Why the Pentagon Is Hiring Wall Street Bankers | Prof G Markets

Yeah, I mean, you know, through the military budget, through these trade deals that the Trump administration has been striking with foreign countries, and with a bunch of other things that they're working on to kind of, as the Treasury Secretary calls it, kind of monetize the national balance sheet. You know, the Trump administration is going to end up with a couple hundred billion dollars, maybe more than a trillion dollars kind of to invest, and has a lot of ideas kind of about its priorities, but its challenge is going to be finding things to buy and invest in. And you know, it's one thing to say, 'We'll just take a 10% stake in Intel.' It's a pretty well-known company, pretty important to national security. But there's a long tail of things that they're going to want to go after. And finding those deals is what Wall Street investment bankers do for a living. They are explicitly hiring what in Wall Street is called coverage bankers, and every industry has them. So you might be a coverage banker covering industrials companies, or energy companies, or retailers, and there are coverage bankers for private equity firms. Their clients are the Blackstones and KKRs and Carlyles of the world, and their job is to know what these guys own, what they might be willing to sell, and then to try to find the money to put those deals together. So that's the unit that's being put together here. And as you correctly note, as the Pentagon correctly dangles, this is a jaw-dropping amount of money and could be a very fun playground for Wall Street investment bankers. And judging by kind of the inbound that I received saying, 'Who do I call to get this job?' it is a fairly juicy opportunity, I think.

I think so. I mean, we published what we know. So I've been calling around and not gotten a lot more detail, but I think that's the idea. I mean, the government through the Defense Department and the Department of Commerce probably have stakes in 12 or 15 private companies right now. You know, they are a way to ensure domestic supply of really important things. They can be a way to provide financing that, for whatever reason, the private sector won't. You know, there's sort of early-stage mining things that are pretty hard to finance that the government might say, 'Yeah, we'll do that.' And then they are obviously politically a thing that Donald Trump really likes. He likes doing deals. And you know, huge parts of the government have kind of retrofitted themselves, and huge parts of the corporate world too have kind of retrofitted themselves around satisfying that impulse.

Yeah, I should say sadly, I did not see an employment term sheet for this job. My guess is actually they're probably not going to pay them huge sums of money. You know, and again, I'm not a lawyer, this is not legal advice, but I do think that if you go into government for a term of service, you can sell a lot of your stock on a tax-deferred basis, which is very attractive to these people. And then the other thing they're dangling is you will make connections in government that you can then turn around and go back to the private sector and monetize. So my guess is that this is probably not hugely expensive for the taxpayer on the personnel side. I mean, the concern you have in this situation, if you go back — what was this, 15 years — to the Obama administration, there was a deal that they did through the Department of Energy. They lent money to a company called Solyndra. It's a green energy company, and it fell down and it became just an albatross around the neck of the Obama administration. And the lesson out of that, which is sort of a textbook lesson, which is that you don't want government picking winners and losers, because a, it's not very good at it, and b, even if it is good at it, like, to whom does that benefit? It's not clear that if they buy — by the way, they're up on their stake at Intel — but like, I'm not getting a check as a taxpayer. I don't. Right. And so you have to think about what you're trying to solve for. And so generally, it's the places where you might be able to justify it sort of in a more academic setting is things that, for whatever reason, the market just isn't willing to finance. Now, like, the government has lots of ways to help that happen anyway. Think about, like, no one would build missile systems if the Pentagon didn't have a huge contract to buy them, right? The government spends money in ways that make things financable. So I don't know. You know, when I talked to some folks about this, I said, 'Is this interesting to you?' And the answer is, 'Yeah, it sounds fun.' But you do have to worry about adverse selection. And the other thing I would note is that private equity firms are sitting on an epic, historic backlog of companies that they have been unable to sell — like something like three or four trillion dollars worth of stuff sitting in their portfolios because the IPO market has been sluggish, the particular kinds of M&A have been sluggish, and they are desperate to offload this to somebody. And you have to worry a little bit, if you're the Pentagon, that you become the dumb money here. And bringing in people who speak that language should probably help with that, I guess.

It certainly is. And you know, I guess on the front end, it's not totally clear to me where the money is coming from. Perhaps the NDAA, the military authorization, you know, the appropriations to fund the US military may have some money for this. You know, the Trump administration looks at these trade deals they're doing with Japan and Korea and Taiwan and saying it's another couple hundred billion dollars that will likely get funneled through Commerce and not the Defense Department. I don't really know. Well, I mean, I don't think the ideal outcome here is to have a profitable, kind of constantly fundraising, self-sustaining private equity firm inside the Pentagon. But the other thing I should note, by the way, is that, you know, the Under Secretary at the Pentagon came from private equity — the former CEO and co-founder of Cerberus. And there has been this really interesting tension actually inside the Pentagon between sort of two warring factions in finance on Wall Street. And one is private equity, and one is sort of Silicon Valley venture, which has been playing a huge role in the Defense Department and procurement. And actually, since you very graciously mentioned, we do have a new podcast, and our episode coming out Tuesday is with the partner at Andreessen Horowitz who's been running their kind of America First investments. And we talked a lot about why venture capital, which has this kind of very capital-light code DNA, like, why is it playing these like bombs and drones and like really heavy capex businesses? And so there's a little bit of tension inside the Pentagon about this. And I think that their requests specifically for private equity, Wall Street's really dyed-in-the-wool, you know, Wall Street finance guys, is probably telling to Deputy Under Secretary Feinberg's sort of personal experience.

I do not have a good answer for you on that. And I do not know like what level of outrage that would spark. My guess is like for some period of time, and then like everything else, it would kind of just be absorbed into the ether. Yeah, you know, it's interesting. We had a story a couple of months ago actually. My colleague Rachel Jones wrote this great story about companies sort of particularly looking to go public via SPACs and kind of twist themselves into basically show a little leg for the Trump administration, trying in fact to get the government to buy five or 10% of their company. The other thing you got to wonder is like a lot of these stakes are just kind of being given, right? It's not totally clear what the economics are. And the Intel stake — this was money that had already been authorized to be granted mostly, or lent mostly, granted to Intel under the CHIPS Act in the Biden administration. And you know, Trump's Commerce Secretary Howard Lutnick came along and said, 'What are we getting for that?' And they got 10% of the company. So, you know, stocks up. You know, and that actually, I think, is sort of a textbook example of something I was a little skeptical of on the way in, but it seems to have marshaled private money followed, right? You know, government money is good when it sort of sets a floor under something and encourages the private sector to take the first steps and then kind of do its due diligence, which obviously the market does on Intel every day.

I do. And you know, my own personal view is that we don't need one. Like, countries that have sovereign wealth funds, they have them because they don't have all of the things that we have, which is like a really thriving private sector and a lot of very dynamic price discovery. And what they do have is like a lot of oil. You know, and usually a big pile of money that they can rely on versus a giant pile of debt. Correct. Correct. Correct. Correct. Correct. And it doesn't usually end that well because they tend to entrench, you know, strongmen and other things. But I do think that if you look at — again, you've got money coming in from trade deals. We'll see how real that is. But the Japanese seem serious about it. I think there's a meeting this week between the US and South Korean officials to kind of hammer that one out. You have a lot of money coming in on trade deals. You've got whatever they get to keep on the tariffs. You got whatever they raise by taking Fannie Mae and Freddie Mac public. You know, there's talk of privatizing the Postal Service. Like, I don't know exactly, but there are these national assets. And Treasury Secretary Scott Bessent has talked about monetizing the asset side of the national balance sheet. I don't know if this ends with us selling the Grand Canyon or naming rights to Mount Rushmore or whatever, but you can start to see these piles of money. There's a $10 billion fee apparently coming to the US government from the TikTok deal. Story in the Wall Street Journal the other day. So you start to put these things together and it's a trillion dollars, which is the size of the largest sovereign wealth fund in the world, which depending on the day is either, I think, Saudi Arabia or Norway. So I don't know. Again, I don't think that we need one because those exist generally to do things that the market does pretty efficiently here. But Donald Trump obviously wants one, and so you're starting to see the pieces get put together. Whether it gets organized in some cohesive fashion, I don't know. It may end up being a bit of a tug-of-war between the Defense Department and Commerce and some various other agencies.

Thanks, Ed. Always a pleasure.