Charlie Rose Session One

Transcription

1 Charlie Rose - 1-8/2/2010 Guests: Wilbur Ross Charlie Rose Session One Wilbur Ross is here. He is the CEO and founder of WL Ross & Co. It is invested in textiles, auto parts, healthcare and other industries. In 2002, he began purchasing financially stressed U.S. steel makers with an initial investment of $325 million. Two years later, he sold that stake for $4.5 billion. In the wake of the economic crisis, he thinks there is another opportunity to revive regional banks in states such as Michigan, Florida and New Jersey. I am very pleased to have Wilbur Ross at this table to share his thoughts on what he does; bankruptcy, and also the idea of where the American economy is. And since he's investing in banks, what he thinks is the future of the financial sector. So welcome. Thank you. That's a big order for not that much time. But let me just talk about you. You came out of Yale and then -- in Yale at the beginning -- did you want to be something other than a financier? Yes, I did. I wanted to be a creative writer. But Yale has a course called daily themes. You have to put in 1500 words of original prose each day. By about the third week, I was out of material. You had no new material. So I dropped the course, and it saved me from a life of poverty. And then you got interested in business, or you went to Harvard Business School because you didn't have anything else you really wanted to do? No. What happened was the then treasurer of Yale left to go to a money management firm. And instead of continuing to park cars at Monmouth Park Jockey Club, which had been my prior summer job, he dragged me down to Wall Street. And that's what changed my whole career.

2 Charlie Rose - 2-8/2/2010 And then back to Harvard after that. Yes, right. And then you worked for a number of years for Rothschild. Yes, right, for about 25 years. Yeah. And then what happened? What did you see that made you go into a different direction? Well, at Rothschild, I had been running originally the restructuring advisory practice on a global basis, but in 1997 also started a fund to invest in bankrupt companies. Between '97 and 2000, I had both responsibilities and finally concluded I and actually my whole team liked the investing better than the advisory. So went to the management of Rothschild and said, we don't want to do this anymore. I'd like to buy the fund from you, and then we'll go out of the business. We won't compete with you for advisory assignments. And that's the deal that we worked out. So on April fool s day, 2000, went into business for myself. And then you started when to start buying -- looking at the steel business and say there is opportunity here? Around mid We'd actually looked at steel before. I had done the first LTV bankruptcy half a dozen years before. This was Ling-Temco-Vought at one time. Yeah, exactly, exactly. Had been a big conglomerate, but by then, it had sold off the aerospace. And it was basically down to steel mill. And I was very unhappy. We made all these recommendations. They didn't follow any of them, about changing the way of the work practices and the pension program and all that. So then it came around. Second bankruptcy was a real mess and it was in danger of being totally shut down. It was on what they call hot idle which is just a little tiny bit of metal going through so that the refractory bricks don't implode. So I went to the leader of the USWA, the United Steel Workers and said we'll buy this, and we'll revitalize it, but we need a contract that's

3 Charlie Rose - 3-8/2/2010 different from the contracts that you've had historically. And it turned out he was looking for someone to do just that. Because he understood that they were about to go out of business. Oh, absolutely. And I've found that the leaders of some of the big industrial unions, the steel workers, the auto workers; they understand the dynamics of the industry at least as well as the senior managements of the companies. So Leo Gerard was the then head of the steel workers. We worked out a contract that took 32 job classifications down to five, changed the work rules to make it more flexible. And most important of all, we put into a blue collar bonus system. I'm a big believer in productivity bonuses for blue collar workers because the American worker, if you give them the right environment and a chance to do well will be a very, very productive person. And so that's what happened as the story unfolded. The year we sold the business, we paid about $200 million in productivity bonuses to blue collar workers, probably more than any American company ever has. Okay. Let me go back to some of the externals also. Okay. But first this point, which is an important point, that management ought to listen to their workers more than they do and that perhaps there is more sort of shared sense of interest in the future of the business from union leaders than we might imagine. Yeah, I think there is because, remember, for the union worker, that he or she presently has is probably the best job they'll ever have because the alternative is to go flip hamburgers at McDonald's or work at Wal-Marts, something like that. Henry Ford invented middle class America. And there was a great danger that the so-called rust belt companies would dis-invent the middle class. And so the union leaders, the big ones and the sensible ones understand all that. And Leo had actually offered the same kind of contract to the more established steel companies, and none of them wanted it, partly because it also put a limitation on the ratio between the CEO's pay and the workers' pay. Now, were you able to do this in addition because, A), the dire straits that the company was in, but also how you had healthcare commitments, you had pension commitments.

4 Charlie Rose - 4-8/2/2010 Right. You had what else? Well, what happened, the bankruptcy court had already done away with the pension plan and had done away with the health program. And what happens when a pension plan is done away with? A company facing bankruptcy? Well, it goes to the pension benefit guarantee corp. which is basically an insurance entity set up by the federal government. And up to a certain level, they honor the pension benefits. But over a certain amount per year, they don't -- Is it a reasonable amount? With the, it's 40 some odd thousand dollars a year. So it's not starvation wages. All right. So there was a pension. And the healthcare -- what happened to healthcare? Well, we put in voluntarily a VEBA. You've heard a lot about VEBAs greatly with the car companies. We actually worked one out with Leo on the theory that even though the retirees were not our employees -- they never worked because it had already shut down -- but we felt a moral obligation to them. So we put in this voluntary employee benefit trust. The way it worked was we seeded it with $50 million. And then as profits came through, an increasing percentage of the profits would go to the VEBAs to take care of retiree health benefits. You also knew, or at least suspected that President Bush was going to raise the tariff. Yes. -- on imported steel.

5 Charlie Rose - 5-8/2/2010 Yeah. We made a bet, that based on the recommendations of the independent counsel that had been advising President Bush, we made the bet that he would do something. Now was it just a bet, or did you have informed opinion and -- Well, we talked with everybody. -- more than a bet. -- we could. We talked with everybody we could in Washington. And our pitch -- we pitched the administration as well, the secretary of commerce and others. That we're prepared to do this if we think that there's going to be some kind of restriction on the importation of steel. Well, no. We made the commitment before it was actually announced that there was going to be the restriction. So in that sense, it was a bet. But all we needed was one year because we needed that so that we could get the mills back up and running and reengaged with the customer. So all we were pitching for was not a permanent tariff law. I don't believe in big barriers forever because that leads to destructive practice. We just wanted a little opportunity to reform the industry. We are in the business not so much of being contrarians deliberately but rather we'd like to take perceived risk instead of actual risk. And what I mean by that is that you get paid for taking a risk that people think is risky. You don't particularly get paid for taking actual risks, so what we had done, we had analyzed the bid we made, we paid the money partly for fixed assets, we basically spent $90 million for assets on which LTV have spent $2.5 billion in the prior five years. And our assessment of the values was that if worst came to worst, we could knock it down and sell it to the Chinese. Then we also bought accounts receivable and inventory for 50 cents on the dollar. So between that combination of things, we frankly felt we had no risk. And then you -- next year you bought Bethlehem. Yes, but before that even, what happened, out came Business Week asking "Is Wilbur Ross Crazy?" a question which my wife, Hillary, thinks still is less than adequately answered.

6 Charlie Rose - 6-8/2/2010 Investigated and answered. No. She thinks more research needs to be done. But the joke was right when everybody was saying this is too risky, it'll never work, the big debate within our shop was: should we just liquidate it and take the profit or should we try to start it up. That's how sure we were that we weren't actually taking a risk. But I wanted to start it up because if you liquidate it, you'd make some money but you wouldn't change the whole industry and you wouldn't make a large sum, as we turned out to do. So you sold it, you started it up and made it productive. Yeah, we became the most efficient steel company in America. We were making steel with less than one man hour per ton. The Chinese at the same time were using six man hours per ton. So we got it to a very, very low -- So you could compete internationally with the Chinese and other steelmakers. We were. We were actually exporting some steel to China. And then so then why did you sell it? Well, we didn't sell it so much as merged it with Mattel. The deal was half cash and half stock. And the reason we did it, we ultimately had gotten to a one third market share of the whole U.S., so there was not much more we could do here. But clearly the growth markets would be outside the U.S., and Mattel was in a lot of the emerging markets. So somebody introduced us, Lakshmi and his son, Aditya. Who live in London, I guess. Yeah, they live in London, but the company now is based in Luxembourg. And we found that we had more in common with each other than any of us did with the rest of the steel industry. Well, what did you have in common?

7 Charlie Rose - 7-8/2/2010 Well, both were viewed as outsiders to the industry, both were viewed as kind of strange for the way we went about things, but also we both believed that consolidation was totally essential for the industry. And the reason it was essential, when we had a lot of mills that only had one mill, one location, steel demand goes down five percent, you can't lynch back a mill five percent for very long. It's kind of like a car engine. It's either on or it's off. So if you have multiple mills, you can modulate your production to be consistent with demand. What the mills were doing when they were fragmented, they'd keep producing, producing, producing, and then they dump it in someone else s market. Well, when everybody s dumping in someone else s market it means everyone s dumping in everybody s market and that s what had driven the price down. So we felt consolidation was needed. Mattel was on the verge of being the biggest company outside the U.S. Putting it together with us made the world s biggest steel company. Here s what I m leading up to. At a time when people are looking at the future of the American economy, does manufacturing in the United States have a future? Well, I think it does but I think there are a couple caveats, there are a couple things that have to be fixed to make it work. The union part is gradually fixing itself, I really do. We ve made very reasonable contracts with the UAW; so did GM and Ford and Chrysler. Right. But what I m worried about is research -- Now again, they had little choice, did they? Well, that s true but people don t make hard decisions until they have little choices left. What I m worried about is R & D. U.S. is graduating one-seventh as many engineers per year as China and India combined, one-seventh. One-seventh as many. Yes and not all of our stay here because many of them can t get green cards.

8 Charlie Rose - 8-8/2/2010 I know they have huge, much larger populations than we do. Well, they do, but in terms of brain power for technology, a multiple of seven is still a multiple of seven, never mind what percentage. Exactly. [talking simultaneously] It s still very big. It s better to have seven engineers than one. Oh yeah. And so what worries me, Business Roundtable of which I m a part, thinks that within a few years if this trend continues, 90 percent of all the engineers working in the whole world will be working in Asia. Ninety percent. Ninety percent. And if that s true and you merge that with an inexhaustible supply of very well disciplined, very well qualified labor, there may not be much room for U.S. manufacturers. So what we have to do as a first step is graduate more engineers. Absolutely and one of the sad -- And computer scientists. Yeah and all the other disciplines. One of the sad things, every year in the Bush administration they cut federally funded R & D.

9 Charlie Rose - 9-8/2/2010 Why did they do that other than just normal budgeting? Well I have no idea why they did it. I guess the political constituencies for R & D are not strong enough but that contributed to the problem. And the reason that s so important is you have to have new technologies, new growth industries to supplant the ones that don t need to grow so fast any more. Right now China -- we think of China as a polluter. Well, let me tell you, China is the leader in wind technology, wind power technology and -- But they are the leading polluter in the world today. Yeah, they are, but -- But you re saying that they re looking to their future and spending heavy amounts of investment in terms of alternative sources knowing that this is an issue for them in the future. Not only that but because they see it as a huge export market. They already are producing 40 percent of all the wind turbines in the entire world and exporting 80 percent of those. And they did it in typical Chinese fashion. They ordered the power grid that it must first take alternative power before it can take anything else. Second it must do it under long-term contracts and third, it must do it at a big premium price. Well, that made all the utilities want to do the alternative power, the renewables, so that then created the demand for the equipment. Then when the foreign manufacturers wanted to come in, the Chinese said fine; 70 percent local content so they got a technology transfer. So they managed to get technology and create a huge domestic market and now they re beaming in on the export. That s how you have an industrial policy. Okay. And we don t have an industrial policy at all in this country. No, nor do we have an energy policy. Nor do we have -- and energy in terms of climate change and alternative sources and weaning us off of imported oil. Yeah. We don t even do easy things, for example, railroads. There s a bill languishing

10 Charlie Rose /2/2010 in Congress -- and we re invested in railroad equipment, in diesel, so I ll make the disclosure. Railroads use one-fourth as much fuel per ton-mile as inter-city freight. Twenty-five -- Twenty-five percent as much as inter-city freight by truck. Yet -- The trucks go from city-to-city-to-city. Yeah, local trucks. You couldn t do it by rail but the inter-city freight. Yet the highway lobby gets tens of billions of dollars spent on highways and the government doesn t do an awful lot for railroads. So you don't even need exotic solutions in order to cut pollution. But what you need is someone to say a policy and enunciate a reasonable policy. So there is something that's right in front of us, wouldn't be that hard to do. But my impression -- Tom Friedman would love to hear you saying this because 90 percent of his columns are about just this, which is the idea that we have to invest in alternative sources. Sure. And B), if we don't, the Chinese are going to lead that market, and they're going to be where the world has to beat a path to in order to get your access to those kinds of technologies. Well, and it's not even just that. Biotech, they're making a big push in. They're making a big push in all the technologies that they see as being the future of technology. Okay. An industrial policy would look like what? And how is it different than what the Obama administration at least wants to do, leaving apart aside what Congress will allow it to do. Well, it's a little hard to sort the two out.

11 Charlie Rose /2/2010 I know. But because some days the president says he has a lot of control over Congress. Some days he says he can't do anything without them. Right. But first you need a policy that's based in the economic realities, not just in political realities. China being a despotic country can deal with the economic realities. It's one of the luxuries of not having the kind of government we have. They had a stimulus bill of 500 some billion dollars one day and began to employ people the next day. Well, that's right. I mean, there it works. So -- but the main thing is they really make a five-year plan and they really hold themselves to it. They really believe in it. And if you're thinking in terms of five years rather than the next 10 minutes, you have the different thought process. So here you are, here is a man who is worth more than a billion dollars and I don't know what -- top 126th richest person around. And you are saying what we need from the government is policy. Yes. We lead leadership. Yes. You know, and unless we have that, we're going to lose our place, our economic place at the world's table. I really feel that within five or 10 years, we could be a second rate power. We'll still be big, but we could really be behind the eight ball in a very big way. And it isn't even just R & D. A generation ago, we were the number one country in the world in terms of what percentage of people finish college. You know where we rank now?

12 Charlie Rose /2/2010 No. 12th. 12th. The percentage of people that enter college and finish. Would finish, yes. No, just the percentage of people who finish. That go to college. And finish, and finish. Yes. And finish. And finish. We used to be number one. Now we're 12th. Now here's what people will say. They'll listen to all this and they'll say, Wilbur, you're actually right. We recognize those are problems. But we still have the greatest universities in the world. They're the envy of the world. That is true. And we have 18 of the top 20. That's right, too.

13 Charlie Rose /2/2010 That's not going to dry up overnight. It's not going to dry up overnight, but we're having a dumbing down of the population because we're not keeping up with the percentages that other people are having -- get college degrees, and for sure in engineering, we're going to fall way behind. But do you have a solution for the problem in terms of the kind of power over the purse that Congress has? Well, stepping up R & D budgets would be a very good thing; spending more on the universities. Most universities need federal help. Because that's where the basic research takes place. Sure. Exactly. Exactly. And if you look at the big venture capital companies that have helped contribute to technology, huge percentage of those are immigrants. And that's another problem with the engineers is getting green cards. You go to Silicon Valley, you'll find a lot of immigrants. You bet. You bet. And that's kind of weird for the United States of America to have to do that. So we need a new immigration policy as well. I think so. So what else would you change? I mean, these are very interesting things: an industrial policy, an energy policy. What else do we need in terms of the United States and its place in this sort of economic -- I frankly think those are more important even than the tax policy and the other things. I'm resigned to the notion that Obama's going to tax people like me more heavily.

14 Charlie Rose /2/2010 Do you have a problem with that? I mean -- No, I don't. I mean seriously. No, I don't. I really don't. So they -- he will extend a Bush tax cut for people who make under $250,000. But for people like you who make more than $250, I think that's okay, as long as they do something useful. Then why does everybody make such a big fuss about it? Well, yeah. My qualification is as long as they do something reasonable with the money. If it's just going to get wasted, that's not so good. Then how is this administration in this economy wasting money? Well, I think they're missing opportunities. For example, the -- I don't see them stepping up the R & D to a huge -- Right. You mentioned that, right. And immigration policy, I don't see anything carved out for engineers and scientists coming here. There a lot of little things. You mentioned those two things already. But I think it is important to keep the tax cut for the lower income people, the below 250.

15 Charlie Rose /2/2010 Right. 21 million of AMT is allowed to expire. 21 million Americans are going to pay more tax and it will be a total of something like $250 billion a year. Right. If you want to do something to destroy consumer spending, just eat away at the middle class because the other problem we have is the structural problem of middle class America. Median income in this country went nowhere the whole decade of the 2000s. But every year, people want to live a little better than they did the year before. And the only solution they could find was to borrow. And I really believe that that's sociological phenomenon is what ultimately led to the subprime crisis. Is there conflict for you between these two big ideas; one, we have a huge deficit facing us. That's one idea. The other idea is that unless we invest, which also means spend in part, we will not have the kind of growth, and we will not have the kind of future that's necessary. Those two things are occasionally in conflict. Well, they would be if there weren't so much waste going on, you know, in the country, so much misspent money. But where is the waste is what I'm -- Well, think about things. We say we want to wean ourselves off foreign oil, but we subsidize the growing of corn for ethanol purposes. Right. Then we impose a tax on Brazilian ethanol, which is very low cost when it comes in. Right. Now, is that a good idea? Is that a well-balanced thing of government? I don't think so.

16 Charlie Rose /2/2010 You spend several billion dollars -- Well, every politician who goes to Iowa soon changes his position. Well, maybe. Maybe we should change the primaries. But we spend billions of dollars a year subsidizing the growing of tobacco. Right. I don't think that that's going to end soon. Because of the farm lobby. Okay. The tobacco lobby. That's an explanation. Yeah. But that money would be better spent on R & D. And you can go thing after thing after thing. There are a lot of places where we could change things. Do you have access to this administration? You're on the business round table. That's one place. Well, the administration has actually been pretty good to me. They've made me a manager of the public-private investment partnerships Public-private thing is buying up the toxic assets; not very much, but the sum total --

17 Charlie Rose /2/2010 I know but it did a lot of good because -- Psychologically or morally? Well more than that because remember what changes the price of anything that trades is the last few percentage points that trade. It isn t the 99 percent that doesn t trade. I hear you. So it really did change the markets for sure. So it did change -- Absolutely right. Do you have access beyond that? Well we ve had dialogues with people in the administration and we will hopefully continue to have them. I saw Secretary Geithner at a pretty small lunch today and actually I had the great pleasure of sitting right next to him so we had quite a little chat. So you told him some of the things you told me tonight? Well he knows my obsessions. And so do we. Thank you very much. [laughs] Wilbur Ross, thank you very much. We ll be right back. Stay with us. Kevin Kline is here, the actor.