Why Stephen Schwarzman Left Lehman to Start Blackstone

When you're an entrepreneur and you start something, every day you're open, you lose money. But that was the strategic plan and we sent that out to sort of everybody we knew and we waited for the phone to ring and it didn't ring. We must have sent out 500, 'Hey, we're in business and we're well-known guys and let us represent you' and nobody hired us. So, this is a very depressing moment. So, I said to my partner after we called everybody and nobody hired us, 'What do we do now?' We had a secretary between the two of us. I didn't get her because I was the junior person. I'd answer the front door, for God's sakes. Actually, I'm from Philadelphia, born in Northeast Philadelphia and then we moved to the suburbs to Abington, Pennsylvania. Actually, we had about 900 kids in a class, 930 or 940. So, it was a small, intimate experience. I went to Yale after that and then to Harvard Business School. I joined Lehman in 1972. It was really interesting. It was a completely different world than we had now. I mean, the whole corporate finance department of Lehman, that was probably the number three firm at that time, was 40 people. So, hard to imagine. And it was great for learning because we didn't have what people have now, which are specialists. Everybody's a specialist at something. And we were all just generalists. So, if you were in corporate finance, you did literally every type of activity from rating agency presentations to private placements to equity offerings, debt offerings, mergers, anything that somebody needed, you did it. And I think that was a really important element of my career because you sort of knew something about everything. And in that way, you could sense trends and changes and so forth. And you know, Lehman for a variety of reasons ended up in an out-of-control situation where we had some very large trading losses and I sold the firm, I guess it was 35 at that time, to American Express Company. And then I left a year later and started Blackstone.

Well, what we did is we tried to figure out what could we do that everybody else in the world wasn't doing. And that's an important way to think, not just try and be better at what everybody else is doing. So, we actually spent, and this might be an interesting lesson for you, we spent 3 months, just the two of us, meeting for breakfast every day. And this was the breakfast that lasted 3 hours trying to figure out why we were going into business. What were we offering? So, the strategic plan we came up with was first to go into the corporate advisory business, which is what we had been in. We knew a lot of people and I finished up as head of the merger department of Lehman, and we had at that point the most active merger department. So, that required no capital. It's always good to not need capital because then you don't have to dilute your ownership. So we did that and then as part of the strategic plan, the second piece was to go into what was called then leverage buyouts. And a lot of my friends were the young people who were starting the other firms at that time, whether it was KKR, Forstmann Little, we were all within five years of each other and these people had trouble getting anybody in the investment banking business to represent them because they were very small companies and they had leverage structures and it seemed all risky and because I knew them, I took them on as clients and there was one very significant deal which if you study these things, it was called Houdaille which was about, I think from memory, somewhere in the $300 and some odd million dollars which laid out the whole structure of what was then a secretive type of thing called leverage buyouts and you looked at it and it was an amazing way to make money. Just amazing. And so I knew I wanted to do that. I tried to get Lehman to start that and we actually got a deal and it was turned down by the management committee which is one reason why they ended up broke. There weren't always great decision makers in my view. And the third part of our strategy was because finance was going through this amazing consolidation after May Day in 1975 when commissions had basically been fixed for I guess 200 years and it led to a lot of different popcorn stands that were highly inefficient cost structures, and those companies started combining and it became very clear that there was going to be massive increase in the size of firms. So, when I joined Lehman, we had about 550 people. When Lehman died, 25 years later, it had 30,000. So, I don't know what the compound rate of return is, but I'll tell you one thing, when I was at Lehman, I knew everybody by sight, a lot of people by name. When you got a firm that's 30,000 people, it's a veritable impossibility. And I thought that strategically, there were a lot of people who like to be in smaller-sized organizations. And what we should do is recruit those people when we saw an amazing opportunity, a market shift, something unusual happening, and that people who were 10s on a scale of 10 would be available simply because they just didn't want to work in these ever-consolidating big firms that became impersonal. And that if we could start those businesses, and have them generate intellectual capital, which we could use to make our existing businesses stronger, then we'd have like a great business. So, that was the strategic plan and we sent that out to sort of everybody we knew, and we waited for the phone to ring, and it didn't ring. Didn't ring. And so, we must have sent out 500, 'Hey, we're in business.' And 'We're well-known guys, and let us represent you' and nobody hired us. So, this is a very depressing moment for those who are starting things. So, I said to my partner after we called everybody and nobody hired us, 'What do we do now?' He said, 'Wait 2 weeks and call them all again. Maybe we'll get lucky.' And we did get lucky. We had a company called Squibb, which was a farmer company, hired us for 50,000 bucks. I've never been more grateful for $50,000 because when you're an entrepreneur and you start something, we had $400,000 of capital. What happens is every day you're open, you lose money. You pay the rent. We had a secretary between the two of us. I didn't get her because I was the junior person. And I had no secretary for a year and a half. I'd answer the front door, for God's sakes. And it was a real change. Now that 400,000 by the time we, I guess it was like last summer when the markets went down, is like $52 billion. So, that sounds like a good trip. But the journeys are always much rougher than people imagine. But the strategic plan of the firm never changed. It's still a great plan and we're still executing on it, endlessly creating new things. But they got to be great. The opportunities got to be fantastic for the customers.