In today’s Flashback Friday episode, Jason Hartman interviews Doug Brunt, former CEO of Authentium and author of “GHOSTS OF MANHATTAN.” The book describes a time before Bear Stearns collapsed, when there were boundless bonuses, expense account routinely used for bar tabs, visits to strip clubs, and worse. The two also talk about the government’s mandate to promote homeownership and the lending institution’s role that led to a collapse.
Announcer 0:00
This show is produced by the Hartman media company. For more information and links to all our great podcasts visit Hartman media.com. Hey, this is Jason Hartman, thank you so much for joining me. Do you know what day it is? Yes, it is flashback Friday, where you hear the best of the creating wealth show and you hear some good prior episodes, some good review. Remember, we’ve got almost 500 episodes out. And you know what? iTunes doesn’t even hold them all if you’re an iTunes listener, if you are listening on Stitcher, thank you for joining us. So we want to bring you some good review stuff. Now. What’s interesting about flashback Friday, it’s a little scary for me. I got to be very, very candid with you on that. Because you the listener, you get the chance to hold my feet to the fire. Did I make any predictions? Was I right? Was I wrong? I’ve been right about a lot of things, but I’ve been wrong about a few. So you can give me a hard time about that if you wish. But it’s flashback Friday, and we will give you the uncensored Best of the creating wealth show with a prior episode. So let’s dive in. Here we go. Remember, this is not current. It’s flashback Friday.
Announcer 1:23
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 2:06
It’s my pleasure to welcome Doug Brunt to the show. He’s the former CEO of authentic comm and author of ghost of Manhattan. And we’re going to talk about some fascinating financial history today. And welcome, Doug, how are you? I’m doing great. Thanks for having me on the show. Good. I was like to give our listeners a sense of geography. Where are you located today? In New York, you are in right in the heart of it? That’s right, 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 you know, I don’t know if they’re pure novels in in any sense. But tell us about ghosts of Manhattan.
Douglas Brunt 2:44
It is a fictional story, but it’s set within historically accurate and 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 it’s 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 in 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’re essentially trading commodities. It’s it’s mortgage related bonds in the secondary market. So it’s all the same bond and get the same quote from any, any bank, or any broker. And so people do business with the folks that they’ve been out to the dinners with in the strip clubs with and things like that. So it follows this bond salesman and his personal life. It’s, 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 his relationships? And what what these people are really like more on a day to day and 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 4:02
Now, that’s the character in the book though, right?
Douglas Brunt 4:05
Right, because the main character, Nick farmer, is the bond salesman and they have Bear Stearns, but there’s a lot of accurate detail in terms of New York City and the different banks and the places that they go, the restaurants and bars are all places I’ve been and know people who frequent these places, and there is a lot of information in broad strokes. I’ve gotten a lot of feedback from people who have worked in this area and in broad strokes. They 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. Oh, sure. Sure. And when you say the lifestyle you talk about, you know, so it’s whoever wines and dines them the most makes 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. Yeah, there’s a lot of all of that and and so you know, you go out for a big night for at a you know, at some expensive you know, Danielle is a very expensive restroom. New York City us for this incredibly high end dinner with bottles of wine that are $5,000 plus on a regular basis on the expense tab, but the next day, we throw a few trades away and the Commission’s are far in excess of a $5,000. bottle of wine.
Jason Hartman 5:14
Yeah, you know, well, Wall Street, it just to me seems like the modern version of organized crime.
Douglas Brunt 5:22
But and I think there are a lot of people that share that view. But what are 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 with a lot of disdain. And you know, on that point, some other feedback I got from bogus, hey, not everybody’s a terrible guy on Wall Street. And that really is true. And there is a subset that lives their life very much the way it’s depicted in this book. But they’re 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 and nice people and people who are not derelicts out to three in the morning on a Tuesday at a strip club.
Jason Hartman 6:20
Remember, you’re listening to flashback Friday. Our new episodes are published every Monday and Wednesday. And I believe that and I know I’m making a sweeping generalization, but there are those who think I made a sweeping good. Right, right. Right, right, you know, apologies to those who deserve it. And no apologies to those who don’t how’s that sound? There we go. There’s, 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, the first Wall Street movie, of course, and, and other depictions of it. And you know, they people get in, and they find they don’t know the way the game works until they’re really in it, of course, so
Douglas Brunt 7:10
well. And you’re also at that point, taking a heck of a lot of money, you know, there are there, 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 and work hard, take pride in his work, do a nice job and, 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 there’s no trader at Bear Stearns, making that level of money, it’s two to $3 million a year for someone who’s you know, early 30s, and doing reasonably well as a trader.
Jason Hartman 7:49
Wow, that’s just unbelievable. Now, do those guys all have MBAs? Or are there non MBAs there too,
Douglas Brunt 7:55
there are plenty of non MBAs and there are a lot of folks who come in right out of undergrad. And, you know, just stay with the trading standard trading floor and work your way up.
Jason Hartman 8:03
Yeah, amazing. So tell us more about the you know, some of the comical stories and just more of the lifestyle stuff. And then I want to dive into the more technical side of it, maybe
Douglas Brunt 8:13
there are those who are more on the entertainment side of the business. So they don’t take a position 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 they’ll be it’s almost like that scene in Goodfellas. When Ray Liotta comes in, he goes to the baguettes, the Goodfellas walk through the backstage in the kitchen, and they’d like playing a table right out in front of the thing. So everyone in this report 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 in the Russian mob are the best customers and well known in the strip clubs, where as you suggested, more than just stripping is going on. Yeah,
Jason Hartman 8:56
exactly. So you your view of life on Wall Street from 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,
Douglas Brunt 9:13
it can definitely cause stress on a marriage if you are still in the brokers broker kind of business, because entertainment is such a big piece of it. And you’re really are out a lot on the weekend. You know, when you’re right at a college all that’s terrific. You’re making great money, everything’s on an expense account, you’re going 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 it’s thinking about kids here, you know, some already have kids and you’re it really collides with some of the values that you need to have in a good marriage.
Jason Hartman 9:47
And no question about that. And we should mention so you’re married to megan kelly, is that correct? That’s right. fed the Fox News Anchor very famous and she’s great. By the way, love her work. Has she been been a help In terms of writing the book and getting some insider stories,
Douglas Brunt 10:03
not on the insider stories, that I mean, I, that content hasn’t come from her, but she’s the first person to read anything that I write. And has. She’s got great judgment on story and has given me great feedback. It’s funny because I, my agent, is formerly with the publishing house has been an editor and editor in the past. And so my agent and Meg would read the books first and separately, give me feedback with their feedback, which was almost always overlap entirely, you know, they have the exact same thoughts and, and not just like little things, but more sophisticated things and ideas for for structure of the story, and 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’s, she was a very talented editor for me.
Jason Hartman 10:50
Yeah, fantastic. So looking at kind of the history of the way this, 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 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 CTOs collateralized debt obligations? Was it Greenspan, I mean, you know, that whole, the whole system is so complex and inter intertwined. But you know, just kind of a, a very high level view of what happened. It’s just sort of interesting once in a while to back up and, and look at things that way.
Douglas Brunt 11:35
I have thought a lot about this, because it’s a thread within the book. And the book really is a human story. But this is the backdrop. And so i have i’ve viewed it as there are five kind of players in this, if I had to pick one, it would be the ratings agencies, Moody’s Moody’s Standards Board, but it’s sort of five things that happen in sequence that led to this huge eruption. So number one was the government promoted the idea that everyone should own a home?
Jason Hartman 12:05
Yeah. So that goes back to George Bush and Alan Greenspan. Is his
Douglas Brunt 12:08
back that Bill Clinton?
Jason Hartman 12:10
Well, fair enough? Yeah, fair enough. He had legislation passed in, like 9495. And the mandate of legislation was to dramatically increase American homeownership. And when you’re when you talk about Clinton in that, are you talking about the CRA, the Community Reinvestment Act, or?
Douglas Brunt 12:25
No, I’m blanking on the name of the legislation.
Jason Hartman 12:28
And that’s okay, because the name of any given legislation never seems to have much to do with what it actually does,
Douglas Brunt 12:36
right. But it does get back to like about 9495. So the government says everyone should go to home, which is, which is a great goal, but maybe it misses the mark. And in terms of what’s realistic, a bit, so that’s number one. So number two is then the banks start making loans like crazy, and not looking at the risk of these borrowers or the abilities borrowers to repay. So they’re essentially just writing these checks out, and they’re, you know, they’re fees associated with initiating a mortgage. And so the banks are making money writing these mortgages, they’re just writing with with a band. And so that’s number two, you got these very bad loans out there. Typically, with a with a teaser to their, you know, 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 and get these people in homes that they own. So that’s number two, number three is Wall Street comes along and bundles up all these mortgages into securities, the mortgage back loans, and start selling them. And again, there’s money to be made by bundling the stuff up and selling it to the banks or making money now creating these securities. But these securities are essentially bombs that are gonna blow up and they’re 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. And the other one, we’ve all heard about the mortgage crisis, you know? So that’s number three. Number one is government. Number two, the banks, right? The mortgages. Number three is Wall Street bundles up all the mortgages into these mortgage backed securities.
Jason Hartman 14:02
Right, right. So before we leave number three, 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, you know, with thousands and thousands of loans and them 10s 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. They were the loans. The loans weren’t really there. They were sold over and over again. It was just a complete show game.
Douglas Brunt 14:50
Yeah. And that kind of gets to the fourth point, actually. But so the first year your first couple things that Yeah, the the adjustable arms came along just creamed people. When the when the Arm came up, and there was definitely some of that. But the fourth point I would make is Moody’s and standard and poor. 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 want to do the right thing on people in homes, the banks, they were sort of following through the right loans, they probably could have screened for better borrowers, but you know, the government saying, We want this, and then Wall Street does Wall Street does a bundle up, all these securities are out there, and they packaged up and sold it. Moody’s and Standard and 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, they’re there 10,000, you know, the 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 piece is up, so they don’t have to make any mortgage payments for the first two years. But then when the when the TV is over, and they start making payments, this person clearly does not have the finances to make the payments. So this is going to be a mortgage that fail. And when they when they start testing these things, they should see that there’s like a 30 40% fail rate inside the securities. But Moody’s and standard Poor’s didn’t do that. They just said they’re 1000 securities, the risk is diverse enough, so it gets an A rating. So now you have the bombs out there. But then Moody’s and Standard and Poor’s hide the bombs underneath and a rating. So they’re out there trading. And then that leads to the final thing, the fifth and final. So you’ve got government promoting it, you got banks, writing the mortgages, you got Wall Street, packaging them up, you’ve got Moody’s and Standard and Poor’s missing the boat on the rating. And then fifth, 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 the security will not fail. And it’s a way for this is getting a little bit technical, but it’s, it’s a way for the banks to get more levered. So I can start selling this. And then if I insure it, I basically covered 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 houses burning down. But then not only do they sell one homeowners, they keep selling more and more derivative products on it. It’s like having 10 homeowners policies on a single house, that’s actually burning down. So what he did was by writing these derivative products, was magnify the problem way beyond the scale of what it really should have been. I mean, there, there were more credit derivatives out there being traded in the actual bonds, that were the underlying security, they were insuring. So the problem became massive in scale.
Jason Hartman 17:41
Just a reminder, you’re listening to flashback Friday, our new episodes are published every Monday and every Wednesday.
Douglas Brunt 17:50
Yeah, and here’s the thing about AIG and this type of this type of thing is that they were insuring in quotes, 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 but here, they could just write this in quotes insurance, right? And this was the total This was they were so unfettered, and it was exactly there’s a, there’s a line in my book that 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 gonna pay me x. And if I write 1000, they’re gonna pay me 10 100 times x. So they’re just cranking this stuff out. And as you say it not in any way that is regulated. And so they just, they just scale up the problem. And again, they’ve got the Moody’s and standard and poor a rating on the bonds that they’re writing these policies under which which, again, if Moody’s and standard didn’t come, they could have stopped the problem by actually examining this. Instead, what a few people do if you read Michael lewis’s The Big Short, oh, yeah, like the advisement come along. Yep. And they actually do look under it. And these aren’t even sophisticated. You know, the person at Iseman 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, right? And this thing looks like it could fail. And so they start betting other way. And of course, and there are only a handful of people who do but of course, they all do very well.
Jason Hartman 19:35
Yeah, 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 sees 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,
Douglas Brunt 20:03
as you suggest, you know, memories can be short and the motivations behind it, which the motivations in every of the five steps that I mentioned, were, except for Moody’s really, which was just in competence was to make money. And so there has to be sensible regulation to have the, the Gordon Gekko greed is good thing to make it which it can be 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, all right, 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, you know, that needs to be at 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. I I
Jason Hartman 20:55
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. But, and you’re welcome to defer. It’s, it’s that if government got out of the game altogether, you know, Fannie Mae didn’t exist in the first place. A lot of this would have never been able to happen 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 entrants into a market, we all know that, you know, instinctively that the more you regulate something, the fewer players can play the game because it cost 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, you know, 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. And I think it can be argued your thoughts on that?
Douglas Brunt 22:12
Well, I I generally fall in your camp, which is free markets, less regulation. And so again, I don’t think it’s more of a good 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 a trader might not play out in a 12 month bonus period. Time cycle might be two, three years. So many of the, you know, Lehman Brothers had its best year in oh seven, and bonuses were biggest off the Oh, seven year, which is when exactly all the positions that they were building up. Were what killed the firm, and oh, wait. So they paid huge bonuses to all these people who ended up destroying them for that work.
Jason Hartman 22:56
Yeah, they’re rewarding them far too early.
Douglas Brunt 22:58
Yeah. So there should be maybe there’s some way to measure the performance over a period of years and compensate based on that I know, and, again, this is tricky stuff. But you know, he, they are doing some of this now to their sort of clawbacks, and there’s bested equity, and with the vest over a period of time, and, and there are ways to look at doing that, to see that, you know, the work that you did if it’s horrendous compensation, I don’t have a lot of faith that a clawback would actually work though, because, you know, when these companies are going down, and everybody’s lining their own pockets with their bonuses, you know,
Jason Hartman 23:35
yeah, I don’t know, I kind of doubt at least in the last cycle, clawbacks would have even worked, you know, unless the government enforced them. And the government stepped in and say give back your money, but most of the time, they’ve usually spent it anyway. Just look at the Enron guys right and, and Bernie Madoff. Yeah, well, not No, I didn’t mean Bernie Madoff. I was actually talking about Kaczynski, Kaczynski, thank you. All right. Yeah. No, I mean, what is it the $6 million shower curtain was this money’s been spent? So. So that’s the thing. But anyway, yeah, very interesting. Well, tell us you know, any anything else you want us to know about the book or just your thoughts on on the financial markets and Wall Street in general? Well, the book you know, I,
Douglas Brunt 24:15
again, I would say that the 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, of of, I guess, 10 days ago or so. And there’s more information about it. And Douglas Brent calm is my website and Twitter is at Doug Bruns.
Jason Hartman 24:35
And, of course, the books available on Amazon and all the usual places, right?
Douglas Brunt 24:38
All the usual places in Barnes noble Amazon, in a lot of the small books, pretty good distribution in terms of the physical books being out there in stores and libraries and that sort of thing.
Jason Hartman 24:48
Fantastic. In Doug, just one last thing for you. I mean, you gave up a very lucrative career with authentic in internet security. You were an entrepreneur and you You gave that up to write Why? I begs the question why
Douglas Brunt 25:03
I’ve always loved writing. And I’ve never pursued it professionally, but just as a hobby, and so I was CEO of a phenom for a few years. And in the last years was, you know, it was stressful. And I was frustrated. And I was traveling a lot too, because the headquarters 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, 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 and I love doing it, I mean, 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 Megan, and she read it. So this is actually good, you should show this to somebody. And so through friends found an agent who’s willing to take a look and and the agent came back and said, I like this, if you’re willing to work with me on some things, I think you found an interesting voice and etc, etc, then I’ll represent you I said, of course. And so work 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 NASDAQ listed company. While most of the company, there’s only a small piece left, and I our CEO, took that over, and I left to right full time. And that’s right around the time when I got to deal with Simon and Schuster to publish this and decided 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 agents read it. And Megan’s read it, of course. So I’m just finishing that up and getting ready to get that one out, which is more about politics.
Jason Hartman 26:42
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? No, not yet. Good stuff. Well, Douglas brunt.com. And the title of the book is ghost of Manhattan. And ghost is plural. And so thank you for so much for joining us today. Appreciate it. Doug,
Douglas Brunt 27:08
Thanks very much for having me on.
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