so I’m not going to delve into that right now. But one sign that there is money sloshing around out there, again, I think is the fact that you’ve got all these sort of somewhat hokey deals out there. And that’s where you hear these companies again, I didn’t hear him for years. And now they’re all back there on the radio, selling like ranch land and lakefront property in these obscure areas. I’m not you know, I’ve got one here that came in my email box. It’s called Tennessee land and lakes. And again, you know, I’ve never seen these properties, I’ve never checked them out. They may be a great deal. I doubt it, but they’re calling this the initial public offering, okay? And they say you can buy lakefront property starting at $99,900. And they say this property sold from 2005 to 2008, upwards of $1 million. Now, here’s the scam on that sometimes, okay, it’s not this exact property, it’s some property somewhere near it might have sold for that it could have been a different, different size of parcel different location, etc, etc. So you can buy these dockable lakefront properties starting at 99,900. You can buy the private wooded locations starting at 24,900. Folks, I’ve looked at some of these properties, like This groups have asked us to sell them. Again, I’m not referring to this specific property, which may be fine. I really have no idea. This is called like legacy shores or something. But I’ve been out to developments that appear to be like this. And let me tell you something. They buy these lots there in the boonies, they buy these lots for nothing. People will go in there and they will buy these lots in mass for $1,000 each and resell them for $25,000. Again, you want to buy rental property. You don’t want to buy crap in Billy’s. I know one of my competitors sells this stuff and but look, listen, I went to Belize last year and I looked at these properties. There is no rental market in Belize, if you like this sort of Caribbean kind of lifestyle where it’s sunny and you got beaches. I mean Frankly, I think it’s a third world country Okay, I I’m not a fan of places like that, but to each his own. If you want to kick back on the beach and check out a civilization that might be okay. But the There’s no rental market for these properties. These are not investments. This lakefront property in Tennessee, show me where the employment is show me who my renter is, okay? I want property that rents to people that produces income, if it does not produce income is not an investment. Remember my rule about that it must produce income, or it is only a speculation gold, silver, platinum, palladium, raw land properties in Belize, these properties Costa Rica, whatever the heck it is, these properties do not produce income. We are not about investing in real estate, we are about investing in income property. Know the distinction in the language. It’s called income property, because it produces income. It’s not speculative. You buy it on a cash flow basis. And remember our meet the Masters event coming up. The theme is Revenge of the cash flow investor. And let me tell you something, these past Few years through this financial crisis, that cash flow investor has won the day, or at least at the very least, they’ve been in a sustainable position where they could weather the storm. So you gotta invest for cash flow. Two more things before our guests here, I got a commercial property in my email box, this one from the well known company, Marcus and Milla chap. And Marcus and Millichap sent on this property and this thing looks like a total piece of crap. Okay, not that I have an opinion about this or anything. And so it says Marcus and Millichap is pleased to offer the following exclusive limited investment property opportunity, a single tenant office building in Little Rock, Arkansas. Now, this is an office building that looks like a house, okay. And there are a lot of properties like this around the country. They’re just like basically little houses that happened to be zoned commercial. So they’re quote, office building, unquote. It’s not the steel and glass beautiful, modern high rise Building you might think of is an office building or even a garden style. This is a crummy little one story basically a house that is zoned to office, it looks like okay, here’s what it says. And I just want this is educational, because look at how crappy this deal is right? single tenant office building. It’s 70 544 square feet, Little Rock, Arkansas, the price is $1,425,000. Now, your first thing you should do is just whip out your calculator and say, what’s the cost per square foot? Is it below the cost of construction? Is it at par with the cost of construction, or is it way above the cost of construction, which is the case here? Remember, we’ve got a 70 544 square foot and you know just I just noticed this, they don’t say that’s the building that can be a lot size. It just says size. Size of what the lot or the building. I’m assuming it’s the building if it’s the size, a lot this deals much worse than I thought, okay, but you just doing the division here 7500 square feet, you know, you take a 1.4 1,425,000 and divide, that’s $189 per square foot for a little crummy house type structure, you could build that for probably $90, a square foot and Little Rock, and it says long term 18 year lease guaranteed by United Mexican States. I don’t know what that is, that must be some kind of company or maybe it’s a charitable organization, I don’t know. So this you’ve got one tenant in there. And if that tenant defaults, you are out of business, you’ve got annual CPI rent increases. In other words, the rent increases are indexed to the consumer price index, which we all know because we listened to this show, woefully underestimates the true rate of inflation so you’re going to get burned there. It’s located directly across from the main entrance to the University of Arkansas, Little Rock. Wow, that’s probably good. Okay, that’s there’s the deal. I wouldn’t touch that with a 10 foot pole are in Oh, I didn’t even mention the cap rate the cap rate on this deal. Listen now cromie this is you go to Jason Hartman calm you look at the cap rates of our properties. And you’re you’re probably not going to see anything below 8.5% you’ll see a bunch of cap rates in the 10% range, the 12% range Some even better than that this cap rate 6.59% folks, people buy that kind of stuff every single day. Why? Why do they do it? You got me? I guess they’re just too sophisticated to know any better. Okay, last thing before we get to our guest, Ben Bernanke. You’ve probably seen these things floating around on the social media. There’s a bunch of them out there. They all have the same format. It’s pretty cute. It’s like a poster. And this is from silver circle. Silver circle. movie.com. I don’t know what that is. But but it’s it’s probably they’re probably selling pretty metals. That’s probably what it is. But it’s a funny sort of collage of about Ben Bernanke. And it’s got six pictures on it. And it says, you know, the first picture is what Congress thinks I do. And it’s got a picture of Ben Bernanke he walking a tightrope. In other words, he’s trying to balance the economy out and make sure that the stock market’s okay and the money supply is okay. And employments good and inflation is in check. What a bogus thing that that is. He doesn’t do it at all. No, no central bank does. The next cell says what Keynesian economists think I do. And there’s a picture of Mr. Spock, from Star Trek that very logical Mr. Spock who evaluates everything is very prudent and careful. And by the way, the Keynesian economist thing you know, remember, john Maynard Keynes, his philosophy was prime the pump, right, put a bunch of fake money into into the money supply. I’m not a Keynesian at all. Okay. I think Keynesianism is a bad thing generally. And then the next sentence says what Austrian economists think I do. And there’s a picture of Ben and there’s a bunch of dollar bills floating around his head and he’s smiling. And the Austrian economists, of course, they’re unlike the Keynesian. They’re the you’re diametrically opposed the Keynesian Zai I’m, you know, I agree with the Austrian School, and what they think is they think government should get out of the way, and free market should rule the day. Okay. The next cell says, what I tell people I do, and there’s a picture of Ben, and he’s captaining a ship and he’s got his captain’s hat on and he’s going off into the sunset, and like the brave man, he is who’s taking care of the economy, and he’s got all our best interests at heart. Okay, that’s what he tells people he does. And then the next picture is what I actually do. And there’s a picture of Ben flipping a coin, because his guest is about as good as anybody’s. And if you listen to that article, that I share it on the last show, Episode Number 242. It’s really telling about That that transcript of a private Federal Reserve meeting that was released that talked about how completely idiotic these people are, they really know nothing. Their guests is as good as ours. And that’s why they should just minimize their level of interference and let the market correct itself. That would be the best thing. And the last image says, how history will remember me. And there is a picture of the Hindenburg blimp, crashing into the the docking tower. And it has got a huge picture of the dollar bill on the side as it’s going up in flames. And that is how history will remember Ben Bernanke and Alan Greenspan, in my opinion, I agree with that. They are the people who destroyed the value of the dollar. But as a prudent income property investor, you know, that as the dollar is destroyed, so will the value of your mortgages be destroyed? Remember inflation attacks, our savings, our stock portfolios, our mutual funds, our bonds, even our equity in real estate. But thankfully, it also attacks our debt. So it destroys the wealth of all the people who did the supposedly right thing who saved money, who paid off their home, who did all that stuff. Those people get hurt the most. Well, the people who have long term fixed rate investment grade debt, outsource to somebody else called a tenant, and attached to a package of commodities that are not indexed to the dollar, because they are traded globally. And those are the construction materials, the ingredients of a house, the ingredients of apartment building, those are indexed to inflation. Those people win the game on every single level. And that’s what we do. prudent income property investors and that’s what we talked about here on the creating wealth show. So let’s go to today’s guest join us for meet the Masters in March. That’ll be next month. It’s coming right up fast folks. Get in on the early bird pricing. Go to Jason hartman.com to register. Also, while you’re there, look at the properties and the blog on our website. Lots of great stuff there. And we look forward to seeing you at meet the Masters in March. And we will be back with today’s very, very interesting guest in just a moment.
Jason provides an extremely unique service deal evaluator. Are you interested in a property outside of our network? Need a second opinion? No problem. Let our experts evaluate the deal. Find out more about it at Jason hartman.com.
Jason Hartman 34:50
My pleasure to welcome William Cohen to the show. He’s the author of several books including House of Cards A Tale of hubris and wretched excesses on Wall Street,
William D. Cohan 34:58
William, how are you? I’m very well, thank you for having me.
Jason Hartman 35:02
Good. Thanks for joining us. So you’re coming to us today from New York. And you’re right in the thick of it there when when we talk about a house of cards, give us some insights into is what you cover in the book and what’s going on in Wall Street in general, maybe?
William D. Cohan 35:15
Well, I think one one has to, of course, reflect a little bit of, you know, nothing is, comes to us sprung full bore and everything has a history and antecedents. And on Wall Street was a series of private partnerships that had been around for something like 200 plus years, until one by one beginning in 1970. They all started going public and substituting other people’s money in their capital structures for the money that was originally supplied by their partners. So for the first say, 200 years of Wall Street’s existence, it was a series of mall under funded private partnerships and the American public had very little interaction with them and very basically knew very little bit about them beginning in 1970. As I mentioned, this one firm called Donaldson Lufkin Jenrette, which was a New York private partnership decided it was going to go public. Other Wall Street firms were aghast and offended. It was against the New York Stock Exchange rules, but they persisted in went public. And then of course, one by one, everybody else on Wall Street went public, too. So over time, what had been partners money that was being risked every day and therefore forced everyone at these small firms to be prudent about the risks they were taking went from being a sort of a partnership culture to what I call a bonus culture, where people were encouraged to take risks with other people’s money. Their own network wasn’t on the line anymore. They had no accountability whatsoever. And as a result They were encouraged to take huge risks with their investors and their creditors money. And as a result, over time, they took more and more risk. They use more and more leverage, they essentially became, hence the title of the book, a house of cards and every firm on Wall Street It was pretty is pretty much was pretty much like this. Bear Stearns was just the first to fail in March of 2008. And when you talk about
Jason Hartman 37:29
these firms going public and so forth, are you talking about investment banks then specifically or or just general financial services firms serve consumers like Merrill Lynch, for example, or
William D. Cohan 37:40
basically I’m trying to make a subtle distinction between securities firms and commercial banks, although now since the, the collapse, the ending of the Glass Steagall act, so you have to go back to the depression and the creation of what was called the Glass Steagall act in a in around 1934 which Forced investment banks securities firms like Goldman Sachs and Morgan Stanley. In fact, that’s how Morgan Stanley got created because two separate from commercial bank so JP Morgan, the great JP Morgan, used to have both commercial banking and investment banking in under one roof. But the Glass Steagall act required that they separate commercial banking from investment banking because investment banking was perceived as being very risky business where people were encouraged to take risks. And commercial banking, of course, had depositors money, and so they didn’t want to put that money at risk. And that’s what people experienced during the Great Depression when so much money was lost because of bank loans that they bank deposits that they couldn’t get out and people lost a lot of money. And so they wanted to separate commercial banking from investment banking. That’s how Morgan Stanley got created. Because two of the partners from JP Morgan started an investment banking firm. called, called Morgan Stanley and Goldman Sachs stayed as an investment bank, it didn’t really have a commercial banking operation and other firms chose which they which way they were going to go. So, it wasn’t until 1999 when Glass Steagall was repealed, that investment banks and commercial banks could be in the same business again. So now, you know, by the time this crisis rolls around in 2007, in 2008, it’s very hard to distinguish between a commercial bank and an investment bank and a securities firm and a non securities firm. But the fact of the matter was, to it hadn’t been that the US government had never saved a securities firm until it decided to step in and save Bear Stearns and passed it It always let securities firms get into trouble fail, as opposed to commercial banks that got into trouble. They were rescued. But now you’ve got sort of you had this system where it was hard to tell one from the other. They were all interconnected, and they were all Important, and you know, the failure or the risk of their failure was too great. And so we had to save them.
Jason Hartman 40:06
And I mean, during the financial crisis, the question is which one but the most recent one, these investment banks on Wall Street, were becoming bank holding companies. Right. Was that so they could receive bailout funds from tarp?
William D. Cohan 40:19
Oh, not not, not really. So, in part, it was Yes. So in September, I think it was September 22 2008. The two sort of remaining big securities firms, Goldman Sachs and Morgan Stanley. And when I say remaining, I say that sort of tongue in cheek in the sense that obviously Bear Stearns had failed in March, Lehman Brothers had gone into bankruptcy on September 15, a week earlier, and also a few days before September 22, Merrill Lynch, which was going to go out of business and fail, was bought by Bank of America so they were used to be five minutes securities firms and by September 22 of 2008, Bear Stearns, Merrill Lynch. And Lehman Brothers had all failed, leaving Morgan Stanley which was about to fail and Goldman Sachs, which was not far behind. So what they did is they appeal to the Fed to allow them to become quote unquote bank holding companies, which gave them basically infinite access to the federal funds at very low cost and was basically a gift from an underappreciated gift from the American public to these two firms allowing them to have all the liquidity they needed to fund their business and, and to survive it but they became bank holding companies and in that they joined the other big banks like Bank of America and JP Morgan and, and Deutsche Bank and things like that, who were also bank holding companies. So, therefore, what happened was on September 22 2008, is basically securities firms. The big securities firms all went away and they became bank holding company. Which has given goldman sachs and Morgan Stanley, like these other banks infinite access to low cost funds from the Federal Reserve Bank, which has been a gift from the Federal Reserve Bank to these funds because then they have the firm’s because then they can turn around and invest this money in Treasury securities and getting it take the spread, or they can or they can lend it out and get an even bigger spread. So it’s an incredible gift that the Fed keeps giving to these firms. And at the expense I might add of the American public who not only helps pay for it, but also whose interest rates that they get on their savings are kept incredibly low. And and now that we’ve become a nation of Savers, again, savers are being penalized for saving I mean, when I don’t know when the last time you looked at your savings accounts
Jason Hartman 42:48
below the rate of inflation, so we’re certainly getting penalized for saving. Exactly. So saving money is about the worst deal going on, fortunately, which is this that incentivizes bad behavior in the economy, and of course, very speculative behavior. And I don’t think that’s good overall. But you know, you have some very interesting chapter titles in your book. One One is a section rather than a chapter where you talk about the end of the second Gilded Age and and then the 10 and 10 strategy. Tell us about some of that, if you would.
William D. Cohan 43:20
Well, I mean, I think that, you know, it was true, truly, it basically it’s been one big party for wall street since since the early 1980s. When inflation was tamed by Paul Volcker. Reagan, came to town and basically loosened the regulatory environment. There was a lot of financial innovation, whether it was the creation of securitization, which led to the creation of securitizing mortgages or auto loans or credit card receivables, the innovation of a high yield finance, which was Mike milken, and Drexel Burnham, who created so called junk bonds and sort of You know, the Wall Street’s animal spirits got unleashed, if you will, and that and that just has led to the combination of that with this other fact of life on wall street that I mentioned before, which was that these were no longer private partnerships. By the mid 80s. All the firm’s except for Goldman Sachs is gone, had gone public. Goldman Sachs didn’t go public until 1999. But basically, all of these firms were encouraged. Other people at these firms were encouraged to make big bets with other people’s money. So you had this one big party, I mean, whether it was you know, leveraged buyouts, or internet IPOs, or emerging Telecom, you know, hysteria or mortgage backed security, hysteria. I mean, on and on and on. I mean, it’s been one, a crisis after another that was created by this combination of the fact that people got rewarded to take risks with other people’s money. All these new kinds of products were being developed and brought into the market without Any accountability on people’s behavior because there was no threat of losing your entire net worth, because there weren’t private partnerships anymore. In fact, people were encouraged to take these risks because they wanted to get big bonuses. And the way to get a big bonus was to generate revenue. And the way to generate revenue was to sell these wacko products to unsuspecting buyers, so and
Jason Hartman 45:21
they may not come home to roost during your tenure. So you know, you can just like like, like our politicians just kick the can down the road to the next group.
William D. Cohan 45:30
And even when they do come home to roost during their 10 year like like they did in 2007 and 2008. What happens? No real accountability,
Jason Hartman 45:36
they get bailed out, and they still get their big bonuses. It’s it’s just, it’s just disgusting. And you can really see why people are so angry about it. Which actually brings me to another question just to get your comments on this not in the book, obviously, or anything but the Occupy Wall Street movement, your thoughts?
William D. Cohan 45:52
Well, I’ll be I’ll be honest with you. This is something that I’ve been wrestling with lately. I’ve written a few columns. about it lately. I was on The Daily Show on April 28, talking about my golden book. And during that show, I talked about how I couldn’t believe that there was nobody out in the streets protesting about what Wall Street has been doing,
Jason Hartman 46:15
or they are
William D. Cohan 46:16
and so and so here they are, but I have I have I guess I am saddened and disappointed with with what here we are means. I wish that the these protesters, whoever they are, and they really are a cross section of America and I applaud protesting I believe it’s an important part of America and what makes America great or what has made America great. So I’m all for it. But I’m really kind of disappointed that whoever these people are, they haven’t. Whatever taking the time or ask people like me who understand these things or other people to share with them the way Wall Street really work so that they can be clear in in the changes that need to take place. So that we don’t have this recurring boom bust cycle on Wall Street, this recurring series of crises that really are extremely debilitating, to not only our economy, but to our entire culture and society. And so, just sort of glittering away with the usual you know, revolutionary pablum, which you often see now down at the Occupy Wall Street movement, I find very frustrating and disappointing. And I wish they were more focused and had a better understanding of the way Wall Street really works so we could get real reform so I’m all for the protest was an early person wondering why people hadn’t protested but now I feel like there’s no there there and I’m not quite sure what it’s all about.
Jason Hartman 47:42
Yeah, it just seems that they need to get clear on a real message and otherwise they’re just sort of being rather childish. But another interesting point and I this has been circulating around Facebook and in the social media, where there are two newspaper clippings, and one is entitled x mortgage co Yo sentenced to prison for a $3 billion fraud. And it talks about how he got a 40 month sentence. And the other article says homeless man gets 15 years for stealing $100. The contrast here is mind boggling. And it is just amazing how little account there has been at least so far for the crimes that have gone on in our financial system at the highest levels.
William D. Cohan 48:24
I know exactly what you’re saying is I wrote in the Goldman book, the crime is not what’s illegal. The crime is what’s legal. You have to remember that. For decades now, generations now, Wall Street has been influencing what goes on in Washington, Wall Street has been paying lobbyists and donating to congressional coffers, so they can get the kind of regulations or lack thereof, that they feel comfortable with. There’s been the revolving door between Wall Street and Washington. That’s been going on four decades, so you get something like the Dodd Frank law, which is 2200 pages long that nobody can figure out. While we’re having this conversation now, Wall Street lobbyists are working away in Washington, to make sure that the regulations that are still being written are ones that they can live with. And they’re willing to take out and you know, take out all the stops to make sure that that happens. As a result you don’t get it’s just shocking to me, I think in House of Cards about about Bear Stearns, I, I didn’t do this intentionally, but I think it’s clear that there’s a sort of a prosecutorial roadmap that shows in documents and in conversations I had with people you know, what was going on with the with the Bear Stearns hedge funds, which led to the collapse of Bear Stearns, the collapse of the hedge funds led to the collapse of Bear Stearns and and there was a trial Actually, these two hedge fund managers were the only time that anybody and all this has been brought to trial. criminally and then they were acquitted. They’re acquitted because the government you know, chose to go down a prosecutorial path that totally missed the boat.
Jason Hartman 50:08
I mean, how could the government mess that up? Seems like it’s almost intentional like there’s a payoff I hate to sound so conspiratorial, but it’s just funny. I mean, like another case that just bugs the heck out of me is that is the Bernie Madoff case there was no trial I mean, he just pled guilty and and that was it. It almost seemed like that was to cover things up so we wouldn’t hear about them in evidence would be made public. I don’t know that all just happened far too smoothly for for me, I thought,
William D. Cohan 50:36
well, of course every every everybody who is charged with the crime does have the option of pleading guilty and avoiding trial. And so he clearly decided to go that route for whatever reasons, you know, I don’t know on the other. Other side you have somebody like you know, Raj Rajaratnam, the hedge fund manager who decided to plead not guilty and so we were had, you know, feel The absurd, you know, as his trial progressed, and he tried to defend himself, but it was clear that he was caught red handed. And so I guess you know, you can always this is one of the rights that people who are charged with crimes have is to plead guilty. I mean, I guess it’s not dissimilar to the way some people in Libya feel when they see that qaddafi has been killed. And when they some people would have preferred that he had been captured and put on trial and, and put away in prison for the rest of his life. So he really continued to suffer. Let me take a brief pause. We’ll be back in just a minute.
Jason Hartman 51:37
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William D. Cohan 53:18
was it wasn’t it wasn’t by accident, right. I mean, Merrill Lynch is now public company. He’s got a real court report, quarterly profit growth all the time. You know, it’s the biggest broker. It’s a global brand name. And so what does it do it it pushes relentlessly through its advertising, encouraging people to own stocks. And of course that serves them well, because they get fees every time they do a trade or open a brokerage account. So it just became a national international industry to encourage people to own stocks. And so you’re absolutely right in like when the market crashed in 1987 24 years ago, today. You know, yesterday, two days ago, I think, you know, you had you had the market going down 22.6% in one day and the little investor got totally screwed. I mean, just completely taken advantage of and lost a lot of money. You know, basically it’s been it’s ever since then it’s been a complete and utter loss of trust between Wall Street and Main Street. But I think that, you know, I think that that with a slow economy does tremendous amount of damage to Wall Street firms. I mean, they, they they don’t, they can’t it’s much harder for them to make money in these slow economies. And you see that in their results that came out in the third quarter. I think that you combine that the slow economy and people being you know shying away from risk taking with, you know, the Dodd Frank law, the Volcker rule and the new regulations being written even though we’re not quite sure how it’s all going to come out. Basically, you know, the casino that you started operate as we talked about for the last generation on Wall Street is clearly in the process of being if not closed, then certainly it’s ours are being a greatly diminished. And so a firm like Goldman Sachs, which has prided itself on sort of having the best trading operation, which could also be the best clinical gambling operation, the those gambling that gambling apparatus to a large degree, I think it’s going to be much tougher in the future and governments and people places like Goldman and all the rest of Wall Street, which prides itself on making these proprietary big bets and making a lot of money from them, and not going to be able to do it anymore. So I think, either intentionally or not, I think that what is likely to happen in the future is these Wall Street firms are not going to make as much money as they used to make. Hopefully they will then not pay their people as much as they’ve been paying them because they get way overpaid. And thirdly, I suspect that they will go back to being what they do. used to be when the Glass Steagall act was in effect, where they provided what what we the services we want them to provide, which is capital to companies around the globe, whatever they needed 24 by seven, in whether that’s debt financing or equity financing, providing investment advice, providing advice on mergers and acquisitions, but you know, closing the casino, and I think that’ll make the world safer for all of us because we just can’t tolerate this kind of risk taking anymore that wall wall street’s been doing for the last 25 years
Jason Hartman 56:34
well I very much hope you’re right however I am pessimistic side says that Americans have very short memories and when when the frenzy starts again, which it undoubtedly will there will be Wall Street will have their their lawyers, lobbyists, PR firms and Spin Doctors and all of it out in mass and the general public will just soak it up like like a pawns are suckers. They are pretty pessimistic I guess?
William D. Cohan 57:02
Well, well, I think it did you know, again, it remains remains to be seen. I mean, we’ve been taught a lesson here. There’s no no question about it. But you’re right. We’ve been taught this lesson many times in the last 25 years, 10 times at least. And, you know, when the market crashed in 1987, I saw grown men standing around, quote, drum machines crying, and everybody saw this kind of thing would never happen again. And then it’s only happened about 10 times since. So there’s certainly nothing in the Dodd Frank law or any of the regulations that are being written that is going to change the way people behave on Wall Street are changing the incentives on Wall Street. So I suspect before long we will have another problem.
Jason Hartman 57:42
Yeah. And what do we do just in closing here, you know, I mean, what do people need to do built to or what needs to happen, I guess in government to fix it. Do we need to change Glass Steagall back to the way it was before 99 what what would solve the problem?
William D. Cohan 57:57
Well, I think I think what You know, reinstating Glass Steagall or something like that separating commercial banking from investment banking, separating risk takers from non risk takers, I think would, you know, would have to be updated, obviously, I think would be a very effective rule or law, I think getting it implemented is very tough in this political stalemate environment, you know, I would, I would call on these Wall Street firms, they can do this without a law, they need to change the incentive system. On Wall Street, it can no longer be right, that people get paid to take huge risks with other people’s money and they get paid big bonuses, whether they, you know, lose money for these firms or don’t lose money for these firms. One thing that was a common denominator through, you know, much of the years until 1970, which was that these firms had to operate using their partners capital and as a result, they were much more prudent about the risks they were willing to take. And they weren’t rewarded to take risks, they were rewarded to create pre tax income so that they would have something to divide at the end of the year. So we need to go back to something like that. I’ve made a few proposals that, you know, never, of course getting any traction. But but but I think that this is something that real leaders on Wall Street, you know, if Lloyd Blankfein of Goldman Sachs were a real leader, he would implement a program that put, you know, the top hundred people at his firm, or the top 300 or 400, have real skin in the game have have their entire net worth, again on the line, so that they were really Cognizant every day about the risks they were taking, and are really prudent about the risks they were taking. And I think if something like that would would help even if we don’t get the lead legislation passed, that might really do it. But that kind of self regulation, that kind of leadership would help reduce the tensions and the risks that wall street poses to the rest of us. And it’s long overdue. And that’s the kind of thing that I think needs to happen.
Jason Hartman 1:00:04
Well, and I couldn’t agree more. But the question is, you look where the incentive lies. Why would they do that? Why would Blankfein care? I mean, playing with other people’s money and taking big risk that’s rewarding to Goldman Sachs. It’s rewarding to all of the other firms too, isn’t it? I mean, your your vision is a good long term vision. It seems like it would inspire public trust and more money ultimately would come back to the market. I agree with you there. But But Goldman
William D. Cohan 1:00:28
used to pride itself on being long term greedy, what better way to be long term greedy than to try to take a quantum leap forward and trying to restore the trust that has obviously been lost between Wall Street and the American public clearly been been lost. And one way to do that is to try to instill into the American public some level of confidence that hey, we have our own network on the line again, and we’re the first ones that are going to get wiped out if we do things that are stupid or not. In our own interests that have that really damaged the American public and the world economy, and that will make them more prudent and I think change the kinds of risk they’re willing to take. And the great thing is on Wall Street is basically a cartel at this point. And so if one firm like Goldman Sachs does it, they’ll all do it relatively quickly. And we will all be much safer as a result, because counting on Congress to come up with laws that make sense and to change people’s behavior is is a long putt in its of itself to turn his shirt is and you talk about it at the investment bank level and the Wall Street firm level, but at the corporate level, the companies that people are actually buying shares in more broadly than in the investment banks. Wasn’t Sarbanes Oxley supposed to solve that problem? I mean, did it help even or things just sort of business as usual, with a lot more accounting fees than before? Well, there are a lot more accounting fees than before. I mean, we haven’t. I mean, you know, I don’t know whether Sarbanes Oxley, his word or not, but we can’t. It’s harder to come up with clear examples of sort of Enron, WorldCom, Tyco kind of horrific corporate behavior. Again, this time it was confined largely to the financial sector. This was a crisis of Wall Street’s own making that was entirely preventable, but they couldn’t. It’s like the parable of the frog and the scorpion. You know, why the scorpion sting? Why Why does Wall Street do this? Because that’s what they’re, you know, unfortunately, that’s what their incentive to do now. That’s their nature, right? Yeah, that’s their nature. Exactly. Right. Yeah.
Jason Hartman 1:02:37
Well, very, very interesting stuff. I sure hope that your vision pans out. I’m less optimistic. But if your vision pans out, I think everybody would be better off for it. And I think Wall Street really needs to just rein in their greed a bit and set a good example be employed. I sure hope that happens someday. Well, because I think it would inspire a lot of confidence. And if it doesn’t happen, then I’ll have an Book, I’m sure to write about the latest, crazy behavior on Wall Street, that’s for sure. Well, William Cohen, author of the house of cards and several other books, a tale of hubris and wretched access on Wall Street. Thank you so much bill for joining us today. The book is getting great reviews on Amazon looks very popular. Did you want to give out any other websites or any other information about where people can get them,
William D. Cohan 1:03:23
they can get them on Amazon. If there are any bookstores in existence anymore. I think they still have them. They’re paperback versions. Sure Amazon sells them for two cents each. So the more important thing is that people get a hold of them and read them and understand the way Wall Street really works. So that they can put pressure on people to you know, congressional leaders and people on Wall Street to to change the way they’ve been behaving fantastic. William
Jason Hartman 1:03:48
Cohen, thank you so much for joining us today.
William D. Cohan 1:03:50
Thank you. Thank you for having me.
William D. Cohan 1:03:56
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