Doug Brunt is the former CEO of Authentium and author of, “GHOSTS OF MANHATTAN.” In his new book, he transports readers back to the extravagant times before Bear Stearns collapsed, exposing a culture with boundless bonuses, where the company expense account was routinely used for bar tabs, visits to strip clubs, and worse. He even throws in some comical stories and describes some of them. Brunt offers a withering view of life on Wall Street from the perspective of an unhappy insider, run-down by the corrosive lifestyle which is jeopardizing his marriage, who is too hooked on the money to find a way out.
Brunt is married to FOX News anchor Megyn Kelly, who has helped him with his books. Brunt describes their relationship and why he gave up a lucrative career as an Internet security entrepreneur.
Find out more about Doug Brunt at www.douglasbrunt.com.
ANNOUNCER: 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 in 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: Welcome to the Creating Wealth Show. This is your host, Jason Hartman, and this is episode number three hundred and thirty-seven. We’re going to be talking to, as our special guest today, Doug Brunt, who is the author of a new book entitled Ghosts of Manhattan, and it’s all about the very interesting Wall Street lifestyle, and you’ll also find it interesting that Doug is married to someone who’s quite famous, and you’ll hear about her as we talk. She’s not in the news—she is the news. So, you’ll hear about that during the interview. But before we get to Doug Brunt, I’d like to invite back to the show Ken, our local market specialist from Atlanta, how you doing?
KEN: Good, Jason, how you doing?
JASON HARTMAN: Good, it’s good to have you back on. And this time we’re not going to talk about the market in general. You just agreed to, you know, come on and help me do the intro portion of the show before we get to our guest, so. Sometimes we do a show that is centered all around a particular market, and that’s not the case here; we’re just going to kind of chat about a couple of current events, and get your opinions on some things before we go to our guest today. And what is the first one? Did you want to talk about construction?
KEN: Well, I think it’s an interesting topic. It’s actually fresh in my mind because we just—we’re wrapping up a new construction house here in Atlanta. And looking at the news, it seems like new construction is hitting a five-year high right now. So, it’s definitely a hot topic.
JASON HARTMAN: It has come back, and you know, I haven’t looked at the stats on this lately, but I would guess that it’s still paling in comparison to what it was at the peak, which was probably 2005 or 2006, I would guess. For single family home starts. What do you think?
KEN: Yeah, I would guess probably 2006 was the high. And you’re right, we’re probably half of where we were at that point in time. But we actually have hit back to the levels in terms of constructions spending that we’re at in September of 2008.
JASON HARTMAN: And, it’s interesting, you know, take—this is really good for investors if they understand it, and if they understand these business cycles and market cycles and the way they interplay together. Because it takes a long time to ramp up the construction machine. This is not quick. Unless you’ve got land sitting around that is already mapped and entitled and it’s ready to build on, which is not usually the case—even if you have that, it takes several months to build and complete a community. But it takes a while to ramp up that construction machine, and that’s really good for investors in a lot of ways, as long as they understand it, and depending on how they interact with that. But you had some statistics and things that you wanted to share, right?
KEN: Yeah, sure. And to your point, it was kind of interesting. I remember the end of 2012, beginning of 2013, we sort of started to see things change where there was actually a pretty major land grab. You know, any of the developed lots and subdivisions that were out there that had just been sitting there for years—all of a sudden there was just a flurry of activity, and you sort of knew that come summer, you’re going to start to see a lot of houses on the ground, and that’s really what we’ve seen happen. And when we saw it happening, we started to try to pick up some lots as quickly as we could, just because we saw the opportunity—the writing was on the wall.
JASON HARTMAN: Yeah, and you’re mostly not a homebuilder, meaning a build it from scratch, be the developer, type of person; you’re mostly a buy it and rehab it person, right?
KEN: Absolutely. And we can plan on continuing to do that. It’s just that we saw that there was going to be an opportunity to pick up a few lots cheap, and sort of ride this wave of new construction this year. And so we’re taking advantage.
JASON HARTMAN: Well, tell us a little more. Get in to some of the details that you wanted to share.
KEN: Yeah, so, the big thing is that—so, construction spending is up, it’s actually 17% higher than it was even a year ago. I mentioned, we’re really at a five-year high, and housing starts are up as well. And what’s interesting too is that in this new construction, houses are selling in the midst of interest rates that are rising. I mean, just some of the last couple of months we’ve seen interest rates rising, and yet new construction is still full-bore, full steam ahead.
JASON HARTMAN: But to be fair, and to put that into perspective, interest rates are still historically incredibly low, right?
KEN: Very true. In the broader context. But I think the rising interest rates probably did give some buyers pause, just to wait and see what they’re going to do—if they were going to come back down, and yet housing is still booming.
JASON HARTMAN: But it still hasn’t really solved the inventory shortage problem. I mean, the rates going up, and the construction going up, we’ve still got really an overall, in good markets, in good neighborhoods, we always talk about the market, the MSA, which is the metropolitan statistical area, like Atlanta, or Dallas, or Dallas/Forth Worth, whatever. But then you look at the micromarkets, or the submarkets within there, and then you parse it way down to neighborhoods. Because housing is such a localized thing. Still, in good areas, I mean, you would say there’s an inventory shortage, wouldn’t you?
KEN: Absolutely. Yeah, we haven’t even come close I think to solving the inventory problem. I think we’re still scraping the surface.
JASON HARTMAN: With rates up and construction up, any thoughts as to how much we’ve gotta do to solve that?
KEN: You know, I think we’re going to see a lot of new construction over the next year, two years, three years—who knows how long we’re going to ride this wave. But you gotta figure, we haven’t built any new inventory for the last five years. And in a market like Atlanta, when you’ve got close to 100,000 new people moving in to the market every year, no new housing being built—we’ve sort of dug ourselves a little bit of a hole, in terms of inventory.
JASON HARTMAN: Well, I think there’s a lot of inventory in places like Detroit—America’s largest bankrupt city.
KEN: You’re probably right.
JASON HARTMAN: Yeah. But you’re not interested in going there and starting up a satellite office there, huh?
KEN: Not so much.
JASON HARTMAN: Yeah, okay. Alright, well, tell us more! You have some more stats you wanna share.
KEN: Yeah, the other interesting thing was that the—I guess there was a survey done of homebuilders, and it seems like potentially the credit is actually easing for the acquisition and development loans, which I think is also going to speed up the recovery, in terms of new construction. In fact, I actually had a meeting with my banker this week to talk about something else, and it came up, and he said the same thing—that they’re finally starting to loosen up, and credit’s starting to flow a little bit better into the new homes construction industry.
JASON HARTMAN: And so that’ll create more building, a little bit more supply, but again, we’re so upside down on this equation that I don’t think it’s anything to be very concerned with at this point. It always goes in a cycle, you know. This is the traditional definition of the business cycle. The money gets out there, and when it’s cheap money, it causes inventories to build, whether it be housing inventory, or inventory of widgets in another kind of business. And that’s what happens, and then there’s still a lot of buyers gobbling up the widgets, gobbling up the houses, whatever they are. Gobbling up that inventory. But then at some point, you get to a homeostasis where it’s kind of like equal, and that’s a really great market. I love a market like that, because as a broker, you can operate in that market. Where it’s not impossible to get a property—the buyers aren’t all totally discouraged, and things work. You can do business, you can do deals. Right now, frankly, we find this market kind of hard to operate in, because people get too discouraged! You know, they go out there and they try to buy properties, and there’s not much to choose from. And you know, if they’re out on properties where—if they’re on the open marketplace and they’re making offers, a lot of times they’re getting their offers turned down, even at full price. Even sometimes above full price.
KEN: Sure. And you’re exactly right, I mean, if you’re selling a house right now, you’re definitely holding the cards right now in this market. It’s definitely a seller’s market. It’s tricky to be a buyer right now.
JASON HARTMAN: So there’s really a few kinds of markets. Most people think there’s just a seller’s market and a buyer’s market. I say there’s a seller’s market, which most people, which the media would call a good market. Most people would call that a good market: when prices are going up really fast, the sellers hold all the cards, and that’s called a good market, for some reason. People like it, it’s a good market. Then there’s a buyer’s market, where prices are depressed, and we’re coming out of that, obviously. We haven’t really been in that market for about two, maybe even two and a half years now, depending where, and depending what product type in what geography.
But then I also like to say that there’s a broker’s market [LAUGHTER]. Where it’s easy for a broker to operate. And I kind of look at that as the middle sort of even keel market, where it’s kind of at an equilibrium. And then when you look at it in the renting and the tenant market, you have it there too. Sometimes you have an oversupply of properties for rent or lease, and you don’t have enough tenants to lease them, so landlords have to lower their prices. And then the other time you have, where it’s a landlord’s market—that previous one would be a tenant’s market—other times you have a landlord’s market, where you know, the landlord is in control. There’s very little rental inventory, and landlords can raise rents, they can insist on really high credit scores, they can insist on, you know, no pets, and just get that ideal perfect tenant. What are your opinions on the landlord versus tenant market? We talked about the buyer versus seller market.
KEN: At least in my—I can really only speak intelligently on Atlanta. To me, honestly, it feels like we’ve still sort of maintained this homeostasis that you used. We haven’t seen any major trends where rents are falling or rents are rising. It doesn’t feel like we’re having a hard time finding tenants or an easier time finding tenants. It sort of seems like the rental market, at least what we’ve seen, has pretty much maintained for the last several years.
JASON HARTMAN: And are you seeing rent prices go up now? We are across the country, I mean, I know that on my own properties I’m able to raise rents in between tenants fairly well nowadays.
KEN: The stats in Atlanta say that they’ve risen, but just very minimally. We haven’t seen any major bumps yet.
JASON HARTMAN: See, if interest rates go up a lot more, then I think it’ll be a landlord’s market, because I always say, people really only have three choices. They can buy, they can rent, or they can be homeless. And when I said that during one of my seminars, a smart aleck said no, they can live with their parents. And I guess that’s true too. We call this the Boomerang Generation, and that’s actually an interesting point too; it’s a little hard to quantify, but we know it’s out there, and it’s gonna be really good for investors. That there’s a lot of pent up demand of these, what they call the missing households. And that’s people that have moved in with their parents, or have doubled up, that are going to eventually come out of that situation and come into the marketplace, whether they be a buyer or a renter. And either way, if you already own, that’s great for you. Because if they’re a buyer, they’re going to put upward pressure on sales prices—we all like appreciation, right?—but if they’re a renter, they’re going to put upward pressure on rents, because there’s more rental demand. So, investor wins either way, right?
JASON HARTMAN: Yeah, this is why I say—income property is a multi-dimensional asset class. It’s not just about price. Most people want to make it about price. It’s just, oh, are the prices up, or are the prices down? And you’ve gotta put in that whole rental side of the equation as well.
KEN: Sure, yeah.
JASON HARTMAN: What else do you have on this, on the construction thing?
KEN: The only other interesting fact that I found that I thought was interesting was, you know, about a year ago, you started hearing a lot of people talk about the build for rent model, and I knew a handful of folks that had sort of gotten into that. And I think that’s because the market for new construction hadn’t really picked up. And interestingly enough, so the build for rent model’s actually down from first quarter to second quarter. I think more builders are seeing that there actually is an opportunity for new construction with just the open market.
JASON HARTMAN: Well, tell us what you mean by that, the build for rent.
KEN: So, it’s somebody who’s even similar to me, where instead of buying and fixing a distressed property and renting it out, it actually makes sense to build a new construction house and put a tenant in it for cash flow. And that was sort of the new model that had cropped up, where historically that represented a very small amount of the new construction market. Well, just last year it represented 5% of the overall—actually 5.8% of the overall new construction market was specifically built for rentals. That number’s down a little bit, but it’s an interesting—it is an interesting market.
JASON HARTMAN: Yeah, very interesting. Okay, what else on the construction? I mean, I see there’s quite a few more points here on your article that you posted.
KEN: Yeah, the other—well, the one other thing that I thought was interesting too was that the new home sales have shifted from purchasing completed homes in inventory, to now there’s so much pent up demand that folks are actually putting houses under contract before they’re even completed. And that’s—it was interesting to me, because it’s actually what we’re experiencing right now, the house that we were building, we decided to go ahead and put it up on the market a couple weeks before we were even completed. And it went under contract within 24 hours.
JASON HARTMAN: That’s amazing.
KEN: It’s unbelievable. I mean, it even surprised us how much demand there was for new construction. So it makes sense that there’s sort of a fundamental shift taking place.
JASON HARTMAN: You don’t do a whole lot of new construction, that’s a smaller percentage of your business. But what are you finding? How is that deal for the investor? What can they buy at per square foot for new construction?
KEN: You know, the one we did—we ended up selling it retail, we didn’t even sell it to an investor.
JASON HARTMAN: And when you say retail, you mean a traditional homebuyer bought the property, right?
KEN: Correct, somebody that’s actually going to occupy the property.
JASON HARTMAN: Okay, an owner occupant. And what did they pay per square foot, do you remember?
KEN: The owner occupant probably paid 80? 80 bucks a square foot, or 90? Somewhere in there. On this particular property. And we looked at it real hard from an investment standpoint to see if we could make the model work, but the fact is, in Atlanta, I mean, we’re still 22% below the high in terms of values, and so, there’s still just too much opportunity to buy distressed real estate, fix it up, and be in it for just a lower per square foot cost than new construction. So the model just didn’t make sense in our market. At least not yet.
JASON HARTMAN: Yeah, so, on your rehabbed, resale properties that our clients can find at www.jasonhartman.com, what are you typically selling at to investors on a wholesale basis per square foot?
KEN: Yeah, so, we’re anywhere from 40-60 bucks a square foot.
JASON HARTMAN: That’s still incredible!
KEN: It’s still. I mean, it’s really good pricing.
JASON HARTMAN: Yeah, yeah. Talk to me about this age-old debate—and we were talking about it a little bit before we started recording—about homeowners association versus non-homeowners association. What do you think?
KEN: Well, it’s a good question, and it’s funny, there’s nuances in different markets. So when I’ve talked to folks in California, and they think about an HOA, they think about spending $200 or $300 a month on an HOA—
JASON HARTMAN: Sometimes more than that.
KEN: Or even more. Where $300 is a yearly HOA bill in Atlanta in your traditional suburban neighborhood. So you’re really only talking about 20 or 30 bucks a month. And for my money, I like the fact that there’s a committee sort of overseeing the neighborhood and making sure you don’t have somebody doing mechanic work out of their garage, or letting their grass get over a foot tall—all of the things that just protect values in a neighborhood.
JASON HARTMAN: Yeah, and I agree with you there. I call that the minimalist HOA, and I think that one’s pretty good; it keeps things from going real bad. But, you know, I’m wondering, how bad is the problem? You know, when you don’t have an HOA, is it really that big a problem? I mean, certainly there are many areas around the country, and in probably every city, except Detroit—no, even in Detroit—that are nice, without an HOA! I mean, they just have a pride of ownership to them.
KEN: Oh, I agree 100%. We’ve got plenty of neighborhoods that don’t have HOAs, and they’re primarily owner occupied, people take care of the yards; but when you start to get into the B-level properties, you know, a little bit less expensive, older, and they become primarily rental neighborhoods—you know, you can run into some problems where renters don’t necessarily have a pride of ownership, and it’s possible they start to let the yards go, and that affects values. So really, I think it sort of hinges on what price point you’re at.
JASON HARTMAN: Yeah. Tell us about one of our clients, and this is Phillip we’re talking about—I’m sure he’s probably listening to the show—and what happened? He got in a bit of a quagmire with buying a property in an HOA, and then one of the problems you might encounter from time to time is a rental restriction, right?
KEN: Yeah, so one of the things—one of our lessons from 2012, we never encountered it before, and then we encountered it on about three different properties all about the same time. Is we bought into an HOA and found out after the fact that there was a leasing restriction, and so, the tenant had actually been in the house for a while. We later find out that we’re not even allowed to rent in that particular neighborhood, and the HOA came down on us pretty hard and said, hey, you need to get the tenant out of there. And so, luckily, the tenant was willing to oblige, and he moved out, and we actually put Phillip’s house on the market just to sell it. He didn’t want to try to get too creative and do an owner finance or anything like that, he just wanted to go ahead and sell the property. And so we put the house on the market, and the house sold literally in about 30 days, for almost $30,000 more than what he had paid for it only a year ago.
JASON HARTMAN: You know, that’s so—in life, that is so true so many times. Things can just be a huge blessing in disguise. I mean, what a nice capital gain!
KEN: Yeah! I mean, he wasn’t complaining.
JASON HARTMAN: Yeah. Granted at first I bet he was bummed out. I haven’t talked to him about this particular thing, and I think he recently signed up for our Meet the Masters event, which is coming up in January, or maybe it was the Austin Property Tour, I’m not sure, but I saw a registration come through for Phillip, so we’re looking forward to seeing you. And at first, he was probably concerned and bummed out, right?
JASON HARTMAN: Thinking, this is going to be bad!
KEN: He was nervous at first. We consulted with an attorney, just trying to figure out the best way to get the tenant out and keep the HOA happy. And he was a little concerned at first, but when we started pulling comps, and seeing what the neighborhood was doing, and the market was picking up, you know, it didn’t look so bad. And then obviously, to our pleasure, the house sold quickly for a really good profit.
JASON HARTMAN: Yeah, fantastic. And, give us an idea as to, in your marketplace, what percentage of the properties that you do are inside a homeowners association, and what percentage are outside with no HOA?
KEN: I would say about 15% of our houses are in HOAs. And a part of that again is just the function of what year they were built, and what price point they are at. So you know, if we’re selling a house north of 110, there’s a pretty good likelihood that it’s an HOA. But if it’s less than that, then chances are there’s not an HOA. So, it’s really more a function of our price points.
JASON HARTMAN: Sure. And when you consider lower end, middle, and high end properties in your market, put numbers on those right now if you would.
KEN: Sure, so low end, and I would say—we don’t even operate in low end. But the low end in Atlanta, you can buy houses and fix them up and be in them for $40,000. Now, they’re not necessarily the kinds of neighborhoods you want to be in at night. Where middle of the road, what we would consider B property, is gonna be closer to 60, 70, $80,000, somewhere in that ballpark. And then our A properties are going to be around $90,000 and above. And again, those are still starter homes. But they’re homes that make sense from an investment perspective.
JASON HARTMAN: And they’ve got a decent pride of ownership in the neighborhood, right?
KEN: Right. Those neighborhoods are going to be primarily owner occupied neighborhoods.
JASON HARTMAN: Good! Well, anything else you’d like to share before we go to our guest today?
KEN: No, that’s it! I appreciate you having me on the show!
JASON HARTMAN: Alright, well thanks for joining us! We will be back with Doug Brunt talking about the Ghosts of Manhattan in less than 60 seconds.
ANNOUNCER: Here’s your chance to catch up on all of those Creating Wealth shows that you’ve missed. There’s a 3-book set with shows 1-60, all digital download. You save $94 by buying this 3-book set. Go ahead and get these advanced strategies for wealth creation. For more details, go to www.jasonhartman.com.
JASON HARTMAN: It’s my pleasure to welcome Doug Brunt to the show. He is the former CEO of Authentium, and author of Ghosts of Manhattan. And we’re going to talk about some fascinating financial history today. And welcome, Doug. How are you?
DOUG BRUNT: I’m doing great! Thanks for having me on the show.
JASON HARTMAN: Good! I always like to give our listeners a sense of geography. Where are you located today?
DOUG BRUNT: In New York.
JASON HARTMAN: You’re right in the heart of it [LAUGHTER].
DOUG BRUNT: That’s right.
JASON HARTMAN: Right in the heart of it. Well hey, tell us about Ghosts of Manhattan! Which is actually a novel. But so many of these novels have such interesting true-to-life comparisons. So I don’t know if they’re pure novels, in any sense. But tell us about Ghosts of Manhattan.
DOUG BRUNT: It is a fictional story, but it is set within a historically accurate context in 2005, 2006, so, the years leading up to the mortgage-related financial crisis. And it follows the life of a fixed income salesman for Bear Stearns. And, so you really get a look at Wall Street from the inside out. It has that sort of insider baseball feel of what is life like day to day on the trading floor. As well as away from the office, which is, for folks who are on fixed income sales and trading, still part of the job. There’s a lot of nightlife and entertainment that goes with that job. Because they are essentially trading commodities. It’s mortgage-related bonds in the secondary market, so it’s all the same bonds; you can get the same quote from any bank or any broker, and so, people do business with the folks that they’ve been out to the dinners with, and the strip clubs with, and things like that. So, it follows this bond salesman, and his personal life. There’s a lot of the Wall Street backdrop that comes into play there, so what’s going on with the positions the banks are taking, what’s going on with the mortgage crisis. But also, all of his relationships, and what these people are really like more in a day to day, it gets into the human side of it. What’s going on with his marriage, and his relationships with siblings and friends and parents.
JASON HARTMAN: Now that’s the character in the book though, right?
DOUG BRUNT: Right, the main character, Nick Farmer, is the bond salesman at Bear Stearns. But there’s a lot of accurate detail in terms of New York City, and the different banks, and the places they go—the restaurants and bars are all places I’ve been, and know people who frequent these places. There is a lot of information—in broad strokes, I’ve got a lot of feedback from people who have worked in this area, and in broad strokes they’ve said it’s entirely accurate on what leads up to some of the issues with the crisis, as well as the lifestyle side of it.
JASON HARTMAN: Oh, sure. And when you say the lifestyle, you talk about, whoever wines and dines them the most, makes the deal, because it is a commodity item. So, I assume it’s even more than strip clubs, it’s actual hookers—I mean, I’ve heard stories about that too.
DOUG BRUNT: Yeah, there’s a lot of all of that. And you know, you go out for a big night, at—Danielle’s is a very expensive restaurant in New York City. You go out for this incredibly high-end dinner with bottles of wine that are $5,000+ on a regular basis. On the expense tab. But the next day, we throw a few trades your way, and the commissions are far in excess of any $5,000 bottle of wine.
JASON HARTMAN: Yeah, yeah. Well, Wall Street—it just, to me, seems like a modern version of organized crime. But, and I think there are a lot of people that share that view. But, what are some of the comical stories that came out of doing research for the book, and in the book? And tell us more about that lifestyle component. I think everybody’s interested in the human interest side, even if they look at some of these people with a lot of disdain.
DOUG BRUNT: On that point, some other feedback I got from the book—and hey, not everybody’s a terrible guy on Wall Street, and that really is true. There is a subset that lives their life very much the way it’s depicted in this book. But there are also folks, you know, Wall Street obviously serves a function that is positive to the economy, but there are inefficiencies in the way Wall Street works, and there are ways to extract huge amounts of money for not, I would say, adding value to society, I guess. But, there are very good people on Wall Street, nice people, and people who are not derelicts out till 3 in the morning on a Tuesday at a strip club.
JASON HARTMAN: And I believe that, and I know I’m making a sweeping generalization. But—
DOUG BRUNT: There are also things I’ve made sweeping generalizations in the book too.
JASON HARTMAN: Right, right. Apologies to those who deserve it, and no apologies to those who don’t, how’s that sound?
DOUG BRUNT: There we go.
JASON HARTMAN: There’s a lot of crooks on Wall Street too. And you know, a lot of people who are just frankly caught up in the machine that is Wall Street. They went into a career in the financial services industry, they wanted to be a trader, it looks pretty glamorous ever since the 80s movie, that first Wall Street movie, of course. And other depictions of it. And, you know, the people get in, and they find they don’t know the way the game works until they’re really in it, of course. So.
DOUG BRUNT: And you’re also at that point making a heck of a lot of money. There are—this is something that’s talked about a bit in the book, but in most industries that you and I might know—for 250 or $300,000 as an annual salary, you can hire a very talented person with a stellar education who’s going to come in, work hard, take pride in his work, do a nice job, and live well on that money. But someone making $300,000 on Wall Street who’s you know, even in his late 20s or 30s, I mean, that guy is a loser on Wall Street! There’s no trader at Bear Stearns making that level of money. It’s $2-$3 million a year for someone who’s, you know, early 30s and doing reasonably well as a trader.
JASON HARTMAN: Wow. That’s just unbelievable. Now, do those guys all have MBAs, or are there non-MBAs there too?
DOUG BRUNT: There are plenty of non-MBAs. There’s a lot of folks who come in right out of undergrad, and you know, just stay with the trading—stay on the trading floor and work their way up.
JASON HARTMAN: Amazing. So tell us more about some of the comical stories, and just more the lifestyle stuff, and then I want to dive into the more technical side of it, maybe.
DOUG BRUNT: There are those who are more on the entertainment side of the business. So, they don’t take positions in the bonds—they basically broker transactions between people taking positions. So, they’re the ones doing heavy amounts of entertainment. And they’ll go to a strip bar, and it’s almost like that scene in Goodfellas, when Ray Liotta comes in, and he goes to the back, he gets the Goodfellas to walk to the back stage in the kitchen, and they plant a table right out in front of the things, so everyone in the strip bar would know this person, and he’s entertaining clients. He’s in several nights a week dropping enormous sums of money, and they become, you know—it’s like, those guys and the Russian Mob are the best customers, and well known in the strip clubs. Where more than just stripping is going on.
JASON HARTMAN: Exactly. So, your view of life on Wall Street, from this perspective—is the lifestyle just really corrosive? Does it have to be marriage-jeopardizing? Is the stress level just enormous? I mean, give us a little example inside these guys’ heads.
DOUG BRUNT: It can definitely cause stress on a marriage. If you are still in the broker kind of business. Because entertainment is such a big piece of it, you really are out a lot on the weekdays. And when you’re right out of college, all that’s terrific—you’re making great money, everything’s on an expense account, you’re basically partying more than you did in college, and doing sort of a higher end type of partying. But when you hit your mid 30s, as the character in this novel does, and he’s thinking about kids, or some already have kids—it really collides with some of the values that you need to have in a good marriage.
JASON HARTMAN: Yeah, no question about that. and we should mention—so you’re married to Megyn Kelly! Is that correct?
DOUG BRUNT: That’s right.
JASON HARTMAN: The FOX News anchor. Very famous, and she’s great, by the way. Love her work. Has she been a help in terms of writing the book, and getting some insider stories?
DOUG BRUNT: Not on the insider stories bit. I mean, the content hasn’t come from her, but she’s the first person to read anything that I write. And she’s got great judgment on story, and has given me great feedback. It’s funny, because my agent is formerly with a publishing house, so has been an editor in the past, and so, my agent and Meg would read the book first, and separately give me feedback, but their feedback would almost always overlap entirely. They had the exact same thoughts, and not just little things, but more sophisticated things and ideas for structure of the story. Which was always very comforting, to have these two people who I know well and trust come back with some of the same thoughts. But she was a very talented editor for me.
JASON HARTMAN: Fantastic. So, looking at kind of a history of the way this whole thing went down, you know, if you had to kind of explain the financial crisis to an outsider, to someone that didn’t know much about it, that was not very informed or interested in this thing, what would you say happened? I mean, can you pin the blame on one company, or one concept? Was it CDOs, Collateralized Debt Obligations, was it Greenspan? I mean, that whole—the whole system is so complex and intertwined. But, you know, just kind of a very high level view of what happened. It’s just sort of interesting, once in a while, to back up and look at things that way.
DOUG BRUNT: I have thought a lot about this. Because it’s a thread within the book. I mean, the book really is a human story, but this is the backdrop, and so, I have—I view it as there are five kind of players in this. If I had to pick one, it would be the ratings agencies—Moody’s, Standard & Poor’s. But it’s sort of five things that happened in sequence that led to this huge eruption. So, #1 was the government promoted the idea that everyone should own a home.
JASON HARTMAN: Yeah, so that goes back to George Bush and Alan Greenspan—
DOUG BRUNT: It actually goes back to Bill Clinton.
JASON HARTMAN: Fair enough.
DOUG BRUNT: He had legislation passed in like ’94, ’95, and the mandate of the legislation was to dramatically increase American homeownership.
JASON HARTMAN: And when you talk about Clinton in that, are you talking about the CRA? The Community Reinvestment Act?
DOUG BRUNT: No, but I’m blanking on the name of the legislation.
JASON HARTMAN: And that’s okay, because the name of any given legislation never seems to have much to do with what it actually does [LAUGHTER].
DOUG BRUNT: Right. But it does get back to about ’94 or ’95. So, the government says, everyone should own a home. Which is a great goal, but maybe it misses the mark in terms of what’s realistic a bit. So that’s #1. So #2 is, then the banks start making loans like crazy, and not looking at the risk of these borrowers—the ability of these borrowers to repay. So they’re essentially just writing these checks out. And there are fees associated with initiating a mortgage, and so the banks are making money writing these mortgages. They’re just writing with abandon. So that’s #2. You’ve got these very bad loans out there. Typically with a teaser, too. It’s like a two year, you don’t have to make a payment back.
So there’s really a high incentive to get these mortgages out there, get these people in homes that they own. That’s #2. #3 is, Wall Street comes along and bundles up all of these mortgages into securities, the mortgage-backed loans, and starts selling them. And again, there’s money to be made by bundling this stuff up and selling it. So the banks are making money, and now creating these securities. But these securities are essentially bombs that are going to blow up. They’re bundling together these mortgages that are doomed to fail. You know, it’s the classic story of the bartender who buys the million dollar home—the one that we’ve all heard about the mortgage crisis, you know? So that’s #3. #1’s government, #2’s the banks write the mortgages, #3 is Wall Street bundles up all the mortgages into these mortgage-backed securities.
JASON HARTMAN: Right, right. So before we leave #3, can we talk about that a little bit? And was it just the quality of the borrowers, was it the adjustable rate loans, or, even more sinister, was it the fact that loans were being sold many many times, and they weren’t really even in the pools? In other words, you know, nobody was looking at what they were buying when they bought these pools of mortgage securities with thousands and thousands of loans in them. Tens of thousands, maybe hundreds of thousands, I don’t even know. But, you hear the stories about the same loan being in 33 different pools. The loans weren’t really there! They were sold over and over again. It was just a complete show game.
DOUG BRUNT: Yeah, and that kind of gets to the 4th point, actually. But your first couple things, yeah, the adjustable arms came along and just creamed people when the arm came up, and there was definitely some of that. But the 4th point I would make is, Moody’s and Standard & Poor’s just missed it. And this is the one, if I had to pick one as, this was the biggest problem—because you know, the government, they wanted to do the right thing, they wanted people in homes. The banks, they were sort of following through, writing loans. They probably could have screened for better borrowers. But the government was saying, we want this. And then Wall Street does what Wall Street does. They bundled up all the securities that were out there, packaged them up, and sold it.
Moody’s and Standard & Poor’s should have come along and done exactly what you were just saying, which is look under the hood and say, this is a disaster! This is doomed to fail. This is not a good security. It gets, you know, a D. But they looked around and said, well, there are a thousand, whatever the number is, so the risk is all diversified, so it gets an A rating. And no one really looked at these loans and said, well, in two years, when this tease is up—they don’t have to make any mortgage payments for the first two years. But then when the tease is over and they have to start making payments, this person clearly does not have the finances to make the payments! So this is going to be a mortgage that fails. And when they start testing these things, they should see that there’s like a 30, 40% fail rate inside these securities. But Moody’s and Standard & Poor’s didn’t do that. They just said, there are a thousand securities, the risk is diverse enough, so it gets an A rating.
So now you have these bombs out there, but then Moody’s and Standard & Poor’s hide the bombs underneath an A rating. So they’re out there trading, and then that leads to the final thing, the 5th and final. So you’ve got government promoting it, you’ve got banks writing the mortgages, you’ve got Wall Street packaging them up, you’ve got Moody’s and Standard & Poor’s missing the boat on the rating, and then 5th and finally is, AIG comes along and does the credit derivatives. So they take these toxic mortgage-backed securities and they start writing what is—the credit derivatives are basically insurance, so it’s insurance that this security will not fail.
And it’s a way for—this is getting a little bit technical, but it’s a way for the banks to get more leverage. So I can start selling this, and if I insure it, I basically cover myself and I can sell even more. And so, they buy the derivatives, which is—it’s like, it’s like writing a homeowner’s policy on a house, but if you drive through the neighborhood, you can see the house is burning down. But they not only do it to one homeowner, they keep selling more and more derivative products on it. It’s like having ten homeowners’ policies on a single house that’s actually burning down. So what AIG did, by writing these derivative products, was magnify the problem way beyond the scale of what it really should have been. I mean, there were more credit derivatives out there being traded than the actual bonds that were the underlying security that they were insuring. So the problem became massive in scale.
JASON HARTMAN: Yeah. And here’s the thing about AIG and this type of thing, is that they were “insuring” this product, but unlike a regular insurance company that is required by law to have a certain amount of reserves to pay claims, they didn’t! They weren’t governed like an insurance company in this activity. What if these go bad, and what if we have to pay a claim, if you will. Even PMI—Private Mortgage Insurance—they have that. But here they could just write this “insurance.”
DOUG BRUNT: Right, and they were so unfettered, and it was exactly—there’s a line in my book, it says, if you compensate a person based on volume, he’s going to give you volume. So you’ve got someone at AIG saying, well, if I write 10 policies on this horrible security, they’re going to pay me x. And if I write a thousand, they’re going to pay me 100 times x. So they’re just cranking this stuff out. And as you say, not in any way that is regulated. And so they just scaled up the problem. And again, they’ve got the Moody’s and Standard & Poor’s A rating on the bonds they’re writing these policies under, which again, if Moody’s and Standard & Poor’s—they could have stopped the problem by actually examining this. Instead, what a few people do, if you read Michael Lewis’ The Big Short—
JASON HARTMAN: Oh, yeah, The Big Short, love it.
DOUG BRUNT: —Steve Eisman come along, and they actually do look under it. And these aren’t even sophisticated—you know, the person at Eisman’s shop who did it wasn’t some long term finance person, they just had some common sense and said, these look like mortgages that are not good.
JASON HARTMAN: Right.
DOUG BRUNT: And it looks like it could fail. And so they start betting the other way. And of course, there’s only a handful of people that do, and of course, they all do very well.
JASON HARTMAN: Yeah, they sure did. Well, it seems like our country has a very short memory, and maybe that’s intentional. Because it’s not rewarded to have a long one. I’m not sure. But I already see signs in the mortgage market of new pressure by the Obama administration to make more loans to people, new funny products coming out, and reemerging again. Do you think—I mean, could this happen again?
DOUG BRUNT: As you suggest, you know, memories can be short, and the motivations behind it, which, the motivations in every one of the five steps that I mentioned were—except for Moody’s, really, which was just incompetence—was to make money. And so there has to be central regulation to have the Gordon Gekko “greed is good” thing, to make it—which it can be, and in most cases greed is predictable, and you can manage predictability to a positive outcome, you know. But if you don’t have regulations in place that say, alright, this person of course, if we’re going to pay him more for doing 100 trades than we would for 10 trades, we need to make it better for everyone that 100 trades happens. That needs to be the right outcome. As opposed to some toxic outcome. So, I’m not sure that the regulation is sensible yet. So, yeah. I guess it is possible.
JASON HARTMAN: I really take a look back further, you know, I’ve got a pretty libertarian mindset, and I think that when you go back even further, it’s not necessarily that more regulation is needed. That’s just my humble opinion. And you’re welcome to differ. It’s that—if government got out of the game all together—you know, Fannie Mae didn’t exist in the first place, a lot of this never would have been able to happen. So if these companies weren’t allowed to get so big, and in a way, many of them are allowed to get so big because of regulation! Because regulation limits new entrance into a market. We all know that, instinctively, that the more you regulate something, the fewer players can play the game, because it costs more to comply with regulations. Certainly very few of us are going to take a company public, because the regulations are so onerous. So, that limits the number of public companies. And yeah, under the guise of also limiting fraud and so forth. You can say that, but to some extent, it all becomes a good old boys club and creates the too-big-to-fail problem in the first place. I mean, that’s my thesis. When you back way up to the Great Depression [LAUGHTER] you know? And I think it can be argued. Your thoughts on that?
DOUG BRUNT: I generally fall in your camp, which is free markets, less regulation. And so, again, I don’t think it’s more—I just think it’s—maybe it’s less regulation, but just sensible regulation. And one of the areas would be to try to match compensation with performance. And the performance of the trader might not play out in a 12 month bonus period time cycle—it might be 2, 3 years. So, many of the Lehman Brothers had its best year in ’07, and bonuses were biggest off the ’07 year, which is when exactly all the positions that they were building up were what killed the farm in ’08. They take huge bonuses out to all these people who ended up destroying them for that work.
JASON HARTMAN: Yeah, they’re rewarding them far too early.
DOUG BRUNT: Yeah, so there should be—maybe there’s some way to measure the performance over a period of years, and compensate based on that. And again, this is tricky stuff, but, you know, they are doing some of this now too. There are sort of clawbacks, and there’s vested equity, where it divests over a period of time, and there are ways to look at doing that, to see that the work that you did, if it’s horrendous, that the compensation is—
JASON HARTMAN: I don’t have a lot of faith that a clawback would actually work, though. Because when these companies are going down, and everybody’s lining their own pockets with their bonuses, you know, I don’t know. I kind of doubt that, at least in the last cycle, clawbacks would have even worked. Unless the government enforced them, and the government stepped in and said hey, give back your money. But most of the time they usually spent it anyway. Just look at the Enron guys, right? And Bernie—
DOUG BRUNT: Bernie Madoff?
JASON HARTMAN: No, I was actually talking about Kazinsky, Kazinsky [Kozlowski]. I mean, what is it, the $6 million shower curtain? Most of his money’s been spent. So, that’s the thing. But anyway, yeah. Very interesting. Well, tell us, you know, anything else you want us to know about the book, or just your thoughts on the financial markets and Wall Street in general?
DOUG BRUNT: Well, the book, you know—again, I would say that it’s educational on the Wall Street side of things, but again, it’s really a human interest story set inside this period of time. It is just out in paperback, actually. I guess ten days ago, or so. And there’s more information about it, and me, at www.douglasbrunt.com is my website, and Twitter is @DougBrunt.
JASON HARTMAN: And of course the book’s available on Amazon and all the usual places, right?
DOUG BRUNT: All the usual places. Barnes & Noble, Amazon, it’s in a lot of the small—it’s got pretty good distribution in terms of the physical books being out there in stores and libraries and that sort of thing.
JASON HARTMAN: Fantastic. And just one last thing for you. I mean, you gave up a very lucrative career with Authentium in Internet security. You’re an entrepreneur, and you gave that up to write. It begs the question, why?
DOUG BRUNT: I’ve always loved writing. And I’ve never pursued it professionally, but just as a hobby. So I was CEO of Authentium for a few years, and the last year was—it was stressful, and I was frustrated, and I was traveling a lot, too, because the headquarters of the company was in Florida, but I was living in New York, and so I did a lot of flying out on Monday morning, flying back on Thursday night, Friday morning. And so, as a way to relax, instead of reading, I started writing this book. I just had an idea for a book, and I thought, it’d be fun to sort of toy around with. And I wrote it mostly on planes, or in the airport lounges waiting for planes, and things like that, over the course of a year. And when I—I loved doing it. It really was relaxing for me. I couldn’t wait to get to it.
And when I finished the first draft I showed it to Megyn, and she read it and said, this is actually good! You should show this to somebody! And so, through friends, found an agent who was willing to take a look, and the agent came back and said, I like this. If you’re willing to work with me on some things, I think you’ve found an interesting voice, etcetera, etcetera, and I’ll represent you. And I said of course. And so, I worked with the agent for a period of time, and I thought, you know, I love doing this. And the company actually reached a point where, in 2011, I sold the majority of the assets off to a different guy—NASDAQ was the company, bought most of the company, and there’s only a small piece left, and our COO took that over, and I left to write full time. And that’s right around the time when I got the deal with Simon and Schuster to publish it, and I thought, I’m going to give writing a go. I’ve actually just finished the second book. It’s not—my publisher hasn’t even seen it yet. It’s still kind of with me in the office, and my agent’s read it, and Megyn’s read it, of course. But I’m just finishing that up and getting ready to get that one out, which is more about politics.
JASON HARTMAN: Fantastic. Well, you’ve certainly got a lot of interest in terms of followers on Amazon.com. 229 great reviews, so that’s fantastic. And keep up the good work! Keep telling the story, and we’ll look forward to your next book. Do you have a title for that one yet, Douglas?
DOUG BRUNT: No, not yet.
JASON HARTMAN: Good stuff. Well, www.douglasbrunt.com, and the title of the book is Ghosts of Manhattan, and ‘ghosts’ is plural, and thank you so much for joining us today! Appreciate it, Doug.
DOUG BRUNT: Thanks very much for having me on.
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Transcribed by David
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Episode: CW 337: The Collapse of Bear Stearns with Douglas Brunt Author of "Ghosts of Manhattan" & Former CEO of Authentium
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