Founders - #177 Robert Campeau (Junk Bonds and Retail Bankruptcy)

Episode Date: April 26, 2021

What I learned from reading Going for Broke: How Robert Campeau Bankrupted the Retail Industry, Jolted the Junk Bond Market, and Brought the Booming Eighties to a Crashing Halt by John Rothchild.----Get access to the World’s Most Valuable Notebook for Founders by investing in a subscription to Founders Notes----[0:01] A stranger comes to Wall Street, borrows nearly $4 billion to acquire a company that six months earlier he'd never even heard of. This transaction is scarcely settled before he's allowed to borrow $7 billion more to acquire a bigger company, making him a major force in retailing, an industry he knows nothing about. [11:16] Just a few weeks back, Randall had figured that Bob might be interested in attracting a single Brooks Brothers store into one of his malls. Now in a great imaginary leap, Bob had vaulted himself into the ownership of all forty-five Brooks Brothers stores. [15:01 Neither Bob nor his advisers really knew one investment bank from another. "It was basically a matter of looking up names in the Yellow Pages." [19:42] Lehman Brothers was impressed by two things: the man's obvious, if naive, enthusiasm; and the absurdity of his proposition. Those who doubted Bob could acquire Allied had grown into a large crowd that included Bob's brain trust, his advisers in Toronto, his Toronto bankers, his advisers from Paine Webber and his lawyer. [21:45] This was Citicorp's first clue they were dealing with a volatile character, who soon acquired the in-house nickname Mad Bomber. [29:26] The M&A department they established at First Boston helped the firm to a record $125 million in earnings in 1985, a long way from the $1 million it had earned in 1978. [33:45] He think's he's destined to take over Allied. His fortune-teller says so. [41:28] Bob understood that Citicorp and First Boston, who together had invested in $1.8 billion in the Street Sweep and who were going to make hundreds of millions in fees if this deal closed, were not about to let the deal fall apart because he didn't pony up his equity. They had more of a vested interest in this deal than he did. [42:53] His $4.1 billion acquisition included a whopping $612 million in fees, expenses, and financing charges. [50:00] The purpose of business is profit, not a platform for your ego. [53:24] Bob said, "Don't worry. If somebody lends a dollar, you take it. The ramifications can be handled later. There's always some way out." He goes bankrupt shortly thereafter. ----Get access to the World’s Most Valuable Notebook for Founders by investing in a subscription to Founders Notes----“I have listened to every episode released and look forward to every episode that comes out. The only criticism I would have is that after each podcast I usually want to buy the book because I am interested so my poor wallet suffers. ” — GarethBe like Gareth. Buy a book: All the books featured on Founders Podcast ----Founders Notes gives you the ability to tap into the collective knowledge of history's greatest entrepreneurs on demand. Use it to supplement the decisions you make in your work.  Get access to Founders Notes here. ----“I have listened to every episode released and look forward to every episode that comes out. The only criticism I would have is that after each podcast I usually want to buy the book because I am interested so my poor wallet suffers. ” — GarethBe like Gareth. Buy a book: All the books featured on Founders Podcast

This is the story of a marvelous financial calamity. Not so wonderful if you happen to be a creditor, of which there are 50,000 at current count, but marvelous in the way that it happened. A stranger comes to Wall Street, borrows nearly $4 billion to acquire a company that six months earlier he had never even heard of. This transaction is scarcely settled before he's allowed to borrow $7 billion more to acquire a bigger company, making him a major force in retailing, an industry he knows nothing about. The companies he acquired were successful retail enterprises, which before Bob accidentally having taken an interest in them, had a 50-year unbroken record of paying their bills.

They were also old-fashioned, that is to say, relatively free of debt. Acquired is really too bland a word to describe the involuntary surrender to the newfangled corporate coup known as the leveraged buyout. In theory, the LBO was supposed to boost productivity and increase profits once the new owner had supplanted the complacent, unimaginative, and overpaid former management. In practice, the LBOs landed both companies in Chapter 11. Among other notable side effects from Bob's joint ventures, abetted by the best and brightest bankers and buyout specialists on Wall Street, are the following.

8,000 workers laid off. First Boston, the once mighty investment firm, having to be bailed out after several of its bridge loans, went kapooey. The collapse of the junk bond market. A slump in profits for department stores nationwide. The dumping of merchandise on discount stores by manufacturers with no place to sell their goods. The cutback in department store advertising, which spread the misery into the newspaper and magazine businesses. The recession on wall street this was an era of debtor barons when billions went out to all sorts

of imaginative speculations bob arrived at the perfect moment in the final stage of the buyout frenzy when playing it safe counted for nothing the bankruptcy courts are now clogged with the results of these foolhardy endeavors. That is an excerpt from the book that I'm going to talk to you about today, which is Going for Broke, how Robert Campu bankrupted the retail industry, jolted the junk bond market, and brought the booming 80s to a crashing halt. And it was written by John Rothschild. Okay, so I had never heard of this book before. I actually got a message from a misfit named Chris, and I want to read part of the message he sent to me because he's talking about why he recommends this book,

and it's a great description of what we're going to learn today. He says, It is a how not to run a business and the perils of overconfidence with debt. This underrated book provides a glimpse into what happens when dreams become delusions. And that's a great way to think about what we're going to learn today. We're going to build an anti-model. So we're going to get the essence of who Bob was, how he made decisions. And we're going to be able to, in the future, when you think of a decision you have to make, you just think, what would Bob do and do the opposite? Because this guy is a

clown. So I'm going to jump right into the book. The intro I just read to you said right up front, the author tells us how it ends. So now we know he winds up in bankruptcy. We know that the supposed quote unquote best and brightest minds lent this guy $11 billion with almost no money down. Within a few short years, he's in bankruptcy. He's harmed tons of people because of his irresponsible actions. So now the entire book is about how did this happen. And I'm going to give you a little bit about his personality.

And you'll see the author is kind of ruthless in how he describes this guy. I'm going to call him Bob. Everybody calls him Bob. So I'm just going to refer to him as Bob the whole time throughout the book because I'm not sure how to pronounce his last name. Bob subjected himself to a barrage of improvements. First, a toupee, then hair transplants, facelifts, sheep brain injections for longevity, which he flew to Europe to receive, roughing rituals, health food diets, and a daily swim in a specially purified pool. The urge to supersede, to win, to maximize his every opportunity was a constant theme in his personal history.

And so now there's going to be a brief description of his early life and his career before he gets to Wall Street. So he says he entered the world in 1923 as the son of a blacksmith. He was raised with seven siblings. Seven other siblings died. His earliest known entrepreneurial venture was peddling newspapers on the street corner. In eighth grade, he quit school to take a job sweeping floors for 50 cents an hour. Bob's career in real estate, so before he was a rather successful real estate developer,

before he had this idea that he wanted to play on Wall Street, he wanted to go to the United States, which makes this story even more tragic because he could have just stopped there, stayed within his circle of competence, and he would have had a lot better life. He winds up losing everything, a multi-hundred million dollar fortune that he bets on just a really silly idea of being the world's largest retailer, even though he wasn't even particularly interested in retailing. So it says, Bob's career in real estate was launched somewhat accidentally in 1949 after he had tried a variety of jobs. So he worked as a mill writer. He hauled logs. He ran a small

grocery store. His cousin, Tony, had built a house in his spare time and then sold it and doubled his money in a few months. Impressed with these results, Bob suggested a partnership. Bob and Tony invested $5,000 in a house, doing most of the carpentry themselves, and then sold it for $7,500. This soon led to the buying and selling of more houses, which led to subdivisions, and then it just continues on and on. Bob foresaw the great post-war migration to the suburbs and put himself in the middle of it. He advanced from home building to subdividing, from subdividing to building apartments, from building apartments to putting up office towers. By the 1950s, Bob had become a comfortably wealthy man. In the 1960s, he became even wealthier, largely thanks to the half a million square feet of office space that he constructed in Ottawa. Most of it rented to the Canadian

government. In the condo boom of the 1970s, he expanded his operation in the United States, building condos and office towers in California, Florida, and Texas. All right, so let's go back to that thought for just a second that he would have been better off if he would have stayed within his circle of competence and never got involved in Wall Street. He might have still failed and went bankrupt anyways, because he loved being over leveraged. There's several other Canadian real estate developers that he gets involved with in the book. And they're talked about in the book about being much smarter and more wealthy than him. When this book ends, they're not bankrupt. I went and looked up and see if I could find books on these guys. Turns out they all go bankrupt too. But the reason I wanted to circle back around to that thought

is because really it's a fantasy because this guy was easily distracted. And as this next section I'm going to read to you, we're going to see a bunch of these anti-patterns, these traits that he had that we just want to do the opposite of. It says, I'm going to skip over the person's name because it's not important,

but he was also aware of Bob's wildcard reputation, his quick temper, his absurd grandiosity his tendency to veer off on exotic tangents outside of real estate many of which were pursued wholeheart wholeheartedly and then dropped so he jumps around a lot he's he's not thorough uh he's there's there's a difference between like we talk about ste Jobs, uh, reality distortion field and the idea that Marc Andreessen has that the world is a lot more malleable than you think. And if you, you focus all your efforts that you can, you can change the world around you.

That's not Bob's version of grandiosity. This guy lives in a fantasy land that has no, uh, attachment to any form of reality by any means. Um, but just his absurd grandiosity. So he's got a quick temper. He yells at people way too. I'm going to read some just ridiculous way he treats his employees. And then this idea of, you know, he jumps from one thing to one. He just quits at everything. He gets excited. If you can have there's a lot of people in the book that have influence over him because he'll listen to basically the last idea. So the last idea he

heard is the best idea until he hears another idea. So the last idea he heard is the best idea until he hears another idea, and then that idea is just better. And so he just gives up and he never allows things to compound. And so here's an example of these things that he got excited about and then dropped. There was a water-powered dishwasher

that he wanted to make. Cardboard box houses for the third world. The investments in technology companies that were announced with great fanfare because he started a tech investing firm in 1981 and then abandoned it in 1982. And then his sudden urge to own a TV station. And so we're going to see this jumping around is how he got the idea to get involved. He doesn't know what an LBO is yet, but he will. And so he said, hey, I want to I want to acquire something. Look for an acquisition for me. So he hires people to go out and look for things that he could buy. And this guy Randall is one of the first ones.

He says, at this point in our story, this is January 1986, Randall wasn't even dreaming of putting Allied Stores. So this is going to be the first conglomerate, retail conglomerate that he's going to buy. And it starts out by just saying, hey, maybe you want to buy some of their shopping centers since you're a real estate developer, right? So it says Randall wasn't even dreaming of putting Allied Stores on Bob's potential acquisition list. A sensible man, Randall knew that Allied Stores was a department and specialty store conglomerate with a market value of $2 billion and 70,000 employees. He also knew that Bob's corporation had a market value of $200 million and was a real estate enterprise with fewer than 1,000 employees. What blows your mind is the financial machinations that happens in this book. They're extremely complicated. That allows a $200 million company to overtake a $2

billion company with nothing but debt. That the one could be overcome by the other was the farthest thing from his mind. Besides, Bob had never mentioned retailing as one of his interests. He had never even stepped foot in an Allied store before. No, Randall's hunch was that Bob, who owned shopping centers, might be interested in buying the five shopping centers owned by Allied stores. In one of their phone conversations, Randall brought up Allied stores for the first time. Bob had never heard of it. So Bob shoots him down at first because he's like, no, I've been reading a newspaper and I've read that Macy's is about to be taken private. Get me a meeting

with the Macy's CEO. And they try to get a meeting with the CEO. And he's like, who is that? No, I'm not going to meet with this guy. What the hell is going on? So he says he was thinking about the Macy's leveraged buyout, which he'd been following in the newspapers. Finding an acquisition was no longer his priority. Now he wanted to participate in the Macy Finding an acquisition was no longer his priority. Now he wanted to participate in the Macy's LBO. So you'll see it's very interesting how this idea constantly morphs. So at first it's like, I'm not going to do an LBO myself. I'm going to, instead of doing an acquisition,

I'll just invest in this LBO of Macy's. So get Finkelstein, I think is the guy's, at the time, the CEO of Macy's. And Finkelstein's like, no, I'm not meeting with this guy. So this continues to develop. I'm skipping along. He says, spurned by Macy's, Bob called yet another strategy session. Let's delve into Allied a little bit more, he told Randall. So it talks about Randall's assumption.

OK, we're going to go back to the shopping centers. That's easy. He says, Randall's assumed at first that delving further into Allied meant that five shopping centers. But it didn't. It meant that Bob was thinking about taking over the whole company uh so he says having learned to expect the unexpected from this unusual client and unusual is like the the most tepid way you could put that uh just a few weeks back randall figured that bob might be interested in attracting a single brooks brothers store into one of his malls now in a great imaginary leap again that's a very different from a reality distortion field or thinking that the world is malleable. He just completely makes

up these scenarios in his mind. It's almost like he's suffering from mental illness. Bob had vaulted himself into the ownership of all 45 Brooks Brothers stores. Again, this is in his mind. Plus, it's going to name all these other Ann Taylor, Jordan Marshall, all the other. There's 24 divisions of Allied at this point. OK, it was clear what had happened. This is why I'm telling you this. Having been rejected by Macy's in its LBO, Bob had decided to do a Macy's style LBO on Allied, putting himself in the role of Finkelstein.

So now we go into his plan. And even though I knew how the book ended, you're going to, well, the most common word I have for the notes I left myself is unbelievable because it's just, there's just mind-blowing things that happen in this book.

But the note I left myself is here is, of course, the banks aren't going to lend Bob the money to buy Allied. But I already knew they would. It's just, you read about this guy and you're like like how did this happen so it says bob's brain trust was engaged in a continuous behind the scenes struggle to keep the boss's impetuacies i'm not pronouncing that word correct in check the man had some great ideas

but from the earliest days advisor advisors had to try to subdue his wilder impulses he has no self-control no discipline at all as the operation got bigger his impulses got wilder impulses. He has no self-control, no discipline at all. As the operation got bigger, his impulses got wilder. In 1970, Bob ceded control in his own, this is more about his inability to focus and how he jumps around. Bob ceded control in his own company to a fellow Canadian entrepreneur in a complicated exchange of shares, a decision he soon regretted. Two years later, he was able to buy back his own shares back so he's buying back his own company at a much higher price remember that because this guy gets taken advantage of over and over again they just see a sucker and in some cases the banks will wind up

being suckers right along with him but he gets pumped for so much money and fees it's going to blow your mind so now he says he decides okay i'm going to exchange shares oh i regret this let me buy back my own company at a much higher price two years later. Oh, OK. To buy back his own shares at a much higher price with the help from a loan of all places, the Vatican. This is also what I don't understand. The fact that this guy does have these wild imaginations, these wild fantasies in mind. He is very charismatic to some people.

And he's able to convince these people to lend him i mean there's so many there's japanese canadian european uh american banks and financial institutions private entrepreneurs that loan this guy money it's just amazing to me bob's fascination with the giant u.s retailer seemed to be so preposterous that they couldn't really believe that their boss was serious the best course of action they decided this, this is brain trust, okay, was to relax, let's play along, and then hope that the allied infatuation would pass. Even if it didn't, the banks would surely put the kibosh on such a project

by refusing to lend money to it. And the realities of the marketplace, as they called it, would send Bob a message. And here's something that's going on is the fact that Bob's at the right, he's got, in this perverse way. He's at his timing is perfect because it says Bob's timing couldn't have been better. Buyouts and takeovers were now all the rage.

Wall Street was uncovering one undervalued situation after another. But he's going to come in right before this bubble is going to burst. OK, this is just crazy. Bob nor his advisors really knew one investment bank from another. You know how they decide to who to call? They pick up the yellow pages. It was basically a matter of looking up names in the yellow pages. So they they just go under investment banks, start calling them, wind up the first four.

They're like, no, kick rocks guy. It was zero for it was zero for four at this point a result that neither surprised nor dismayed bob's two sidekicks who were somewhat relieved that the marketplace had given the right message as a last resort they made an appointment at pain weber unfortunately pain weber entertains this idea uh now he's going to use them as long as they are uh like he finds utility out of them and then he's going to drop them for somebody else. But we're not there yet. Bob secretly began to buy. So this is the plan one. Right. Because they don't there's there's no way that they're going

to lend him money right away. This is I guess let me back up. I need to explain the point more clearly. It's not like he jumps from no money down to eleven billion dollars. He takes one step. Then once he gets further down the line he it's actually there's some form of intelligence on how he approaches this because he builds up like this this equity in this capital um to other to other people's reputation so everybody says no then he gets a a meeting at payne weber they give him a a tepid endorsement right then he gets an attorney that's very famous for handling uh like m&a transactions Wall Street. And then he uses the name Payne Webber and that attorney to open another door. And so all throughout this book, you're going to see people substituting, instead

of them thinking for themselves, they substitute their own thinking for the results of other people's thinking. And so that allows him to just keep getting to the next, like further down the line. And then eventually he goes so far down the line and some of these banks have so much money at stake that they have no choice but to keep throwing good money after bad. But before we get there, let me go into like his more of just, he has this nervous breakdown. He's a big, he's a bigamist. He's got two families.

They say he's not a bigamist, but he was for a certain amount of time. Bob secretly began to buy shares and allied to a dummy corporation called Perez Capital. Allied didn't know this. This is the first way he his first strategy. OK, Bob didn't know that Payne Webber didn't really believe he had any chance to take over Allied. And Payne Webber didn't know about Bob's nervous breakdowns or about his two families with two wives and two sets of children, which he'd maintained for several years. He had had, and they're talking about two times in his career, he had these nervous breakdowns where there was months where he was unable to get out of bed.

This is more about his leading these double lives and then eventually people finding out that he's two families. And this is going to remind, this part reminded me of when back on, I think it was like Founders, somewhere in like the early 100s, I read the biography of Frank Lloyd Wright. And I'll explain what I mean by that after I read the section. It says, for three years, Bob kept up this exhausting routine. So he's got the two wives, multiple families routine, while somehow finding the energy to do his real estate deals. At his headquarters in Ottawa, key employees aware of his situation had begun to gossip, which eventually caused Bob to summon them to a special meeting in which he admitted to his double life. At the same time, he made it clear that he'd never

tolerate such behavior on the part of anyone else on the payroll who'd be fired on the spot for pulling a stunt similar to his. Only an extraordinary person, he said, could stand up to the strain. This guy is bananas that he would say that. But we've seen this before. Frank Lloyd Wright winds up getting, at the time he's having an affair, I think in the state he's in, it's like illegal.

Adultery was actually illegal. I think he gets arrested for, if I remember correctly. Then he holds a press conference on Christmas Day. And he actually says this. He says, listen, rules are for normal people. I, Frank Lloyd Wright, am not normal. Essentially, Bob just did the same thing with his employees, right? So let's go back to the very beginning of this, the first financial transaction. Payne Webber knows that he doesn't have the money to buy Allied, so they're trying to get creative. Payne Webber's plan was for Bob to buy a sizable chunk of Allied stock,

then approach the CEO about cooperating in some sort of friendly deal. Further study of Bob's assets had reinforced the suspicion that a hostile takeover was out of the question, since Bob would have to borrow up to $2.5 billion to buy all of Allied's 50 million shares. He didn't expect that Bob could borrow up to $2.5 billion with only $100 to $150 million for a down payment, which is what Bob had told Payne Webber that he could come up with.

So he's not only dealing with Payne Webber, he's also going around having these meetings and everyone thinks the same thing. They're amused at how absurd Bob's idea is that his tiny little company is going to take over Allied. So this is Lehman Brothers was impressed by two things, the man's obvious if naive enthusiasm and the absurdity of his proposition. Those who doubted that Bob could acquire Allied had grown into a large crowd that include Bob's brain trust, his advisors back in Toronto, his Toronto bankers, his advisors from Payne Weber, and now his lawyer. And so Bob is just keep marching on. He's like, I'm going to do this regardless. I don't even think he even understood people doubted him. I don't even think it penetrated his brain.

So it says that. But now here we get to the how like the foundation for I guess a shaky foundation that's all built on. It says the cash itself didn't have to be there. What was required was the promise of cash, which various reliable sources would provide for a fee. And wait till I get to the fees. This is going to blow your mind. So what Bob had was Payne Webber's assurance that it could raise at a considerable chunk of the necessary amount by selling junk bonds. Remember, this is the 80s. This is the end of the 80s. This is the junk bond era, right? So that's going to be one way. They're not going to finance the entire acquisition this way. It says junk bonds in themselves were not enough

to launch a credible offer. Along with this unsecured debt, which is why it's called junk, Bob would also need some secured debt, money that a commercial bank would agree to loan against the assets of the would-be target allied, which is crazy, is how this loose definition of security that some of these financial institutions use. In one case, he's borrowing money against his own shares, and they're using the shares as collateral. The shares go from like $50 a share down to, I think, $4 a share, so it's not actually a secure debt.

Then he gets in like this web of promises. Once it winds up in bankruptcy court, he discovers that he had promised, like there's multiple people that have collateral on the same asset. So that complicates things because he's essentially just going out there and giving promises, the same promises to multiple people,

which obviously you can't do. So one institution that he goes to is Citicor and they give him this great nickname of the mad bomber. This was Citicor's first clue that they were dealing with a volatile character who soon acquired the in-house nickname Mad Bomber. Whether the bank should have anything to do with the Mad Bomber was hotly debated. The pro-Bob faction won the debate with three persuasive arguments. Number one, if it all went well, Bob might use Citicorp as his banker in future real estate deals. Number two, a peek at Allied's balance sheet showed that there was more than enough collateral to cover a Citicorp secured takeover loan. Here's the problem with the assumption number two.

They thought he was going to have a professional manager. He eventually hires a professional CEO and says, no, I'm going to do this and then goes around and just runs the company terribly. Because again, he's never even stepped foot in one of these stores. Number three, Bob said that he could put up to 300 million of his own money on the table as equity. That is also a lie. And part of a way to understand why these banks would kind of talk themselves into, you know, they have weak arguments. They build one assumption on top of one weak assumption on top of another weak assumption is because at this time, they're just making so much money from M&A activity. And I'll get into the actual numbers and you just see you're just blinded by it. And I think it's in human nature. It's not like they're necessarily I mean, they definitely did dumb things, but I think a lot of people that were in their same shoes would be blinded.

But like it's clearly in our nature to be to have the capacity to be blinded by greed. So I think that's the lesson. It's like, OK, you know, we're kind of poking fun at these guys. Look, look how stupid they are. I cannot believe they wind up, you know, betting in first Boston's case. They bet so much money on just one flaky dude that they wind up having to build out themselves. But this has happened over and over again. So it's just like we can't think it's like like it's not it's not unique to them we have to be aware of our the capacity in our own lives to make foolish decisions and again avoidance uh i guess one of the main lessons from here from this book is i was thinking about what charlie munger says says he's got this great anecdote he's like tell me where where i'm

going to die so i'll never go there and it's like you study the decisions they made and so you can avoid putting yourself in situations that all the parties are in here bob his staff the people in the banking uh the people running allied and federated uh all these people there's just a combination of uh one bad decision after another this is a note of myself on this page. I duck this guy. Look at what he does here. Bob, he's in the middle of a negotiation to purchase some some shopping centers. We just talked about the way he negotiates in general. Bob wasn't budging either.

He hadn't gotten to where he was by budging. Once at a retirement party for a longtime employee, he tried to make a deal to buy back the man's stock at a favorable price. Once the sale of his house in Ottawa to his own daughter was stalled over his insist up while Bob and the buyer argued over who got to keep the lawnmower. Never underestimate humans. Just focus on getting the next step done. Future problems will have future solutions. And he was getting turned down by a bunch of people at the very beginning. The further along the process goes, the more they're just they wind up yielding to his wishes. So it says there was but one course of action left short of going home. Make a hostile bid to the shareholders and conquer allied against the management's will, which is exactly what Payne Webber and his attorney said they would not do at the very beginning. When neither Payne

Webber nor Finkelson had thought Bob capable of doing, they were now helping him to do. Payne Webber had expressed distaste for hostile deals at the initial meeting with Bob in July. How quickly this resistance was overcome as soon as Bob decided to do one in September. Payne Webber, in fact, was delighted to continue to participate in this zany escalation of the allied Bob conflict. A remarkable pilgrimage was soon on its way to Bob's Waldorf Historia suite. So now once they realize this guy's going to do a hostile takeover he's already with payne weber he's with this other respected attorney you see a series of more respected

banks get involved and he leverages their name to to for more institutions just kind of builds on all these reputations right so it says morgan stanley uh lehman brothers first boston all they just the list goes on and on and talks about these people have done more than 200 billion in M&A transactions in 1985. I think we're still in 1986. So they're fresh off. OK, last year we killed it. We made hundreds of billions of dollars doing this. Let's see if we can do more. How things have changed in six months. People that had previously wanted nothing further to do with Bob after the facelift incident. So he missed a meeting. No one could find him because he flew down to Brazil.

This guy, he flew down to Brazil to get a facelift, didn't tell anybody where he was. This is very strange. So now they're saying, OK, we don't want anything to do with this guy. Now, six months later, it's like, OK, now all three were competing for his business none of them had heard of bob at all what sent them scrambling to his suite was a tip from finkelson a guy from canada wants to do a hostile so again that's his attorney that's respected by the bankers he's saying hey this guy wants to do it okay i'm gonna run up and i'm gonna compete for this business let's go more into like the historical to give you like historical context of what's happening at this time and this guy right here uh wasserstein what's his first name bruce bruce wasserstein he's actually one of the smartest ones in all this he he's like uh

credited with being the most prominent merger and acquisition uh like person responsible for a lot of these uh he did he winds up doing over a thousand transactions for like 250 billion dollars and the reason i say he's one of the smartest ones is i again i don't really like what he was doing with these companies but um he doesn't he's he's not he's smart enough not to put himself on personal liability so a lot of the companies like first boston is the company he works for eventually he feels he's underpaid because he's doing like 80 to 90 percent of their profits which is bananas so he winds up going on on his own winds up surviving uh he died about 10 or 15 years ago something like that and you know but he died with a net worth of a couple

billion dollars he just he he he didn't take the tail risks that other institutions did i guess that's what that's what i mean by he was smart so it says uh washerstein's highly publicized success so it talks about he took he did texaco's 10 billion dollar acquisition of getty oil That's what I mean by he was smart. It says, Wasserstein's highly publicized success. It talks about he did Texaco's $10 billion acquisition of Getty Oil, DuPont's purchase of Conoco. I'm going to skip over a bunch of these because they're not important. But this is the description of what's happening. It says they were the principal reasons that one out of 10 Yale graduates applied for a job at first Boston in 1986. And that 30% of Harvard business school graduates ended up in the M&A department of the top four firms. That's crazy. And here's why.

The salaries were phenomenal. A rookie just out of MBA program could easily make $150,000 to $200,000 a year in 1986 money. A junior partner in the early to mid ths, in his early to mid 30s, excuse me, was making a million to two million a year. A senior partner, two to three million a year. And all stars like Wasserstein could get six, seven to 10 million. There was no limit. And eventually he's going to realize that even when he's making 10 million plus that he's still underpaid. And that's when he goes out and starts his own company. And the growth of these M&A departments were really fast. They went up in first Boston's case under and Wasserstein was largely credited with this, him and his partner. It went up 125x in seven years. So it says the M&A department they

established at first Boston helped the firm to a record $125 million in earnings in 1985, a long way from the million dollars it had earned before M&A gathered its lucrative momentum in 1978. So they made a million in 1978 and $125 million in 1985. That's just one company. Okay, so eventually, as Bob builds up steam, Allied realizes, oh, no, we might get taken over. So what was common at this time was they look for what's called a white knight so if they're like if we're going to be taken over let's at least be taken over by somebody that we admire or like somebody that's more like on our side and so this is about the white knight and then what was surprising is there's this uh

this guy's really famous for social media he's got tens of millions of followers on instagram his name is dan bazarian well his dad is a major character in this book, which again is just unbelievable. So the White Knight is this guy named Edward D. Bartola. He was a man who owned 59 major shopping malls from Florida to California, one-tenth of all retail mall space in the country. He owned the San Francisco 49ers,

the Pittsburgh Penguins, and a sizable slice of Ohio. This is more about him. The would-be rescuer of Allied, Dee Baratolo, was a courtly octogenarian who worked seven days a week. Stylistically, he couldn't have been more different from Bob. So this is a description of him. He continued to occupy a modest ranch house in a suburb of Ohio. His favorite restaurant

was a friendly neighborhood place that he owned. He never had a facelift or a hair transplant. He had never been to Europe. His idea of a wild time was ordering a scotch with an orange peel, which he never seemed to finish. When his house was being redecorated, Di Bartolo, who could have gone anywhere, chose to rent a room at the local Holiday Inn. He owned the local Holiday Inn. He had few extravagances. This was a multi-billionaire who preferred to live the life of an overworked clerk. And so Di Bartolo is working with Paul Bazarian. Paul Bazarian was Di Bartolo's partner in a number of stock market deals and was instrumental in convincing Dee Bartolo to do this here. Bizarian subsequently was convicted of criminal charges for unrelated financial transgressions.

I can't tell you how many characters in this book. There's this. They're described the same way. They're doing this deal later on. Five years later, they're in jail. Two years later, this guy got convicted of this. This guy was forced. And now they're all running afoul of various different regulations and laws. It's a wild, wild time and a wild, wild story. This is another example why I would say Bob would not be somebody. Bob or anybody like Bob is not somebody you want to work with. Eventually, he decides he's going to drop Payne Webber because First Boston is better and he's really impressed with Wasserstein.

So he's talking to Payne Webber now. He says, First Boston is going to take the lead on this one. You'll still be part of the deal. You'll be paid your full fee. A separation agreement stipulating that Payne Webber would receive $6.5 million from Bob for its services was signed by both parties. Bob didn't pay. He contended that Payne Webber hadn't done anything to deserve the fee. And at a meeting set up later by the Payne Webber people to resolve the problem, the Bob people didn't show up. Payne Webber had to sue

to get its money. And eventually the case was settled in Payne Webber's favor. And this is a reminder that Bob is risking a good business for all these shenanigans. First, Boston studied the financial condition of Bob's corporation. In looking over these annual reports, as well as private valuation studies, the bankers were impressed with Bob's $700 million equity in real estate. That Bob's properties could serve as collateral in the event of a mishap, such as Bob not being able to pay his takeover bills, which he can't, weighted heavily in favor of doing business with him. So they thought, okay, we can do this because we can at least secure it.

But again, what's 700, it's not even 700 million. Why is it being much less than that? But what's 700 million collateral when you're loaning the guy $11 billion, right? This guy just gets weirder and weirder. This is a conversation that's happening with inside of first boston sit down you're not going to believe this bob's got a fortune teller bullshit how do you know he just told me himself on the phone a german fortune teller he thinks he's destined to take over allied because the fortune teller

says so so uh they're they're still they're failing to take over allied because the fortune teller says so so uh they're they're still they're failing to take over allied he doesn't have enough assets they they do this this is where wasserstein comes up with a good idea and it winds up with the idea it winds up being a loophole and it's closed right after this happens but really the lesson is don't quit until you've tried everything um i mean i guess it's partial lesson i i guess at this point like why even try this if it's gonna wind up up ruining your entire life, which is what it does. But I guess they don't know that yet. So it says no self-respecting player could afford to throw in the towel before trying every conceivable last minute ploy.

And Wasserstein was the champion ploy maker. This particular ploy was called the street sweep. The idea was to bypass the tender offer process and buy enough shares on the open market to gain immediate control. In Allied's case, Wasserstein figured a street sweep was possible because of an interesting development his rivals had overlooked. A large percentage of the Allied shares had fallen into the hands of a single interested party named Boyd Jeffries. This is another example of a guy that plays a role in this acquisition that winds up going to jail later on. Boyd Jeffries is going to make some money, but then he goes to jail later on on unrelated stuff.

Let's go more to this idea. It's like three pages in a row. I just jot down unbelievable, unbelievable, unbelievable. Thus far, neither side had dared to buy the block because with tender and merger offers still on the table. So there's the white knight and Bob all going for Allied. Right. So those are the two parties. So when you have merger offers still on the table is against the SEC regulations for them to acquire shares in the open market. A judge would surely nullify any purchase of Jeffrey shares and perhaps invalidate the entire tender offer as well.

But with Bob flirting with capitulation, Wasserstein had a wild thought. What if Bob withdrew his tender offer, then turned around and grabbed the Jeffrey's block a minute later? It's kind of a loophole, right? It's technically legal, but against the spirit of the regulation. That's why the SEC closes the loophole and doesn't allow this after this goes through. The combination of the Jeffrey shares and the shares he already owned would give Bob more than 51%. Bob would then force a second merger transaction in which he'd buy the remainder of the stock because now he owns 51%, right? Finkelstein was invited to First Boston to describe the possible ramifications.

So that's the attorney. He's meeting with Wasserstein and saying, OK, what's wrong with my idea? Including a worst case scenario. So they're mapping out worst case scenario. Bob buys the block for $1.8 billion. A disapproving judge refuses to let Bob vote these shares. So even though Bob technically owns a majority, he's barred from running the company. This is all hypothetical, by the way.

It doesn't actually happen. With Bob's takeover threat now neutralized, DiBartola pulls his offer from the table. The price of Allied stock plummets. Bob is stuck with millions of shares he can't unload, except at a huge loss. And the people who lent him the $1.8 billion, remember, he doesn't have the money for this. The people who lent him the $1.8 billion in cash to do the street sweep want their money back. Bob can only repay part of it. His Canadian real estate is liquidated and he's forced into bankruptcy other than that everything is fine and now here's a problem another question is who would lend bob 1.8 billion dollars to do this wasserstein suggests that first boston bypass city core and lend him the money for the street sweep. Earlier, First Boston had committed itself to

making Bob a $455 million bridge loan, a daring step in itself. So they go from making money on fees to now trying to make money on fees and loans and investments. This is what's going to cause them to go under. Wasserstein winds up extracting himself personally, right? So he's not personally liable, but the company winds up bearing the brunt of this because we already know Bob's going to go into bankruptcy, right? Now, why would First Boston agree to this? Here's the problem. Wasserstein was coasting First Boston

farther towards the edge of prudence and the firm that wouldn't see Bob the previous summer was now on the verge of investing in this uncertain ploy. First Boston's management may have resented what they perceived to be Wasserstein's smart-ass attitude, but his M&A department made 90% of the profits. And if Wasserstein wanted to do a street sweep, he could do a street sweep. So technically technically, Wall Street has more power than the CEO of First Boston. Also, the executive committee was convinced that Bob had enough real estate assets to cover the downside. He didn't. A liquidation would be tough luck for Bob, but not for the firm.

The upside, why are they doing this? Not only does Wall Street tell him to do this and he represents 90% of the profits, but the upside was that First Boston would make over $100 million in extra fees, not to mention the interest on the bridge loan. So it was that First Boston gave its official assent to betting one. This is a crazy crazy sentence so it was that so it was that first boston gave its official assent to betting 100 of its entire corporate capital on bob the notorious flaky canadian real estate developer and liar who is doing this deal because his fortune teller tells him it's going to work out so let me reference let me go back to that idea that bob was flirting with capitulation me um not macy's

allied was uh there's this comment at the time it's called like green mailing and so they're like hey if you'll go away um we'll buy the stock that you already own and we'll give you like i think it was like another 60 million on top of that he could have made i think it was like something between 60 and 100 million 60 and 80 million maybe just to go away and so that's what they talk about he's thinking about capitulation and this is the other side and so they're going back and forth about hey we should just do this that way d bartola gets it and they're advised against it because of paul bazarian so it says um frank had been trying to get DiBartolo to agree to the severance package, but DiBartolo had deferred to Bilzerian and Bilzerian had balked. It's because he didn't

know about the sweet, sweet, right? Wall Street's idea. Now at 9am, Bilzerian was commenting on the news that had just come over the financial wires. Bob had dropped his tender offer. Did you see this? He yelled to Frank, Bob has given up. He's done, finished, withdrawn his tender offer. Did you see this? He yelled to Frank. Bob has given up. He's done. Finished. Withdrawn his tender offer. And you suckers at Allied wanted us to pay him $60 million to get rid of him. What a waste of money that would have been. He's gone. History. Out of the picture. We didn't need to pay him anything to get rid of him. He's, oh my God. Bilzerian had seen the second message on the financial wire. Bob had bought 25 million shares of Allied stock from Boyd Jeffries.

He was now the majority shareholder. So I called Bob a liar earlier. This is why. Because he kept saying, I'm going to put up money. I'm going to put up money. But he kept getting these. He pushes the financial institutions further than they want to go. And then as they get deeper, he says, oh, did oh did you change my mind now you got to figure it out

so it says and now in addition to everything else after city core had agreed to loan bob 150 million to solve half of his equity problem remember he said he was going to put up 300 million right bob was telling the bank he couldn't produce the other half so i'm going to give you three i'm going to put up 300 million oh okay just kidding i only have 150. I only have 150 million. You let me the 150. Oh, you let me the 150. Now, guess what? I don't have the other 150. This guy's terrible. He was relying on the bankers forbearance and ingenuity to come up with that, too.

Bob understood that Citicorp and First Boston, who together had invested 1.8 billion in the street sweep and who were going to make hundreds of millions in fees if the deal closed, was not about to let the deal fall apart because Bob didn't pony up his equity. They had more of a vested interest in the deal than he did. So let's go and let's talk more about the fees. Fees, then more fees, and more fees. It's crazy. Potentially, it was the most lucrative deal in history for First Boston

from its growing list of Bob's fees. I'm just going to list off a bunch of them, okay? Eventually, we'll total them up at the end. $1.5 million for the initial commitment, $7 million acquisition fee, a million for issuing a highly confident letter, 7 million for the original bridge loan commitment, an additional 3.6 million for increasing the bridge commitment. How the hell is Bob ever going to make money out of a business like this when he's giving away hundreds of millions of dollars in fees? 50 million for the sweep state loan.

More and more fees coming from the junk bond financing. That was for Boston. For Citibank, the takeover was just as lucrative. The closing fee of 1%. The initial commitment fee of $3 million. The syndication fee of $8 million. An agency fee of $1 million. The commitment fee of 1% per year on the unused portion of the loan, the bridge loan fee for its half of the street sweep, and so on and so on.

So this is just for the first acquisition. Remember, he does two. It was a $4.1 billion acquisition was the final cost, including a whopping $12 million dollars in fees expenses and finance charges so a few weeks ago we talked about how in the early days of spacex elon musk would insist on interviewing the first 3 000 employees for spacex wanted to make sure like he was he had the most talented people bob will have a conversation with somebody for a few minutes. He says, you'll do fine after having asked him just a few questions. And then the guy, his name is Riggs. Fine for what? I'm hiring you as senior vice president of real estate. OK, so after a week on the job, he was hired as senior vice president of real estate after just a few questions. They're on Bob's jet and he says, I want you to be president.

Riggs could hardly believe what he was hearing. He'd been on the job only a few days and was certainly no expert in retailing. That's how Bob's going to make his hiring decisions. This guy's insane. Later in 1987, this is just a few months after, Bob and Riggs had a falling out. This resulted from an argument Bob was having with the owner of a shopping mall in Massachusetts. The owner wanted an Allied store. This is, remember, after he already took over allied, an allied store to anchor his mall. But Bob refused to cooperate unless he got a 50% equity interest in the mall as compensation.

This demand was rejected by the owner as preposterous, but Bob somehow got it into his head that the owner had agreed to the terms. the imaginary deal fell apart for in truth there was never a deal bob blamed me for screwing up the negotiations he blew up at me and called me stupid okay so some of the idea that they had about taking over allied is okay we got to figure out how to we had to pay all i think a couple hundred million of interest on all the debt that we borrowed um and so we're going to sell off a bunch of divisions, right? And there's a lot. I have three separate notes all filled up on this page

because there's a lot of things that came to mind when I was reading this. And really emotion blurs judgment. And this is, again, Bob's not the only idiot in this story. There's tons of people that are buying assets that are just, they're overpaying for assets. So Allied is selling off their worst stores and yet there's like acquisition fever at this time so every other retailer thinks they just have to keep buying shit because other people are buying things

so says where there was little apparent interest they did their best to stimulate it by creating the illusion of competition the idea was to convince a likely buyer which they call a live one that other interested parties were ready to bid on whatever division he was thinking of buying, and then to scare him into making a generous preemptive offer. Give us your price now, they would say, and we'll shut down the auction process. When this ploy worked, first Boston was elated. That's who's doing this for Bob, okay? In one of the most spectacular examples of overbidding for an allied division, the Crown American Company was panicked into making a ridiculously high preemptive bid for this company called Millers. Millers was a second-rate franchise for which First Boston expected to get 75 to 80 million dollars at most. Crown

America had wanted to buy Kane Sloan. So that's another franchise. But Dillard wound up winning that bid. So Crown Americans. This is why I say motion blurs judgment. Crown Americans management became desperate to buy Miller's. OK, I lost out on what i really wanted i have to buy something to to to their amazement crown american shut down the auction process on millers with a bid of 95 million dollars the guy that's doing this negotiation for humphrey's boston's behalf says i was struggling to keep a straight face this is like the opposite so what i thought of when i um there's a great i covered the book uh jim clayton it's called a first a dream i think might be founders number 91 and it's this book uh warren buffett read the book and then buys buys the company guy starts off if i remember

correctly selling like uh car dealerships then realizes he starts selling like mobile i think the uh i think called mobile. What are they called? Manufactured homes. Largest producer in America then winds up getting into, he finds it very lucrative in the financing of these homes. But anyways, he retires at this point

so his son is the one that has to, is the one that's negotiating with Warren Buffett and if I remember correctly, he says something like, okay, Warren calls him up,

says, okay, I'll give you $12 a share and the son is like, you know, I went to the board. Let me, we said 16 goes back to Warren. Uh, it just goes back to Warren says 16, right? These are approximate numbers. I don't have it in front of me, but this is how I remember it. Uh, Warren Buffett says 12. Okay. 14, 12. Okay. 12. And Warren's like, I don't bid. Like this is, I've already worked out what I'm going to exclude the company and the people because it doesn't matter they do uh this one bid 95 million the next highest offer the only other

offer turned out to be 60 million dollars 60 million and so there's a there's a footnote in the book later and i went and put it back on this page because it would remind me. It says, in only a minority of cases did the allied divisions add to anyone's prosperity except the bankruptcy lawyers. And so a lot of these people that are overbidding, if you overbid by $35 million or something, and who even knows if it's worth $60 million to begin with, what do you think is going to happen? Another note I left myself, time is the best filter. There are several people in this book who are described as wealthy. I looked them up after, and they all went bankrupt. And a lot of these companies that overbid for these second-rate allied divisions wind up failing as well.

You can't be a poor steward of your resources and expect to survive. Okay, so eventually Bob tries to recruit some other people that had retail experience to run his company. He's going to recruit this one guy. There's a small story I want to tell you that I found interesting because he's recruiting this guy named Morosky. And Morosky's partners with Wexner, who is the founder of Limited. And there's another crazy, like, postscript to his story, too. So they said they kept in constant touch. We were like brothers who who could read each other's thoughts.

So it's talking about the relationship between Moroski and the older Wexner. Right. Wexner is the founder. Moroski is the guys like his second in command. In mid 1987, they had a spat. The spat originated in what else? A difference of opinion about takeovers. Wexner, he says, was intent on taking over something. Morawski was opposed to these acquisitions.

What did they need them for? Especially at the prices that people were paying for the ego trip of owning vanity stores that were losing money. That's another thing. A lot of people are buying these companies or tens of millions of dollars companies, spending tens of millions, rather, on these companies. And a lot of them aren't even profitable. The purpose of business is profit, not a platform for your ego, Morawski told Wexner. He worried that an ill-conceived and overpriced acquisition would have an unpleasant side effect on the value of limited stock, where his personal fortune lay. And I think they had worked together for like two decades. Though Wexner bought nothing from Allied, he did buy Henry Bendel.

This exasperated his differences with Morawski, who reminded himself that Bendel had been losing money for several years. Moroski told his old friend and partner that he was quitting. A few days later, Moroski returned to the office to clean out his desk. This was no longer possible. The desk had disappeared in rubble. Wexner had had the place bulldozed. Humans are crazy, man. As Moroski stood in the midst of the destruction, it occurred to him that Wexner had been more upset than he had anticipated. Wexner also terminated the lifetime discount at all limited stores that he had extended to Moroski's wife. He and Moroski never spoke again.

So there's two interesting postscripts to Wexner. Wexner, he also made really intelligent acquisitions. He who Wexler's financial manager was starting in 1987 when Moroski left? Jeffrey Epstein. Moving on, I mentioned earlier that there's a ton of examples in this book of people substituting someone else's thinking for their own. The lesson here is you got to think for yourself. Up here says the Toronto security analysts, people were amazed by what had happened in New York.

The pavilion viewpoint was that if Wall Street and all its geniuses would lend Bob billions of dollars, there must be something to it. Wall Street, many Canadians decided, must know something about this guy that we didn't. So Bob had no trouble, and this is after borrowing, what is he up to? $8 billion or $11 billion? I forgot how much up until this point he's borrowed. So Bob had no trouble in obtaining a $150 million personal loan to buy back his own stock, secured in part by real estate, but mostly by the value of the stock itself. The National Bank of Canada was taking a major gamble on Bob's vision. And they took that gamble because they said, hey, well, Wall Street, these guys seem to be smart. They must know what they're doing.

So here's $150 million. And we see the overconfidence that Bob has in himself and thinking that things will just work out in the future, which he says there's always some way, causes him to vastly overpay. So this is actually, I was wrong. We haven't got to the point where he finished Allied yet. This is him, or not, he's done Allied. We haven't done Federated. And so this is where they're going and the price keeps going up. And so let me just read the

section to you. Bob raised his price once again to $66 per share to put more pressure on the board. An official press release listing Bob's new improved lineup of equity partners was put out. Bob had managed to round up $1.2 billion in equity. Who would quibble with that? The fact that most of this was borrowed money and therefore not true equity was bothersome to Ron. Ron is working, one of the guys that works for Bob, who could see the dangers of loans piled on loans. I told him that although from Federated's point of view, this might be equity, that it was borrowed and that long term we could have a problem. Bob said, don't worry.

He thrived on leverage. So he says, don't worry. Then the description of him is thriving on leverage. And then he says, this another quote from bob if somebody lends you a dollar you take it the ramifications can be handled later there's always some way out let's go back to more of these ridiculous decisions by people made uh not named bob and i cannot believe he wants to selling he owns brooks brothers now and he winds up selling it look at this is unbelievable uh when we heard that Bob was flying to London to meet with Lord Rayner and sell Brooks Brothers for $750 million, our immediate reaction was, sure, Bob. Nobody around here thought he'd get more than $450 million.

Bob negotiating with Lord Rayner was Bob at its best. In a face-to-face negotiation with an eager buyer, he never blinked first, gave no hint of compromise, stuck to his price with such passionate conviction that his adverse that that to his adversary it began to seem reasonable there seemed to be no choice but to accept bob's price or walk away empty-handed so he gets 750 million dollars for something other people thought he could only sell for 450 million. So Bob is bidding against Macy's for Federated. His first bid was 47. Now we just saw him bump it up to 66,

right? The bidding continued to pace with Bob's bump to $77 a share. He has no idea if this is going to make money. He's just like, I'm going to get it. Macy's bumped to 77.50 and it just keeps going. And then again to 79. Neither Bob nor Macy's showed any sign of backing down. At each higher level, the number crunchers, this is such an important sentence. At each higher level, the number crunchers dutifully produced another computer simulation

to prove the deal made sense so why are they doing that because the higher the deal goes the more fees they're going to reap whereas charlie munger wisely told us whose bread i eat his song i sing it's like asking a barber if you need a haircut what do you think he's going to say it's an example how bob's a lunatic with poor follow-through uh hearing that the problem with and he's he's he always has meetings in his hotel room which is really creepy to me ever since the harvey weinstein stuff came out too right uh hearing that the the problem with ann taylor was not as simple as revising things that we did hey let's just spruce up the cat the the catalog everything will be fine again this guy knows nothing about retail hearing that the

problem with ann taylor was not as simple as revising the catalog sent bob into a rage he picked up his fork and stabbed the table the fork penetrated the table and was vibrating back and forth and i'll never forget it looking at that fork vibrating there and this guy's eyes bulging wide and his hands shaking and i looked at this poor woman. This is the, uh, there's a group of like four people. One of them is the president of Ann, uh, Ann Taylor. Her name is Michelle Fortune. I looked at this poor woman, Michelle Fortune, and thought she was going to have a heart attack. And then I saw the look on the other faces and I wondered who was going to have the heart first heart attack in the room. Bob ran around in a circle, circled the table once, then twice, then he stopped and sat

down, took a couple of deep breaths, and apologized. In closing, Bob said he wanted a full report on the Ann Taylor situation at the forthcoming meeting. Fortune wasn't sure what sort of report to produce, so she decided to wait for further instructions but there was no further instructions there was no forthcoming meeting bob never called back more poor follow through more this idea is the last idea he ever heard is the best idea he hires moroski that guy i told you that was with partners with wexner and he's going to let him be ceo of both allied and federated changes his mind decides he's going to do it be CEO of both Allied and Federated, changes his mind, decides he's going to do it. So he says, and he tells Moroski, he's like, no, I'm not,

I can't accept that. Like, I'm not, that's not what you hired me for. And then a few months later, more fees. Bob paid Moroski the balance of his contract, $3 million for six months work. It was supposed to be, I think, a million dollars a year at three years, right? So he's in $3 million for six months work, plus an estimated $200,000 more of stock options. I want to go back to this terrible idea of relying on models. So for the federated deal to work, the model had one assumption stacked on another, stacked on another assumption, stacked on another assumption that all had to go exactly as planned. Because there's no room for error here because that room for error is taken up by a gargantuan amount of fees. Check this out. Such was the federated deal as it appeared on paper.

All would be well, the number crunchers predicted, provided, of course, that the divisions on the block sold for the expected high prices, that Bob would take out the federated mortgages, the federated would be kind of think about all these crazy assumptions i have to go exactly precise this is insane uh the divisions on the block would sold would be sold for exactly the high prices they they they expected uh that bob would take out the federated mortgages or that he could get it the federated budget would be cut on schedule etc etc interesting enough city corp which had put on the financing package together wasn wasn't taking this bet. And this is going to remind you of, if you ever read the big short, 2008, 2009 financial crisis. As it worked to syndicate the federated deal and to form a permanent bank group, Citicorp also assiduously, I can never

pronounce that word, laid off its own part of the loans so that they would end up with practically no ongoing exposure. That's the most important part of those three words. No ongoing exposure to Federated after it booked its big fees. Who could resist the wonderful procession of fees? 1.5 million for being a deal manager. Another million for being highly confident junk bond letter. Another 1.8 this is going to sound just like the Allied deal, right, that I read to you earlier, except now federated is twice as large, twice as many fees. Another 1.85 million for a highly confident bank letter. 4.5 million for a willingness to commit letter. $2 million for the equity bridge commitment. $15 million in fees for the junk bridge commitment.

This is how complicated the deal is. $20 million for the funding of the junk bridge, $10.5 million for M&A advisory work, $38 million on the interest on the loan, $17.6 million in profits from the spread on the junk bond deal, $15 million in divestiture fees. This is insane that you would ever agree to this. Plus a few other fees and general interest charges producing a grand total of $130 million in divestiture fees. This is insane that you would ever agree to this. Plus a few other fees and general interest charges, producing a grand total of $130 million, plus expenses, and that's only for First Boston. Add that to the Citicorp fees. Payne Weber, the other company, Drexel, Kidder, and Peabody,

all of which were paid by Bob for the privilege of acquiring Federated. The result exceeded $200 million more in fees and charges than the entire Federated and all its stores nationwide earned in a year. So if he bought something poorly, he's run his life poorly up until this point, what is the chance that he's going to run the combination of Allied and Federated? Well, it's not going to happen, right this is just there's a million examples here's just another example he's a sloppy mess this guy so says bob had flown into atlanta bob and now he's meeting with two uh two of the divisions that he owns which is riches and what's the other one called? Goldsmiths.

Okay. So it says, and he's very wasteful too. I hate his obsession with opulence. Bob had flown into Atlanta. He was met by a dutiful contingent of executives, this guy named Zimmernitz. So it says, Bob and the Rich's contingent, that's the one company he's going to visit,

got into one limousine to drive to the downtown store while a second limo was dispatched with Bob's clothes. The guy packs so much that when he lands somewhere, he needs two limos, one to go where he's going and the second to go for his clothes. How wasteful is this? So he gets in the car and tells Zimmerman. Again, last idea is the best idea. I want to merge riches with goldsmiths, he said, right away. That's impossible, said Zimmerman. Get them on the phone, commanded Bob, referring to the two heads of goldsmiths, and we'll see. Zimmerman reluctant to broach this sensitive subject with dire implications for the management of goldsmiths from a car phone. Look, if you want to talk to them, then you talk to them, Zimmerman told Bob.

But I don't think this is the proper time. Bob told Zimmerman to dial the number as there was no time like the present. And Bob himself talked to the two heads of goldsmiths and instructed them to fly to Atlanta that very night so they could work out a merger of goldsmiths into riches, fearing that they were about to be given an axe. And this is why you see why I said that. I just I would I hate that these type of people exist. He's passed away now, but they still exist.

They just they treat other humans terribly. And I always when I when I run across these people, one, I want to know that they exist. The reason I want to know that they exist is for this the second point is that i want to make sure that i'm not on i don't i'm not doing business with them i want to make sure i'm never on this side of the transaction i never put myself in a position where i can be what i do and where how i make a living and where i'm at is is reliant on people like bob and unfortunately these psychopathic sociopathic delusions of grandeur having people can have the ability to work themselves into positions of power.

Let's go back to this. So it says they were, they're feared they were about to be fired. So the two men hopped on a plane for Atlanta and checked into a hotel where the new boss was staying. As Bob, Bob had gone out to a dinner party. They waited nervously in their rooms for his call. I just feel so bad for these guys. By 1130, having received no word from Bob, they phoned Zimmerman at home to ask what became of this urgent meeting. Where the hell is he, they said. Zimmerman said he assumed that the meeting with Bob had already taken place.

Maybe he forgot, Zimmerman suggested. Bob admitted as much when Zimmer finally reached him in his hotel room. We can discuss Goldsmiths later, Bob said. Think about what an asshole move this is. Make me, like, I have to leave my family, hop on a plane, at your bidding, I have to go fly to you because this murder has to be done right away, and then you probably go out and get drunk at a dinner party and say, oh, no, forget it, we'll do this later.

It's inconsiderate. Zimmerman politely reminded Bob that two top managers had been summoned to Atlanta for what they'd been led to believe was an emergency session, and that having come this far, they'd appreciate a response from him in person. Bob agreed and invited the heads of goldsmiths up to his suite. Bob opened the door in his underwear and announced, Goldsmiths will be merged into riches and then bid them good night so shortly after that both allied and federated are pushed into bankruptcy that should be no

surprise i did fail to mention there's a bunch of stories in the book where he did this even before he was into real estate anytime he would close art not real estate uh into retailing even back in his real estate career let's say he closed on a building he started a new project he would close art not real estate uh into retailing even back in his real estate career let's say he closed on a building he started a new project he would insist on throwing a party and then he was obsessed with self-aggrandizement and so like he threw events so you could celebrate how great he is this is not an exaggeration he did the same thing with allied when he closed allied he's like okay he told first boss and all these people was like uh you know send invitations out to new york's best business peopleite them to this party that's celebrating me. No one would show up.

So they went about staffing the party and faking it with a bunch of people that actually work for the bank. So, again, he's not doing this because he actually gives a shit about building a great business or a great product. He doesn't care about that. He just wants you to idolize him. He's doing this all to be idolized. And it's just not. Again, we go back to warren buffett's idea about inner scorecard versus outer scorecard which i think is such a powerful

idea it's like the key to happy life is to have an inner scorecard to make sure that the decisions you're making you're doing them because you're satisfied with them not making decision because you hope to get prestige or adulation from outside parties it's just not a way to live your life and and bob is a complete outs outs outer scorecard person um and now we get to the part where it's like why reading this book it's valuable in studying bankruptcies uh because this idea is like you know going back to charlie munger idea tell me where i'm dying so i won't go there just realizing hey if i just do the opposite of bob i'm way ahead of the curve but this is why i have a distaste for who he was as a person, because he hurt thousands and thousands of people and he didn't seem to care at all.

So says the 50,000 creditors from a single bankruptcy filing is a record in financial history. and George Grossman. These are small business owners that are supplying all these various stores with, sometimes it's fabric, sometimes they're actually the ones making the house brand, everything else. Again, these are not people flying around. Bob's Jet had a gold-plated toilet. These are people just trying to provide jobs for their families, for other people, moderately successful people. And he's stiffing them. One of them makes the example. It's like, I just sent 30,000 dresses to Bob. He never paid for them. But yet if I go back in the store and take them back, I'd be arrested for stealing. He's like, how is what he did not stealing? So this is where,

again, it's just the value here is let's be anti-Bob's. The 50,000 creditors from single bankruptcy filing is record financial history. The 50,000 creditors from single bankruptcy filing is record financial history. The number includes several of these small business owners, plus thousands of other vendors and merchandisers, plus bankers, real estate companies, factories, bondholders, and the IRS, which were seeking $600 million in federal income taxes from Bob. Bob's efforts to insulate one asset from another and to maximize every advantage had backfired in a sad and spectacular way. At the end of his two glorious leverage buyouts, he himself had suffered their fate. His various possessions sold off for cash.

His real estate empire dismantled. His Bob Corporation shares, which in 1988 were worth $500 million, were reduced to $10 million by 1989. His debts far exceeded these assets. His net worth was less than zero. The banks sued to force him into involuntary personal bankruptcy. In May 1991, his own company sued him for $12.7 million and asked him to return paintings and cars, $5,200 worth of telephone equipment that was in his Toronto Chateau. The company also said it would no longer pay the salaries for his chauffeur and his household staff or his travel bills and club memberships. In March, his lawyers informed the bondholders and other litigants that Bob would not be coming to court or giving depositions on the advice of his physician.

Rumors were rampant that he had had another nervous breakdown. And that is where I'll leave it. For the full story, by the book, the author did a great job of eliciting an emotional response from the reader and i think that is going to prevent me from forgetting the cautionary tale

of bob for a long time so if you want the full story uh i'll leave a link in the show notes it's available on your podcast player at founderspodcast.com if you buy the book using that link you'll be supporting the podcast at the same time also leave a link if you want to support the podcast and give the gift of founders to a friend or co worker. I'll leave a link to do that. That is 177 books down 1000 to go. Thank you very much for your time and attention and I'll talk to you again soon.