AI transcript
0:00:05 Hello, hello, hello, Nelly. This is Tim Ferriss. I figured I’d mix up the intro. Welcome to another
0:00:09 episode of the Tim Ferriss Show, where it is my job, each episode typically, to sit down with
0:00:13 world-class performers of all different types, from all different industries, from all different
0:00:19 fields, to tease out the habits, routines, favorite books, influences, and so on, that you can, in some
0:00:24 fashion, emulate or test and apply in your own life. This time around in this episode, we have
0:00:30 a slightly different format, which I’m super excited about. I will not be the one doing the
0:00:37 deconstructing. Instead, we have my good friend, Peter Attia, taking my place. In this episode,
0:00:42 we have Peter interviewing the legendary John Arnold. As many listeners know, and many probably
0:00:49 don’t know, Dr. Peter Attia, on Twitter and Instagram, at Peter Attia, A-T-T-I-A-M-D, is a
0:00:55 former ultra-endurance athlete, so he’s done swimming races of 25 miles, etc., a compulsive
0:00:59 self-experimenter, so we get along well, and one of the most fascinating human beings I know.
0:01:07 He is also one of my go-to doctors for anything related to performance and longevity, because
0:01:13 blending the two is quite a sophisticated and subtle business. Peter also hosts The Drive,
0:01:18 a weekly ultra-deep-dive podcast focusing on maximizing health, longevity, critical thinking,
0:01:24 and a few other things. He really gets into the weeds with specialists on his show. Topics include
0:01:28 fasting, ketosis, Alzheimer’s disease, cancer, mental health, and much more. You can subscribe
0:01:33 to The Drive on Apple Podcasts, Spotify, or wherever you listen to podcasts, and you can find links to
0:01:38 all of this in the show notes for this episode at tim.blog forward slash podcast, and just search
0:01:44 atia, A-T-T-I-A. I will let Peter take it from here to give John’s full bio and introduce the episode.
0:01:50 This is one not to miss. I really enjoyed it, and hope you do as well. Thanks for listening.
0:01:56 But first, just a few quick words from our sponsors who make this show possible.
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0:05:13 Optimal minimal.
0:05:18 At this altitude, I can run flat out for a half mile before my hands start shaking.
0:05:20 Can I ask you a personal question?
0:05:23 Now would it seem to be a perfect time?
0:05:24 What if I did the opposite?
0:05:28 I’m a cybernetic organism living tissue over a metal endoskeleton.
0:05:44 I guess this week is John Arnold. John is probably the guy that’ll go down in history as the most
0:05:51 successful natural gas trader of all time. And we spend the first part of this episode explaining
0:05:54 that story. And you might think, well, what does that have to do with anything? Well,
0:06:03 it’s only by understanding how John came to amass a fortune of billions of dollars trading natural
0:06:09 gas. Can you understand the second part of this discussion, which is how at the age of about 37 or
0:06:17 38, he shut it all down and turned all of his attention to the full-time craft slash business slash art
0:06:25 philanthropy. John’s philanthropy is as serious as his natural gas trading. And his foundation,
0:06:31 Arnold Ventures, which he is the co-chair of along with his wife, Laura, focuses on really the hardest
0:06:37 social problems imaginable. And in this episode, John discusses at great length where philanthropy
0:06:43 fits into the broader picture of the nonprofit sector, differentiating it from charity and how that
0:06:47 fits into even the broader umbrella of public or government spending and even private spending.
0:06:52 And it’s only by understanding that lens that you can really understand how someone like John
0:06:59 thinks about deploying the types of resources they do, which are legion to be clear. The foundation
0:07:08 currently spends about $400 million a year in grants. And John’s goal is to basically spend their entire
0:07:14 fortune in their lifetime solving very hard problems, problems like criminal justice reform, health policy
0:07:21 reform, K through 12 reform, public finance, things like that. We obviously don’t go nearly as deep as
0:07:27 I would love to go into all of these topics. And yet somehow this podcast managed to be probably two
0:07:32 and a half hours, if not slightly more, which certainly leaves ample room for a part two of this at some
0:07:38 point in time. I guess one thing I would say about this is I’m obviously fascinated by this topic and
0:07:42 could sit here and talk about natural gas trading forever. If that subject matter, isn’t that
0:07:46 interesting to you? What I would suggest is paying close attention to the timestamps in your podcast
0:07:51 player. You’ll probably want to listen to the first part of this because it’s, I think John’s
0:07:56 background and growing up and his card trading business, his baseball card trading business. I think that
0:08:01 stuff is really important to kind of understand John’s mentality. You may actually want to skip his
0:08:06 career where he goes from college to work at Enron and don’t worry, he’s one of the good guys at Enron.
0:08:12 And then you may want to sort of skip to the part where he decides to shut his own hedge fund down
0:08:16 and instead focus on philanthropy. Again, I’ll leave it up to you, but I guess the point I want to make
0:08:20 is I wouldn’t be put off by the fact that if you’re not interested in natural gas, you won’t find this
0:08:25 episode interesting. I think this episode is interesting start to finish, but there may be some people who only
0:08:30 find one part in string or another. So, so just pay attention to where that is. So without further delay,
0:08:32 please enjoy my conversation with John Arnold.
0:08:43 Hey John, awesome to sit down with you. I’m bummed we are not able to do this in person because anytime
0:08:49 we sit down in person, it is a long and fruitful discussion where I just feel like I’m learning at
0:08:55 a geometric rate. But nevertheless, I’m excited that we’re finally getting to sit down and talk because
0:09:00 there’s so many things on my mind. Now, a lot of people listening to this podcast will not really
0:09:07 know who you are. And I’ve struggled to think about the best way to introduce you. So I thought one of
0:09:12 the funniest ways to introduce you is to do so through the tweet that you have pinned at the top of your
0:09:16 page. So remind me your handle on Twitter is, is it John Arnold Foundation?
0:09:18 John Arnold Foundation. Yeah.
0:09:22 Okay. And what is it that you have pinned at the very top of that?
0:09:30 So it’s essentially that I’ve been called the next Koch brother by the far left. And I’ve been labeled
0:09:36 the next George Soros for by the far right. And I think I write that I’m an equal opportunity,
0:09:43 special interest pot stirrer. And I think it does label me a couple of ways versus our actions at the
0:09:51 foundation, which has been kind of in its current form for about 10 years, have led to getting into
0:09:56 a lot of squabbles with both the left and the right. And at times it’s been frustrating, at times it’s
0:10:02 been liberating, but it has brought a lot of conflict, which one doesn’t normally think about when you think
0:10:08 about philanthropy and a philanthropist about having conflict and fights and battles with a lot of these
0:10:14 issues. And that’s generally been a component of our work, not by design, but by necessity.
0:10:22 And then I think the second part of it that I like is that we don’t approach all problems with the same
0:10:29 ideology. I think problems are different. Problems are complex and the type of solution for each problem
0:10:34 is different. So we don’t say that the free market is the right answer for everything. Don’t say government
0:10:40 is the right answer for everything, but it depends on the makeup of the problem, the actors, the market
0:10:45 failures, et cetera, as to what the right solution is. And therefore over the years have managed to
0:10:49 make mad both the left and the right, and sometimes simultaneously.
0:10:54 And by extension, I think there are many times that the right and the left also think you were doing the
0:10:59 greatest work on earth. I mean, I think that’s the corollary of that, which is there are times when
0:11:02 you were in lockstep agreement with both sides as well, correct?
0:11:04 Yes. Although whenever-
0:11:05 Not simultaneously.
0:11:10 They tend to be louder whenever you’re in conflict with them than when they’re showing appreciation.
0:11:11 Yeah.
0:11:18 I think part of how we’ve chosen issues to work on is we’re looking for these system problems that have a
0:11:25 lot of impact in people’s lives, where the two sides, the left and the right, have historically
0:11:31 been divided for some reason and that they’re starting to come together. Like there’s a reason
0:11:37 why there can be a solution that’s viable today that wasn’t viable five years ago or 10 years ago.
0:11:42 And that ends up being a component of almost every issue we work on is that the left and the right
0:11:49 are coming together. And so we need to be able to work with both sides. And so we’ve tried to tamp
0:11:56 down the politics, both personally and professionally over the years and try to see in the Venn diagram of
0:11:59 things that the left will support and the things the right will support, even if it’s for different
0:12:04 reasons or different motivations. Let’s explore those territories and see what can be done.
0:12:09 And I think we’re going to explore one of those in greater detail, perhaps than others,
0:12:13 which will be criminal justice. But currently the foundation I know focuses very heavily on health
0:12:18 policy, public finance platforms and criminal justice. And I think at least one of those,
0:12:22 and I don’t know why I just personally find criminal justice to be such an important one,
0:12:27 maybe we’ll come back to it because it is one where I think maybe the left and right have a different
0:12:32 ultimate motivation for establishing it, but the solutions can certainly benefit society and both
0:12:37 sides. Let’s take a step back because to put the magnitude of your philanthropy and scale,
0:12:43 the foundation is deploying what type of assets per year? Can you put some numbers to this
0:12:48 for people? We give about 400 million a year. The assets in the foundation are a little over
0:12:54 2 billion. And then we have a couple other giving vehicles, specifically a DAF. We contribute money
0:13:01 every year as well. So we have a high spend rate, but one of our philanthropic intent is to give away
0:13:06 the vast majority of our money during our lifetimes. Yeah. And you’re very young, John, you’re in your
0:13:12 mid forties. You and your wife, Laura have been at this, as you said, since you’re in your thirties and yeah,
0:13:17 you’re sort of on a mission to spend this enormous sum of money during your lifetime. That’s something
0:13:22 I want to come back to because it’s also not a typical path to philanthropy. Many people are
0:13:27 thinking about serious philanthropy at a slightly later stage of their life. Let’s start with the
0:13:30 first half of the story, which is where did this money come from? You didn’t have a trust fund to
0:13:36 my recollection, right? I did not. I did not. So where did you grow up? I grew up in Dallas
0:13:43 and a very boring, great upper middle-class lifestyle in Dallas. Went to Dallas public schools,
0:13:49 ended up going to Vanderbilt. Well, let’s go before Vanderbilt. What was your first business?
0:13:55 First business. So probably mowing lawns. I was sitting around one summer and said,
0:14:03 I want to make some money. So what can a 12 year old do to try to make a dollar? Not much. And so
0:14:09 went knocking on every neighbor’s door and tried to find a lawn to mow and realized that everybody
0:14:14 either cut it themselves or had a lawn service already set up. And so that wasn’t going to be
0:14:22 my path to riches. And then kind of around age 14, I ended up getting into the baseball card business
0:14:31 pretty actively. So this was right around 1988, 89, 90, when the sports card business was taking off.
0:14:37 And I had a small collection at the time, but I always thought of it more as an asset rather than
0:14:43 a collectible that I wanted to put on my desk and look at every day. And so the first experience was
0:14:50 just renting a table at a local trade show for $30 and going and putting a lot of the collection on the
0:14:57 table and trying to sell it. And again, the sports card business was booming. And so came home with maybe
0:15:04 $100 from the $30 investment. Now, of course, the cost of goods sold was, it didn’t really factor that in.
0:15:10 Maybe that was a sunk cost at the time, but it started getting me interested in this as a potential business.
0:15:17 And I kind of quickly figured out, I didn’t want to be spending my weekends sitting at the local trade
0:15:22 fair and couldn’t, I played highly competitive soccer. So I had things to do on the weekend,
0:15:28 but there was a wholesale market that didn’t require as much time. And so this is really kind of the,
0:15:33 again, during the start of the bulletin boards of ways where people would transact.
0:15:41 And there was a small bulletin board of baseball card dealers where they would do the wholesale trading.
0:15:47 And the market was so volatile at the time. If a particular player went on a good streak for two
0:15:55 weeks, that card would get hot, especially in the region he played. And you’d start seeing number one,
0:16:02 volatility in prices and second kind of geographic differentiation in prices. So the market for hockey
0:16:08 cards was very strong in the Northeast and in Canada, a little in Michigan, they would sell them
0:16:13 across the nation. Now the guys that bought them in Texas, there wasn’t much of a local market.
0:16:21 So I could go buy the hockey cards there, ship them up to a dealer in New York and make a few dollars.
0:16:27 And that few dollars, I would then reinvest and do it more than the sports card business was going
0:16:33 parabolic at the time. And so kind of one thing led to another, and I ended up spending a couple summers,
0:16:39 just kind of full time on this baseball card, really geographic arbitrage and information arbitrage
0:16:47 that I would have a sense of who the best buyer was for every product, wherever they were in the
0:16:55 United States, or even into Canada, and would go around and try to find any bargains I could in the
0:17:02 Texas, Oklahoma, Louisiana, tri-state area, kind of do day trips down to Houston and go to the big
0:17:07 fairs down here, would go canvas all the dealers. And that was really my first business.
0:17:14 And how were you able to drive around so young? This was pretty unusual for a kid your age to be
0:17:21 able to track that circle of geography, right? It was. I got my driver’s license at a young age.
0:17:27 I think it was at 14. My father at the time was going through an illness. He had Crohn’s disease
0:17:34 through his life and kind of a chronic condition that, especially in my teen years, became a bit
0:17:40 debilitating for him. And so I was able to get, I forget what the name of that particular license
0:17:48 was, but because there was a kind of family hurdle, family handicap that I was able to start driving
0:17:53 when I was 14. Did you know what the word arbitrage actually meant when you were conducting it?
0:17:57 Great question. And I don’t remember.
0:18:01 Can you explain to people, I mean, you’ve effectively explained it in concept because
0:18:06 it’s such a big part of your ultimate business. Can you explain it more formally and technically to
0:18:06 people?
0:18:14 I would describe arbitrage as taking advantage of price differences with little to no risk.
0:18:19 They think true arbitrage is no risk where you bought it for one and you’ve sold it at two
0:18:24 and you’ve taken no risk in doing so. In reality, there’s always a little bit of risk.
0:18:32 And so by knowing that the market in New York valued something at $20 and it was trading in Texas at $15,
0:18:39 I could take advantage of what I call geographic arbitrage there, that the market in Texas was
0:18:43 different from the market in New York. Now, of course, today with the internet, a lot of those
0:18:49 arbitrages and inefficiencies, pricing inefficiencies have gone away or have been, what we call in the trade,
0:18:56 arbed out. And so now you see the high-frequency traders trying to make a hundredth of a penny on a
0:19:02 share of stock and have huge incentive to do so and do so at massive volume. But it’s like buying and
0:19:05 selling same item with little to no risk.
0:19:12 Which is a theme we’ll obviously come back to at length. So you go to Vanderbilt. You studied, if I recall,
0:19:12 economics, yes?
0:19:14 Econ and math.
0:19:17 Do you have a sense of what you wanted to do when you were finished college?
0:19:24 I remember reading Liar’s Poker and I think Barbarians at the Gate, both classic books about
0:19:32 Wall Street. And although growing up in Dallas with my mom as an accountant, my dad as a corporate lawyer,
0:19:38 I didn’t have a sense as to what Wall Street was except through these books, except by reading Wall Street
0:19:46 Journal every day. And it seemed like that was the biggest game around. I got drawn to that game or the
0:19:53 desire to enter that game. And so my goal throughout college was to get the job and the classic post-college
0:19:56 analyst job at a big Wall Street bank.
0:20:02 So then how did that pan out? And I also recall from our discussions that you blazed through college.
0:20:06 I think you got your degree in three years by taking summer classes and just being kind of
0:20:08 maniacally focused on your degree. Is that right?
0:20:16 Yeah, I’d take 18 hours every semester, did summer school one summer, came in with some credits, and I was the guy
0:20:22 that was trying to get out of there and into the game as quickly as possible. Every day I was at college,
0:20:29 it was one less day that I had to be in the game. And I think my grades probably reflected that. I was not
0:20:35 academically focused, either in high school or in college. I think academics came relatively easy to me.
0:20:41 So it didn’t instill a great work ethic at school, but I just wanted to move on. It was a task to
0:20:43 complete to get me to the next stage.
0:20:47 So do you start interviewing for a bunch of Wall Street firms when you’re in your senior year or junior
0:20:47 year, I guess?
0:20:55 I did. So at the time, Vanderbilt was probably a tier lower than it’s considered today as a school. And
0:21:01 the investment banks didn’t do much recruiting there. So there was maybe one or two in some of the
0:21:06 regional banks. And then I was able to talk my way into a couple of interviews, but I didn’t get
0:21:13 those jobs. So I was a bit crushed. Here’s what I want to do. And I got things that were close to that
0:21:20 working at the regional investment bank. And then one of the jobs I got, which I thought was closest to
0:21:26 what I wanted to do to being in that game, was at the company Enron. And Enron at the time was in
0:21:32 this transformation, trying to become essentially an investment bank to the energy industry and
0:21:34 specifically the natural gas and electricity industry.
0:21:36 What year was that?
0:21:40 So I started at that job in 95, 1995.
0:21:44 So at 95, nobody knows Enron. They’re a pretty unsexy company, right?
0:21:45 Correct.
0:21:51 They’re basically doing disintermediation, like their market making on energy. And that’s about it.
0:21:55 They’re not this darling of Wall Street that they would become before their fall. Is that,
0:21:56 do I have my era right?
0:22:03 Right. It was historically a pipeline company. And over the decades, natural gas, which went from a
0:22:08 highly regulated business and all the troubles associated with trying to regulate a commodity,
0:22:14 right? That you end up having these huge booms and busts, way too much supply or way too little
0:22:23 supply was deregulated. And that deregulation ended in 1992. And that was really the emergence of
0:22:29 Enron, as it became the late stage company, was that previous to then you had the pipeline was
0:22:35 responsible for providing the merchant services to the buyer and seller. So the producer of gas would
0:22:41 sell to the pipeline and then the pipeline would transport the gas and sell it to the customer.
0:22:46 It was viewed that this was negative because pipelines are natural monopolies frequently.
0:22:54 And so the services and the costs of those services were too high. And so 92, they deregulate and here’s
0:22:56 Enron as the gas merchant.
0:23:02 Only because they become relevant later in this story. So was Ken Lay the CEO at that time of
0:23:06 deregulation? And when you came on board, or was Jeff Skilling there at that point in time? Not that you
0:23:10 would have had any interaction with those guys as a lowly first year guy.
0:23:19 So Ken Lay was chairman CEO. Shortly after I joined, I joined, I think, May of 95, there had been two
0:23:23 aspects of the company. It had the historical pipeline business, and then it had this new,
0:23:32 it’s called investment bank side. And there was what I later came to realize was the great decision
0:23:37 point for the company was who was going to be the number two at Enron. Was it going to be the head of
0:23:43 the pipeline business? Or was it going to be Jeff Skilling, who is the head of the energy bank? And so
0:23:50 shortly after I joined, Jeff was promoted up and Rich Kinder ended up leaving and starting Kinder Morgan.
0:23:56 And obviously, that promotion was based just as much on perhaps who they were as the direction that the
0:23:57 company was going to go in.
0:24:06 Right. I think this was a trend in corporate America then was go asset light. So get rid of your big assets.
0:24:12 Coca-Cola spins off as bottling business. They just become the seller of the syrup because that’s
0:24:18 lighter on assets. But your return on equity is higher if you have fewer assets. And so that was
0:24:21 the direction of corporate America generally and the one that Enron took.
0:24:26 So I love that you show up in May of 95, not even taking a month off like any other kid would.
0:24:29 And what is your first job at Enron? Where do they stick you?
0:24:36 It’s very rare for someone at Enron and even someone at an investment bank to be put on the
0:24:43 trading floor. Mistakes are expensive on the trading floor. And so they don’t want the kid
0:24:47 that’s a few days out of college. That would be the equivalent of we’re going to take kids out of
0:24:53 medical school and you’re going to get to start operating even simple operations without supervision.
0:24:54 That would be catastrophic.
0:24:56 Organ transplant is your first thing, right?
0:24:56 Right.
0:25:01 But I had expressed interest on the trading side when I went through the interview process
0:25:07 and they called me in April and said, a couple of people recently left our oil trading group.
0:25:14 If you can start immediately, you can start in trading. And I said, well, I graduate in 10 days.
0:25:21 How about 12 days from now? I’ll be there. And so I literally graduated, drove from Nashville to Houston
0:25:25 that weekend. And that Monday show up at work in the oil trading group at Enron.
0:25:32 So what did that mean? What did an oil trader do without as much supervision or experience as maybe
0:25:34 you would ideally want of a trader?
0:25:38 Right. So I certainly was not trading. I was kind of an assistant on the desk,
0:25:44 which meant doing a lot of spreadsheets of running analytical studies and correlation studies,
0:25:51 building models, getting lunch, doing all the things that first years do, right? Trying to learn
0:25:51 the business.
0:25:59 And at what point did your bosses there start to realize that this kid that just came out of
0:26:03 Vanderbilt a year younger than everybody else has a knack for this game?
0:26:08 Or maybe asked another way, when did you first realize you had a knack for it?
0:26:14 Quickly. I look back at all the good timings and kind of good decisions that went into my career.
0:26:22 And one of them was, I found the perfect job for my skillset as my first job. And I think that’s
0:26:29 pretty rare. And it happened by accident. Could have very easily ended up a mergers and acquisition
0:26:33 investment banker at Merrill Lynch. But I ended up trading commodities.
0:26:38 At a relative upstart of a company. That was just the perfect spot for my skillset.
0:26:46 So tell me a little bit more about that. So oil is a very complicated thing. Gas, perhaps less so,
0:26:52 at least at the time. Were those two viewed as the same trading desk at Enron? Or did you shuttle
0:26:54 back and forth between them and find yourself eventually at gas?
0:27:02 Enron, by its nature, was always a gas company. It was gas focused. The oil group was small. It was
0:27:08 kind of the redheaded stepchild. It didn’t make much money. It was necessary because some customers wanted
0:27:12 to transact on oil with the same company that they were doing their gas transactions with. But it was
0:27:18 always a small group. So then how did you work up the ranks in natural gas trading? And when did you
0:27:26 actually start to go from modeling to actually making some trades and by extension, then earning Enron some
0:27:35 money? So early 1996, I was supposed to be on a formal rotation, six months on one desk, six months on a
0:27:40 different business within Enron and kind of rotate for rotations over the two years and then go back to
0:27:46 business school. And after six months, I think the team there liked me and I liked being there and kind
0:27:53 of got made to be an exception. So I didn’t have to rotate. But kind of shortly thereafter, one of the
0:27:59 traders, I was speaking earlier about mistakes are costly in the trading side. And there was an older
0:28:04 gentleman who kind of made a mistake, kind of did a trade that ended up going bad. And they
0:28:10 reorganized the whole group. And the new boss came up and I worked for him for a couple months.
0:28:16 And one day he pulls me aside and says, I have to blow up this group. I like you. It’s not going to
0:28:20 be good for your career to be here. You need to find a different group. And he gave me two options. One
0:28:28 was go to London and work in the oil group there or go downstairs and work in the natural gas trading
0:28:34 group. And as a 21-year-old getting offered an expat package to go to UK, it was
0:28:38 extraordinarily tempting because I’m thinking I’m going back to business school anyway.
0:28:44 It was a hard decision, but I realized the core of this company is natural gas. That’s where I need
0:28:49 to be. I need to learn that. And so I went downstairs and started natural gas. And that was on its own,
0:28:55 just very fortuitous timing. I spoke about in 1992 was when the full deregulation happened.
0:29:05 The winter of 96 was the first time that natural gas prices really blew out. It was extremely cold
0:29:15 winter. And all the historical relationships that gas had just completely changed. And so going down
0:29:21 there, I knew nothing about gas, but people who had spent their career in gas wasn’t sure if they knew
0:29:25 anything about gas either. They knew the fundamentals about the physical molecules,
0:29:31 but what the historical pricing relationships were, it was a whole new game. So I went down
0:29:36 there knowing nothing, but it felt like the whole industry was trying to figure out what does the
0:29:39 world of natural gas look like today going forward, given everything’s changed.
0:29:44 How did you rise through those ranks there? Because that’s a pretty interesting situation where
0:29:47 it’s not necessarily the person with the most historical knowledge that’s going to bring the
0:29:51 most value. It’s probably the person who can learn the quickest spot patterns, the quickest,
0:29:54 and basically morph to a new environment.
0:30:02 Right. So my first job in the Nat gas division was they put me as an assistant trader with a gentleman
0:30:07 who had expertise on the physical side of the business. Didn’t know anything about trading,
0:30:12 but he knew natural gas. And I knew nothing about natural gas, but knew something about trading
0:30:17 and was good with numbers. And they essentially put the two of us together and said, you guys were
0:30:24 go figure this out, work together and run this book. And so that was my first real trading job
0:30:29 where, although I was an assistant trader on the book, but where I was involved in the trading.
0:30:36 At this time, Enron started to become a darling. And it was certainly within the energy side and within
0:30:42 the pipeline business had become this darling. Its stock was higher than all other stocks. So every
0:30:47 other company was trying to figure out how do I be more like Enron. So what’s the easy way to be more
0:30:55 like Enron is go hire Enron people, go hire someone kind of mid-level, give them a promotion and a raise
0:31:01 and have them come over to your company. And so that was happening all the time, which was great for the
0:31:09 young guy at Enron because the guy above you was leaving to go get a better job. And so it was an
0:31:18 environment where if you could prove that you were responsible and that you were smart, you could rise
0:31:25 much faster than you could at a mature company or in a mature industry. And so that next four years for me
0:31:32 was really the roller coaster where every nine months or so I would get a promotion again, like much faster
0:31:41 than I would have gotten had I been at a more mature company and ended up by the time I was 25, I was the
0:31:47 head natural gas trader at the largest natural gas trading company in the industry.
0:31:52 It’s hard. It’s almost hard to believe that that’s possible, especially now when I look at what I was doing when I was
0:31:59 25. Right, right. It is almost hard to believe it was a company that was very merit focused. I think
0:32:07 by giving out that responsibility, it was fantastic to work at a place like that. I think it ended up being
0:32:12 the downfall of the company as well as there just wasn’t the controls on people who were given too much
0:32:20 responsibility, too much of the company’s balance sheet to use without their adequate controls on it.
0:32:26 Just a quick thanks to one of our sponsors and we’ll be right back to the show.
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0:33:45 What was the stress like that you felt just in a self-imposed manner? I mean, were you,
0:33:50 if you’re 25 years old, and just give me a sense of, as a head trader at Enron,
0:33:56 we’re the largest gas trading company. We’re talking in the billions of dollars worth of potential profits
0:33:57 and losses here, correct?
0:34:05 In a given day, I was trading billions of dollars of notional value of gas. So a lot of it was trying
0:34:13 to buy it at $2, trying to sell it at $2.5 penny for enormous volumes. And so Enron was the largest
0:34:18 market maker. It was the largest speculative trader of gas. It had the most customer business coming
0:34:24 through it. And so being at the center of that, being the head trader there, it was just from the
0:34:32 moment you sat down in the morning until about 3, 4 o’clock. It was just nonstop trading. Someone would
0:34:38 bring food and put it in front of me, run to the bathroom and run back. Internet trading was starting
0:34:45 to take off then. So there was still the trading in the pit on the trading floor, like trading places
0:34:50 style. So there was that. There was trading that was happening on the internet. There was trading that
0:34:55 was happening with other people within the company that they had customers or somebody needed to put
0:35:00 a hedge on because of another deal that they did. And so it was just nonstop action. And the stress
0:35:08 level was intense. I think I’m very good at handling stress. The stress level was intense to a point of
0:35:14 not being healthy. And I think this is true of many trading floors, especially back in those days.
0:35:21 I think it’s why traders generally have short lives, trading lives, trading careers. It’s hard for
0:35:26 the body to handle that level of stress for decades and decades.
0:35:32 Were you seeing this creep out into other areas of your life? Did you have difficulty sleeping? Were you
0:35:37 able to exercise in the periods of time, like presumably in the evenings would be your only windowed
0:35:42 exercise? Were you eating like crap? I mean, you’re a very fit, healthy guy today. Is this what
0:35:45 John Arnold looked like when he was the head of trading?
0:35:51 No, I didn’t realize it. Kind of looking back probably after, after I eventually lost the weight
0:35:56 that I gained during those years and cut down on some of the drinking, started exercising a lot more.
0:36:03 Looking back at the health of my life was a bit telling, even like going and putting on some of the
0:36:09 clothes that I used to wear, seeing how I’m so differently built today than I was back then.
0:36:12 You had to find some method to relieve stress.
0:36:17 And unfortunately for a lot of traders, that’s pretty negative behaviors, right? It’s more drinking,
0:36:19 more partying, more gambling or whatever.
0:36:25 Exactly. Exactly. It is not a healthy lifestyle. As I grew up, I was able, I learned how to handle
0:36:31 the stress better. I got tired of the drinking and partying and gambling and especially kind of
0:36:37 as I got into my 30s, as I got married, as I had kids, that all starts changing. But it also can be a
0:36:44 reason why people start to get repulsed by that career. It’s the lifestyle that doesn’t necessarily
0:36:47 go along with it, but oftentimes does.
0:36:51 I want to go back to just something before we leave this topic, which is, did you get a sense of
0:36:57 an addiction to trading? Because I’ve spoken with many friends of mine who are, have at some point in
0:37:04 their life been in that field. And for some of them, the addiction, the high, the physiologic response
0:37:12 that they get to a good trade is easily on par with what the most indebted gambler feels when they’re
0:37:18 sitting at a blackjack table or with the drive that someone has to drink who is so disproportionately
0:37:25 dysregulated by alcohol. I mean, did you personally get that? Or was it more of an intellectual exercise
0:37:33 for you? How much of this was just purely limbic system, dopamine surging versus more of a calculus?
0:37:40 So I definitely seen traders where they had that dopamine aspect to their trading personality.
0:37:47 I’ve gotten the question many times, why were you a good trader? Why were you considered one of the
0:37:53 best traders in the market? And it’s always been hard for me to answer. I think part of it is I had
0:38:00 this emotional detachment from the business. So if I was having one of my best days or having one of my
0:38:08 worst days, if you walked by me, you couldn’t tell. It was just 100% focus on executing the process.
0:38:16 And so my views would change, but the process of how you look at the market can easily get swayed by
0:38:24 whenever, and there’s the phrase fear and greed that drives a lot of price trends in financial
0:38:31 assets. You’re either greedy or you’re fearful and that’s driving your behavior. And to the extent I
0:38:37 think that you can eliminate those two emotions from the trading and from the process, you get better.
0:38:42 And you know me well enough, you wouldn’t describe me as an emotional guy.
0:38:48 So does that mean it was natural for you, John, that this superpower, because that is probably a
0:38:54 trading superpower. Is that something you had to cultivate or spend any energy training in yourself?
0:39:01 Was it the product or byproduct of something in your childhood? Or was it simply as innate to you as
0:39:02 your hair color and height?
0:39:07 I think it was just innate. I think this is how I was born. I have that detachment from the emotions
0:39:14 that doesn’t affect my decision-making process. And so I think that’s one of the two superpowers
0:39:23 that I had. I think I also fell perfectly on the confidence spectrum. And I say that it takes a
0:39:28 certain amount of arrogance to be a trader because the market’s usually right. And to be a trader,
0:39:33 you have to say, I think I’m smarter than the market here. I think the market is wrong. I think
0:39:40 I am right. So it takes that arrogance in order to be willing to put on a trade. And I’ve seen people
0:39:45 just get paralyzed where they just say they’re so concerned about the downside and of being wrong
0:39:51 that they can’t do anything. So you have to be arrogant, but you can be too arrogant. And that’s been
0:39:59 the destroyer of many trading careers is if you stick with it, I am right. The market is wrong,
0:40:05 then you’re going to blow up. And so it’s, how do you have the right level where it’s like,
0:40:09 I’m confident in my view on this, but I know I might be wrong.
0:40:14 That’s amazing. When we get to talking about the second half of your career professionally,
0:40:20 which is now your full-time work in philanthropy, especially the type of bets that you make and the
0:40:27 scope and magnitude of problems that you go after. I think those two traits that made you,
0:40:32 I think most people would argue the greatest natural gas trader of all time, probably serve
0:40:35 you just as well in your philanthropy. Would you agree?
0:40:41 I think you said that well. The notion of going in saying, I think we’re right about this,
0:40:48 but it might not work, or we might be wrong. Let’s kind of write down our theory and test it along
0:40:55 the way and see if it’s playing out the way it should and not get wedded to this theory that
0:41:02 everything we’re doing in the foundation is evidence-based, but the evidence is never perfect.
0:41:08 So we’re taking the best available information and saying, how much risk should society be willing
0:41:10 to take to test a different idea?
0:41:17 So bringing the Enron chapter of your career to a close, help me understand how you and your
0:41:27 colleagues under your direction are making so much money. And yet by 2001, Enron is going bankrupt.
0:41:29 How are those things happening simultaneously?
0:41:35 I don’t have the right answer for that. I knew things in the company and other divisions. I had
0:41:39 friends that worked in other divisions. We would go have a beer after work. I would hear their stories
0:41:47 about some crazy deal that their division was doing that they thought was stupid. I would hear stories
0:41:53 about this, but our day-to-day in the trading group was just so focused on the one activity
0:41:58 that we didn’t have firsthand knowledge of any of that. It was always kind of the hearsay,
0:42:06 but the trading group was making so much money that there was a thought, I think, that we could actually
0:42:13 see this whenever earnings would get released, that the trading group could support the other divisions
0:42:18 until they stopped making the dumb mistakes and became profitable on their own. I can’t speak
0:42:21 exactly about why the trading group was making so much money.
0:42:25 There were some really dumb ideas. In retrospect, when you look at the documentaries, I mean,
0:42:30 I remember reading the book, The Smartest Guys in the Room in 2006 or whenever it came out and being
0:42:36 like completely fixated on this thing. But the whole broadband water idea, the Indian power plant that
0:42:41 didn’t seem to make any sense. I mean, there were a lot of ideas that, and again, I’m not saying this
0:42:46 like I would have known at the time these were dumb ideas. I’m sure I wouldn’t have. So hindsight,
0:42:52 of course, offers that luxury. But I mean, these were really, really half-baked at best, right?
0:42:59 It’s always easy in retrospect. Yeah. I think the disintermediation, which not only Enron was doing,
0:43:07 but was a broad theme in the business world at the time, was real. And the investment community
0:43:13 was valuing companies who were disintermediating, right? The same way that they do today in the
0:43:19 tech sector. There’s a lot of value to be created if you can disintermediate a business chain.
0:43:25 I think Enron, trying to approach it from the commodity side and trying to do it with water,
0:43:33 trying to do it with electricity, doing it globally in places where the quality of law and of
0:43:39 intellectual protections isn’t what it was in America, and then having the culture of never
0:43:46 being able to admit failure that existed not only in Enron, but again, in many other companies at the
0:43:53 time as well, meant that whenever mistakes were made, there wasn’t the admittance to Wall Street
0:43:58 that this was a mistake and we’re going to change. It was swept under the rug.
0:44:06 And Enron, the process of bankruptcy kind of happened so quickly because all these financial
0:44:11 businesses, which at the time Enron had morphed into a financial business, is completely contingent
0:44:17 upon having the faith of your creditors, having the faith of Wall Street. And once Wall Street
0:44:23 loses faith in you and refuses to fund you on a day, the business is toast. And that’s what happened.
0:44:28 And it happened, as you said, precipitously. I mean, I could certainly sit here for another four
0:44:33 hours and talk to you about mark-to-market and all of that, but I think we’ll let the listeners who are
0:44:38 really interested in that go back and either read the books, watch the documentaries, or go deeper on
0:44:43 that. Let’s bring it back to you, which is at what point do you realize your career at Enron is going to
0:44:49 be cut short? So despite the fact that you’ve had your head down, you’ve been, I think you could make the
0:44:55 case the single most profitable human at that company. If the company goes under, you’re out of a job.
0:45:00 When was that apparent to you? And then what were your next moves? And how did you consider the decisions
0:45:01 you had to make?
0:45:09 It happened so quickly that there was damage control that I could see from my perspective in the company.
0:45:13 Again, my perspective was sitting at a desk with two phones in my ear for most of the day.
0:45:19 Didn’t get a much of a sense of what was going on outside of what natural gas prices were ticking up.
0:45:26 So it happened so quickly that there wasn’t much to be done from the trading side perspective. This was
0:45:32 all kind of, all those decisions end up in the finance side, the CFO’s office of how do we raise
0:45:42 money? And so when it finally kind of November of 2001 was kind of shortly after 9-11 and that caused
0:45:47 some havoc in the financial markets. And then that’s when Wall Street was not going to give you a second
0:45:54 chance in that environment. And Enron arguably didn’t deserve one. And so it all happened so fast that
0:45:59 whenever Enron lost credit worthiness in the business, then it just, it was over. Business over.
0:46:06 There was some time spent trying to find a credit worthy JV partner to come in and Enron would
0:46:10 contribute the intellectual assets and someone would contribute new money and keep the trading
0:46:17 operation going because it had been so profitable. If it was just swept away in bankruptcy, it was a loss
0:46:23 of a lot of potential value to what was then the estate of Enron, the creditors of Enron. And so there
0:46:27 was a lot of focus on trying to cut that deal and a deal was eventually cut with the New York bank.
0:46:32 And I looked around and I looked at the deal and kind of for the first time stepped back and
0:46:36 started thinking like, what do I want to do with my life? And that’s where the decision was.
0:46:42 I don’t want to go with this entity. I have different views on how this business should proceed in the
0:46:50 future. And I want to go try it somewhere else. So you take your bonus check, you take some money
0:46:54 from a few other folks and you set up your own hedge fund in early 2002, right?
0:46:57 Yeah. Mid, mid, mid 2002.
0:47:02 Again, you’re the perfect guy to do it because you’re not too stressed about it. You’ve got a
0:47:07 proven track record. I guess you’re somewhat toxic because even though you come from the part of Enron
0:47:13 that is fully legitimate, you still have that name on your back. Did that hurt you when you were,
0:47:16 I mean, were you trying to raise capital? How did that factor into your hedge fund?
0:47:22 So it was an interesting time to say the least. So right after Enron declared kind of the first
0:47:29 quarter of 2002, I was getting calls by a lot of people, people I didn’t know saying,
0:47:36 if you are going to do your own thing, I have interest in investing with you. And my intent was
0:47:42 to try to raise $50 million of day one capital and just start there and let it grow organically and
0:47:48 increase over time. And I thought I’d be cutting people back. I thought fundraising would be very
0:47:53 easy. There was going to be $200 million of interest and I was going to cut everybody. You can
0:47:59 invest 25% of what you want to. Second quarter, 2002, dramatic change. This is when a lot of the
0:48:06 investigations into Enron start to bear fruit, if you will, and the headlines come out. And the
0:48:13 headlines are, they’d say every week there’s a new scandal that’s coming out. And now the people who
0:48:20 had called me, one, they don’t know if the profits that were posted in the New York Times, whether those
0:48:28 are real or not, whether I was going to jail or not, all these questions. And so everybody who was
0:48:33 banging on my door to invest pulls back. But meanwhile, I’ve rented office space, I’ve hired
0:48:40 employees, I’ve bought computers and telecom systems, and I got to move forward. I have almost no money to do
0:48:48 this now. I ended up starting in August of 2002 with $8 million of capital, some of which was mine, and I had
0:48:49 two outside investors.
0:48:56 So talk about pressure. $8 million of assets under management is not exactly what you had in mind.
0:49:00 As far as you know, basically the only way you’re going to grow your fund at this point is by
0:49:05 organic returns. You’re going to have to return your way into more money. You’re not going to be out
0:49:05 there fundraising.
0:49:10 Right. So one of the things after Enron went bankrupt is Wall Street started looking at
0:49:17 all the copycat Enrons. So all the other pipeline companies and electric utilities who had started
0:49:23 out these merchant businesses or trading businesses. And Wall Street essentially says, we’re not funding
0:49:29 those businesses anymore. There’s too much risk. And so what happened was that there is great need
0:49:36 for risk intermediation and for risk warehousing in the business. And half of the largest players
0:49:45 are out of that business over the first six months of 2002. And so the market became incredibly
0:49:54 inefficient and was willing to pay for the task of intermediation at a very high rate. And so just by
0:50:01 setting up the computer, there was, going back to the arbitrage, it was very low risk or arbitrage type
0:50:09 trades that shouldn’t exist in a normal functioning market that existed for that next year, just because
0:50:17 the market players had been so decimated. So the first month, I was up 36%. On a percentage basis is
0:50:23 high on an actual dollar basis and made $3 million. But also to put a point on what you just said a
0:50:29 second ago, you’re up 36% in a month at a very low risk. So it’s not just the value, it’s the value at
0:50:33 risk here that matters. Exactly. Value at risk, I like the term.
0:50:38 Well, I was a McKinsey guy, remember. Risk practice, right? So we think a lot about VAR as well.
0:50:45 Yeah. So then second month, I’m up 33%. Third month, I’m up 38%. And I’m sending the notes out,
0:50:50 the investor notes out to everybody that was in my Rolodex that expressed interest. And now all of a
0:50:56 sudden, three months in, I’m up, what’s the compound rate? Probably 150% in three months. And so some of the
0:51:02 people will start calling me back and saying, hey, maybe I’ll send you some money. And so those
0:51:09 first few years, it was doing a lot of the low risk trading to create the base and this upward trend in
0:51:17 profitability, and then layering on some speculative trading on top of that. And I was able to play
0:51:24 bigger than my asset size because I had this upward trend in profitability. If I was wrong on my market
0:51:29 call, I wouldn’t be decimated because I was still making money on the market making arbitrage
0:51:30 side of the business.
0:51:36 Your spec market initially was actually quite small. You switched those 10 years later. We’re
0:51:41 basically doing the opposite. But at the beginning, it was an amazing, you described it to me in the past
0:51:44 as I think the perfect time to be a natural gas.
0:51:45 Yes.
0:51:47 Based on that inefficiency.
0:51:53 Yeah. It was just risk reward. It was don’t even bother about taking risk. Yeah. There’s so much
0:51:58 free money in the market by providing that service. Just do that. You can think about the business as
0:52:04 a bundled product. One was the market making, providing liquidity and getting paid for that
0:52:10 service, warehousing some risk. And the second was trying to make a call on where natural gas prices
0:52:15 were going next. There’s some synergy of having those together. There’s a lot of synergy in having
0:52:18 those together, but that’s the two strands of the business.
0:52:24 And most people, myself included, when they think about gas trading are only thinking about the
0:52:31 speculative business, which is my former countryman, Brian Hunter, very, very famously blew up in fall of
0:52:36 2006. A hedge fund called Amaranth at the time was probably one of the biggest blowups in all of
0:52:38 energy. We’ll come to that because you were on the other side of that trade, if I recall.
0:52:44 But it’s those stories that get most people thinking about that’s how you make or lose money
0:52:49 in natural gas trading. But you were doing something, you know, I always talk about risk to people. I sort
0:52:53 of explain it as a two by two. Are you picking up bitcoins? Are you picking up pennies? And are you
0:52:58 doing it in front of a bulldozer? Are you doing it in front of a tricycle? You want to think through
0:53:02 that two by two very clearly. It might be worth picking up a Bitcoin in front of a bulldozer,
0:53:07 but it is not worth picking up a penny in front of a bulldozer or a bullet train or something like
0:53:13 that. And so you sort of have to understand that’s this idea of risk and return. So at what point,
0:53:20 I mean, I just want to kind of go back to John, the guy who’s on this ride that seems hard to believe,
0:53:27 but anybody who’s made the type of money you’ve made in life goes from being, I mean, I guess I’m
0:53:32 asking this question in a weird way. Is there a moment at which you realize you’re not going to have
0:53:35 to worry about money anymore? I don’t know what that dollar amount is. And I’m guessing for different
0:53:40 people, it’s a different amount. I’ve had people tell me that this is going to sound ridiculous too,
0:53:46 but I’ve had people explain to me that until you have $600 million in your bank, you will never feel
0:53:51 totally secure, which I find that ridiculous. And I disagree with that idea though. I will never have
0:53:56 $600 million in my bank, but there must be some number at which you realize, Oh, my life and the
0:54:01 life of my family is going to be very different. Do you remember that occurring for you?
0:54:08 Yeah. So that first year was remarkable and for many reasons, but one of the things that happened was
0:54:16 that the gas market ended up being very tight. That demand was high and supply wasn’t keeping up.
0:54:24 And so the outright level of inventories was okay, but the trend was that we were drawing inventories
0:54:30 or not putting gas in the ground like we should have been doing. And again, had the market been more
0:54:35 efficient than I think other traders, other traders did notice this and others put it on,
0:54:40 but there were some trades that were, I thought were very misvalued from a risk reward perspective.
0:54:48 And that was that if we were to have a cold winter, that first one, 2002, 2003, if that winter was cold,
0:54:55 the gas market could experience some significant shortages and the price spikes that would correspond
0:55:02 to those shortages. Now the weather event was maybe a one out of five probability, but I think the
0:55:11 bets were pricing them at, that it was one out of 50. And so as I’m making money on market making and
0:55:15 providing liquidity, I was putting on some of these trades, just putting a little bit of money into
0:55:20 this trade at various points. And that winter ended up being the one in five weather event.
0:55:24 And there was a two day stretch in late February.
0:55:25 February 2003, right?
0:55:26 February 2003.
0:55:27 Yeah.
0:55:30 One of the three highest gas prices we’ve had in the last 20 years, right?
0:55:36 I think so. Yeah. It all starts to blur together now, but you had this massive spike in price of
0:55:44 gas, I think approximately doubled in if two days. And that was the day the fund also kind of more than
0:55:51 doubled in those two days in terms of, of assets. And that was the day when it was like, I feel rich
0:55:54 for the first time. I am set for life today.
0:55:57 Did you call anybody?
0:56:02 I remember calling my mom, pretty much saying those words that we’re set. We have financial
0:56:05 security now forever, regardless of what happens.
0:56:13 So doing the math, you’re in your late twenties at this point. Did you have any sense at that moment
0:56:20 that you were going to be out of the game in 10 years and full-time working as a philanthropist,
0:56:23 or was that not a clear part of your vision yet?
0:56:30 I always recognized the limited social value of trading. I think there is a need for someone to
0:56:38 provide risk warehousing and liquidity to markets, but they trying to tell the story about how I was
0:56:45 adding value or contributing to society was hard. And that always bothered me. So when I first started
0:56:52 getting my first hundred thousand dollar bonus back when I was at Enron, I shortly thereafter was at a
0:57:00 supermarket and I see a magazine that says top 50 nonprofits in America. And I pick it up and throw
0:57:07 it into my, my grocery basket and take it home and immediately turn to the education section. I think
0:57:13 a lot of younger philanthropists, a lot of people from the finance industry get drawn to K-12 education.
0:57:18 One of the organizations was based in Houston. It was KIP, KIP charter schools. And so I called them up
0:57:26 and got scheduled to go do a tour, went, did a tour. They had no idea who I was at the time. I wasn’t a
0:57:32 rich guy back then, but I came home and, and wrote them a check, a five figure check. And I get a call
0:57:37 from the founder who I had not met on the, on that original tour a couple of days later. And this was back
0:57:44 kind of five figures was really significant to the organization. And he said, thank you. And who are
0:57:50 you? And I need to cultivate this relationship. And that was the start of my very long journey thinking
0:57:58 about K-12 education in the country. And so in this time, 2002, 2003, I was getting more interested
0:58:03 in it and my check size was going up, but it was something I thought about 1% of the time.
0:58:13 So as your hedge fund is growing and growing and growing, at what point are you now getting the
0:58:20 attention of basically everybody who wants to come in and you’re doing the opposite? You’re probably
0:58:22 starting to force distributions at some point.
0:58:30 There was a trading magazine that came up with a list of highest paid traders. And that was from
0:58:37 specifically from the hedge fund world where most of the highest paid traders existed. And it was not
0:58:43 only what was the return on your investment in the fund, but what was your incentive fees and kind of
0:58:49 trying to estimate that. And they would create these lists of top 100 for the year. And I don’t remember
0:58:57 what year it was, but somehow they got ahold of my returns and started doing the math on it and figured
0:59:05 out that I was not only one of the top 100, but I think top five that year. And that was the first time
0:59:14 in a broadcast to the world that I was making big money, but also was a broadcast to the rest of the
0:59:22 industry that something’s going on in natural gas and all the other hedge funds should, it was a signal
0:59:27 to them, go figure out what’s going on over there. How’s he making this much money and see if there’s
0:59:32 something for us to do. So during that time, as will happen in any market, whenever there’s kind of
0:59:38 above market returns going on in a field, new entrants come in. And that’s certainly what happened
0:59:46 during that time. I made a very deliberate decision that I was going to keep the focus of the business
0:59:54 narrow, which I wanted to be the best in the world at North American natural gas and power trading.
1:00:00 That was the business. Didn’t want to trade oil. Didn’t want to trade natural gas stocks or natural
1:00:07 gas bonds. Didn’t want to trade agriculture. Stick to our expertise. Don’t try to build an empire here.
1:00:15 Just do this one thing. And I think by doing so, I think it, by keeping focus and it allowed us to
1:00:22 achieve that mission of being the best in the field. I think it also started, it put a natural limit as to
1:00:28 the amount of assets that we could manage. So we just couldn’t be too big relative to the market.
1:00:33 And the amount of money that we were making was significant. And so we started sending back money
1:00:40 to investors. What was the greatest you allowed your AUM to swell to, to allow yourself to stay so
1:00:46 narrowly focused? At the peak, it got to about $6 billion. That’s a staggering sum of money. There
1:00:51 are lots of hedge funds that have ballooned to $20 and $30 billion in assets under management. And your
1:00:56 point is, yeah, that sounds great. And you’re going to collect a lot of fees on that if you’re the fund
1:01:02 manager, but you may be spreading yourself too thin into areas that you don’t have the deepest,
1:01:07 deepest domain expertise. Right. From very shortly after I started, I was the largest investor in the
1:01:14 fund. And I was in it for the return on my money. That’s how I managed the fund. And that’s how we would
1:01:23 pitch it to central investors was, I think this is a great investment opportunity. This is where I want
1:01:31 my money. This is the risk, where I am on the risk spectrum for my money. And if you want to join on
1:01:38 that journey, I’d be happy to have you, but I’m going to run a risky business. And you have to be
1:01:45 prepared for that going on because I wasn’t in it to make the management fees. That’s not how I wanted
1:01:50 to, that wasn’t my business. Right, right. If you’re more than 50% of the AUM, you can’t make money on
1:01:55 yourself. You can’t make fees on your own money. Right, right. So it was, it was always driven by
1:02:01 how do I want my money managed? What do I think is a good investment for me? And then if other people
1:02:07 want to put money alongside, that’s great. So by the way, I want to go back to one thing. Talk to me
1:02:11 about the 06 Amaranth trade. Explain for people that given the historical significance of that was
1:02:15 pretty significant and the fallout of that has reverberated for many years as far as the amount
1:02:21 of money that was lost and things. Who is Brian Hunter? What did he do so well in 2005? How did that
1:02:28 speculation sort of go the other way in 06? 2005, I hope I get all these facts right. My memory gets a
1:02:35 bit cloudy from those days, but 2005 was Hurricane Katrina. It came in and caused significant damage
1:02:41 on the offshore natural gas production as well as the processing, natural gas processing facilities that
1:02:48 were onshore Louisiana. And because of that, the price of gas spiked significantly. People were short
1:02:54 supplies. I looked this up yesterday, John. That is both unadjusted and adjusted for inflation,
1:03:01 the greatest peak in natural gas pricing of the last, I think, 30 years. That’s September 05,
1:03:07 right after Katrina. Yeah. And after that time, I think two things happened. First was as ocean
1:03:12 temperatures were rising, there started to be a belief, the number of hurricanes and the intensity
1:03:18 of hurricanes, and thus the damage from hurricanes to the energy sector and natural gas sector was
1:03:27 structurally increasing. And second, that there’d be a great fear amongst any trader to be short during
1:03:36 that time period, the hurricane season and August and September peak hurricane season. So he had done
1:03:42 very well in 2005. This is Brian Hunter. Brian Hunter. In 2005, he was long during that time and made a lot of
1:03:48 money for his fund. And at the time, he worked for a fund, Amaranth Advisors, which was a macro hedge fund,
1:03:54 meaning they do everything. They trade stocks, they trade bonds. Brian Hunter was the natural gas trader for
1:04:01 them. Now in 2005, as I understand it, he was by far the most profitable trading desk and trader at
1:04:08 a large hedge fund. And so he was given a lot more position size or capital to trade with. And I think
1:04:15 he had the belief that something similar would happen or at least a big scare would happen next year and
1:04:20 would cause the same type of move. The difference was partially in reaction to the spike in prices that
1:04:28 we saw in 2005. It sent the signal to every producer to increase supplies. So every producer
1:04:33 gets that price signal. Every producer puts more money into drilling for gas. You start to see that
1:04:41 in 2006, that supplies are ramping up. And talked about earlier that the supply demand was tight in 2002.
1:04:48 Supply demand got very loose in 2006. And so the market was just oversupplied. It was a very bearish
1:04:55 market. But Brian Hunter kept this trade on, this very bullish trade on, and kept the prices supported
1:05:01 even though the fundamental picture was deteriorating by continuing to buy more and more and more of this
1:05:09 one product. And to put a long story short, he distorted the relative values in that market so much.
1:05:16 It gets told now that the trade was me versus him. And that’s very not much the case. It was the whole
1:05:23 market versus him because he was such a large position in this as it started to get into the
1:05:28 first, the very early part of hurricane season and there was no hurricane and then prices were starting
1:05:34 to collapse and he couldn’t hold it anymore. So he kind of single-handedly, that position bankrupted
1:05:42 this macro hedge fund. And I did well during that trade. I think I may have had on 25% of the
1:05:48 opposing position. I was very cognizant that it is possible that a hurricane comes and has a short-term
1:05:54 price spike. And I don’t want to blow up if and when that happens. So I need to size this appropriately.
1:05:58 And I don’t think he had sized it appropriately given the alternative scenario.
1:06:03 And that’s an interesting thing because it wasn’t just that you guys were betting against each
1:06:08 other in terms of climate or weather, for which I would say three months out, that becomes an
1:06:14 unwinnable bet. Nobody can have more or better information on that. It’s the second order bet
1:06:21 that’s interesting to me, which is, okay, he’s taking a position on climate or weather, but it’s really,
1:06:26 you’re taking a position on the more important question, which is supply. And you’re saying,
1:06:32 even if we are hit with a demand shock, I believe the market is better able to bear this now than it
1:06:38 was in 2005. And ultimately, that’s really what the bet comes down to. It’s true, a hurricane didn’t hit
1:06:44 that year and the price collapsed. But it’s also possible that if a more mild hurricane than Katrina
1:06:47 had come, we probably wouldn’t have seen the price shock we saw in 2005.
1:06:54 Right, right. The market was so scared. And so people were hesitant. People were only going to
1:07:00 put on that short trade if they thought the market had already priced that in. And I used to think
1:07:07 about it as you have this unknown weather event. How cold is the winter going to be? What’s the hurricane
1:07:11 situation going to be? And you can think about it, you have this probability distribution function
1:07:18 of the possible outcomes. And then think about, okay, under each outcome, how would I think about
1:07:23 what fair value is of the commodity at that time? And then did your simple math and come to expected
1:07:31 value? And that really simplifies the process down much too simplistically. But that was the type of
1:07:37 thought process that would go in is, okay, if it’s 80th percentile hurricane damage, what is that? If
1:07:43 it’s 90th percentile, it’s 99th percentile. What if it’s 10th percentile, right? And think about all
1:07:48 these and then how’s the market price today? Certainly at that time, there were people who
1:07:53 weren’t allowed to be short. There were people who were only going to be short if it was way mispriced
1:08:00 relative to expected value. And I think that’s what got him was that it was already so mispriced to
1:08:07 expected value that even had you had this supply shock happen, what’s the upside now? We’re already
1:08:13 priced for that. Yep. When you explain it that way, it’s a much sadder story than just two guys
1:08:18 betting against weather and one guy’s got to be right and one guy’s got to be wrong. You realize
1:08:23 that it was probably a bit more of an error and hubris as well, which goes back to your point about
1:08:27 maybe being a little too confident in your ability to predict what’s going to happen.
1:08:33 You spent a lot of your time doing research. I mean, again, we’ve already talked about you having
1:08:38 two superpowers, but having known you for a while, I would add to that list, maybe a third superpower,
1:08:45 which I believe also has come to serve you very well in your philanthropy, which is you have an
1:08:52 insatiable bordering on pathological obsession for knowing everything. And I say that in the kindest way
1:08:57 as someone who shares part of that affliction. And I remember once you explaining to me some of the
1:09:01 details you would study about natural gas pipelines. It’s like, look, if I’m going to be
1:09:07 the best trader in this commodity, I have to know everything. I have to know exactly what this
1:09:12 pipeline looks like. How does it cross this type of part of the country? What type of bolt are they
1:09:16 using in it here? And what happens to it during this type of weather? I mean, how much of your time went
1:09:24 into understanding every piece of the minutia of how the system worked that you were basically going to
1:09:27 dominate in terms of arbitrage and speculation?
1:09:34 So by being a hedge fund structure and not being in the physical business, not dealing with customers
1:09:40 and dealing with pipelines, we were at an information disadvantage going in. When we were thinking,
1:09:48 think about whenever I trade against a counterparty and they’re putting on the opposite trade I am,
1:09:56 what are they thinking? What do they know? Can I replicate as best I can the knowledge that they have
1:10:01 so that I can make an educated and confident decision? Do I want to be on the other side
1:10:10 of this bet? And to do so, we were at an information handicap just in terms of BP had more information that
1:10:17 would come through their shop than we did. So we had to make it up by having better analysis and
1:10:24 knowing where to get third-party information and how to analyze that information, how to craft better
1:10:32 models that described what the past was and thus what the future is going to be, and then try to overlay
1:10:40 some good smart trading and structuring of trades on top of that to get the above average returns.
1:10:45 But I think we were always fundamentally focused. And this came from the days at Enron, which was the
1:10:53 largest physical mover, shipper of gas, was count the molecules. Try to count as many molecules as you
1:10:59 can. Where did it come from? Where did it travel? How was it consumed? And so you can build a molecule
1:11:05 about, if you know how every molecule behaved yesterday, you can model how those molecules are going to
1:11:10 behave tomorrow and how those molecules can behave in six months. Now, your confidence level is not as
1:11:15 good in the six-month model, but you can start doing that. And then you can start doing the speculative
1:11:22 trading on top of it. And so I think we probably had the biggest fundamental research department of any
1:11:29 competitor in this space at Centaurus. And that was really what I thought our advantage was, was that
1:11:35 we’re going to invest in the fundamentals more than anybody else is, and then overlay that with some
1:11:40 good trading. You just alluded to something which I guess I hadn’t picked up on before, or at least it
1:11:46 just occurred to me now when you said that. Earlier, you said natural gas was easier than oil. When you just
1:11:53 gave that explanation, you talked about being able to count every molecule of gas. I suspect that that’s what
1:11:59 allows an island like North America to be easier to trade gas than oil, because we have more insight
1:12:06 into where gas is coming from. LNG was not a big part of gas. So gas was being locally produced and
1:12:12 consumed. It’s not like with oil where, my God, it’s coming from everywhere and it’s going everywhere,
1:12:16 right? Is that a fundamental difference between natural gas and oil trading, at least at that time?
1:12:21 I mean, I know natural gas is more complicated now with shale, with liquefied natural gas that can go
1:12:26 offshore, but is that part of why you made that statement earlier? Yeah, I think there’s three main
1:12:32 differences that made natural gas a great product to trade. One was, it was this closed system that you
1:12:37 described, that the molecules for the most part were just stayed in North America. There was a little bit
1:12:43 of LNG business, it was mostly baseload, so it was easy to predict what those flows were going to be in the
1:12:50 future. That wasn’t a big variable that was going to cause price moves in the future. And because it was this
1:12:57 closed system, you can model it with much better accuracy. Second was that the deregulation that got
1:13:03 the pipelines out of the business and the pipelines had to be third parties that couldn’t take ownership
1:13:09 of the gas. The only service that they could provide was transportation. And by doing so, they didn’t have
1:13:15 the pipelines, which had the most fundamental information about where the gas came from and where it was
1:13:22 going. They had to publish all this information in a way that was publicly accessible, and they couldn’t
1:13:27 trade on it. So there had to be the Chinese wall between the trading group. And when you compare that
1:13:35 versus oil, Exxon can own the oil platform in the Gulf of Mexico, stick it in on an Exxon ship, take it to an
1:13:42 Exxon-owned refinery and put it in Exxon gas stations. And so as an outsider trying to figure out and track
1:13:49 those molecules, it’s impossible. And that’s why the best and most profitable oil traders have to be in the
1:13:55 physical business, have to be moving molecules. And the third is that natural gas, because it was a
1:14:03 seasonal product, you store it during the summer, getting ready for the peak winter demand, that there
1:14:10 was a window of storage that the industry almost required when you go into the winter. And there was
1:14:18 a window of what it should be when you exit the winter. And so twice a year, there was a mechanism
1:14:26 to get you back close to fair value. And if you compare that to a tech stock today, I have all these
1:14:31 debates about some stock, there’s nothing that necessarily has to get that tech stock back to
1:14:38 one’s belief of fair value. There’s not that forcing mechanism. And if you’re talking about gold,
1:14:43 there’s no forcing mechanism in gold. If you have a surplus of gold, you’re going to stick it in a safe
1:14:50 place. But with limited storage in natural gas, and the need to have a certain amount of storage when
1:14:55 you enter the winter, it caused that forcing mechanism, which got you back to fair value. So
1:15:03 while price could deviate from fundamental value for parts of the time of the year, twice a year,
1:15:08 it kind of had to go back to that, which was great as a fundamental trader. There’s a lot of commodities
1:15:12 where they don’t necessarily have to go back to that fair value.
1:15:21 So the country is entering a recession, 2008, 2009. You are still staggeringly profitable.
1:15:27 Where at this point in time is your head with respect to philanthropy? So we’ve established the
1:15:33 fact that when you were making $100,000 bonus as an early trader at Enron, even before you became head
1:15:39 trader, you’re already spending 1% of your energy thinking about how you want to utilize your wealth
1:15:47 down the line. But now let’s talk 2009, 2010. You’re almost a decade into running your own fund,
1:15:51 which will probably go down in time as one of the most profitable hedge funds of all time,
1:15:56 certainly in this space. Are you, what are you, 10% now thinking about philanthropy? I mean,
1:16:00 how are you now thinking about chapter two of your career?
1:16:09 Yeah. So I met my wife in early 2006 and she had moved to Houston. She was a mergers and acquisitions
1:16:17 lawyer and had moved to Houston to help start an energy company and spent, I forget exactly how long,
1:16:22 but call it 18 months on that job. She and I had started in the meantime, we’d gotten married
1:16:29 and we’re starting to think about what should we do with our lives now. We had this momentous event of
1:16:33 marriage. What does she want to be doing? What do I want to be doing? We have the financial resources
1:16:40 to do what we want with our time. And so she answered that question by saying, I don’t want to work at the
1:16:46 energy company anymore. I want to focus on our philanthropic activities, which we had both been
1:16:54 doing a little bit on the side. At this point, call it 2006, I was spending maybe 3% of my energy on
1:17:04 philanthropy and she the same. And by 2008, she had gone full-time with our nascent foundation and we
1:17:12 started hiring a few people. And I was starting to spend more of my energy, call it 10%, 15% of my energy
1:17:21 energy on the foundation, which became troubling a little bit because it’s obviously markets are
1:17:27 efficient in the longterm. The markets are smart. The competitors are smart. Competitors entered,
1:17:34 had to keep finding new ways to stay above the competition. And one of those was you have to be
1:17:42 100% focused on this job. It’s too competitive to not be 100% focused. And when I went 90%, then it got
1:17:49 harder. As the preceding years happened and I started thinking more about giving the money away than
1:17:54 making more of it. That was really the signal to me that I want to be spending my time on the other
1:18:02 side of the table. And I’m physically and mentally, emotionally exhausted with trading natural gas. It’s
1:18:08 the only thing I had done as a professional, again, from a few days after graduating college. And here I am
1:18:14 17 years later, I’m still doing pretty much the same thing. And I want to do something else with my life.
1:18:19 And so that was 2012. And that’s when I decided it’s time to shut this down.
1:18:24 I’m guessing that, I mean, I’ve spoken with some of the greatest scientists in the world and
1:18:30 not everybody says this, but there are some that do, that they say they can’t stop thinking about what it
1:18:37 is they’re working on. Anytime they get to a stoplight, that’s where their mind wanders. When
1:18:41 they’re in the shower, that’s where their mind wanders as to the problem, as to the questions that
1:18:46 they’re trying to ask, as the problem they’re trying to solve. Is it safe to say that you probably felt
1:18:53 the same way until you hit that inflection point? Absolutely. And this was spent more than a decade
1:18:58 living, breathing. I would, after work, go out with other people in the industry and talk about
1:19:03 natural gas, dream about natural gas. I would wake up in the morning. First thing you do is
1:19:08 check the prices, get in the shower, think about it. What could go wrong? What do I want to do today?
1:19:13 What’s the plan? And it was just all encompassing in life. I think to be successful in these competitive
1:19:20 fields, whether it’s in health research or in trading, you have to give it that a hundred percent
1:19:25 focus. And if you don’t, you’re going to see it in the results. It’s just too competitive.
1:19:32 So was it a hard decision for you then to shut your fund down, return the capital to people and
1:19:38 become a full-time philanthropist? Or was it actually quite easy once you accepted, I’m no longer giving
1:19:46 a hundred percent of my brain power to this other thing? It was hard. That’s who I was as certainly a
1:19:54 professional and who I was largely defined as a person as well, was as a natural gas trader.
1:19:59 Had been the place where I’d had the most success of anything I had tried to do in my life. And so
1:20:06 starting in about 2010, I knew this was the decision I needed to make. It was hard. It was a hard decision
1:20:14 to make. It got easier because things had changed in the market. So if you look at the graph of natural
1:20:22 gas prices, you see them peaking about July of 2008, maybe late June, 2008, and just being on a steady
1:20:28 decline and the volatility starts to change as well. The shale revolution took the market from one that
1:20:34 was ever increasing demand and harder and harder to get the next molecule of gas out of the ground.
1:20:40 So having to try to balance that through price, which becomes very volatile and needs to booms and
1:20:46 bus to one that was in perpetual oversupply and kind of bouncing around marginal costs to produce.
1:20:51 And so the opportunity had changed. And so I’d given back at $3 billion back to investors.
1:20:58 And I was at the point where by 2012, I was at, I need to give back another 50% down to a billion and a
1:21:03 half, just the market opportunity is not there. And it’s hard when you’ve been playing in Vegas with,
1:21:08 at the $25 table to go back down to the $5 table. It’s just like not as emotionally
1:21:16 interesting. And so that happened. I’d gotten married. We had kids. The regulation in the business
1:21:22 partially, in fact, maybe largely due to the Brian Hunter episodes that had, when the price distortions
1:21:29 that wasn’t good for the market had just become harder. And I had just lost the focus of my interest
1:21:33 in the foundation side. And so all these things came together and it still took me two years to
1:21:40 really figure out to try to make that call that it’s time. It’s time to close us up and go find
1:21:46 happiness somewhere else. And I think part of that struggle was I had seen many other people in the
1:21:52 industry who had, who had had similar thoughts along the years that they want to go do something else.
1:22:00 And a lot of times those people left and couldn’t find what to do or couldn’t find satisfaction at
1:22:05 their lives doing something else. And so even though that they were unhappy in the trading business,
1:22:11 they ended up back in the trading business because they were even more unhappy what the other thing
1:22:16 that they had tried to go do. And so that was my fear. It was that a year from when I close up,
1:22:21 I’m going to miss it and I’m not going to find satisfaction in this other thing.
1:22:27 And then what, what do I do then? Do I, am I really going to go start it up again? And like,
1:22:33 that took me those 24 months to really get the confidence to say, I can’t find happiness here.
1:22:36 I can find other things to do and to close it down.
1:22:43 So talk me through some of those early days. Then Laura has obviously been well up and running.
1:22:50 She’s been on this full time for several years now. You both have a great number of interests at the
1:22:56 time. How do you begin to make that transformation? We’ve already talked a little bit about what the
1:23:02 skills are that you brought to bear. And again, I’d reiterate them as kind of an emotional temperament
1:23:08 for it to not let your feelings get in the way of what you’re doing. The second one being kind of the
1:23:12 right amount of confidence to say, yeah, this is a huge and hard problem, but we should go after it,
1:23:17 but maybe not too much confidence to say we’re going to solve this problem no matter what. And
1:23:23 then I think the third one being probably one that gets overlooked a bit, but basically an ability to
1:23:27 become an expert in something in a relatively short period of time. I mean, I think people who are
1:23:32 familiar with Bill Gates just watched the documentary about him and not read much about him. You’ll realize
1:23:37 he’s not just a guy that revolutionized the computer industry, but when you look at the voracious
1:23:43 appetite with which he has explored other topics, I mean, I’ve only met Bill in person once and I’ll
1:23:48 share that the subject matter that we were speaking on, which was something in my wheelhouse and not
1:23:55 his, it only took me about 10 minutes to realize I was talking to someone who knew as much about this
1:24:00 topic as almost anyone I had spoken with. And that’s saying something, because this is not something you
1:24:05 would assume that a person would know a lot about. I mean, this was at the beginning of the discussion,
1:24:10 I’m using terms that I would use with a lay person. And he’s like, yep, yep, yep, yep, yep. He’s like,
1:24:15 no, no, no. You just go straight to shorthand for me. And I was like, but he wasn’t doing it from a
1:24:20 place that was anything other than totally genuine. You knew that this is a guy who really knew the
1:24:27 subject matter. Again, you share that trait, which is, I don’t know, that’s, that allows people,
1:24:28 I think, to have a bigger impact in their philanthropy.
1:24:35 Well, I appreciate the comparison, but it’s not close. I agree with, I’ve gotten to know
1:24:43 Bill over the years and agree with your assessment of him, that his breadth and depth of knowledge is
1:24:49 something that I have never seen in somebody else. And it incredibly impressive in that he knows the
1:24:56 background and knows the issues of almost anything that you can think of in a way that is scary.
1:24:59 And I am certainly not that way.
1:25:06 Well, I will agree to disagree on that, John. So talk to me about the first problem that you
1:25:11 decided to turn your attention to once you became a full-time philanthropist.
1:25:19 As I said, I’d gotten my start in giving with K-12 education and kind of over the years,
1:25:25 I’ve just gotten deeper and deeper into those questions of why does one school have different
1:25:31 results from a school down the street serving a very similar population of kids? And what’s the
1:25:37 theory of change in K-12? It is such a massive system that’s broken down at the school level.
1:25:45 And how can we as a country try to get results that we’re happier with? Knowing all the hurdles that go
1:25:54 into that and all the factors that go into education and behavior. So how does that scale? How does those
1:26:02 small gems that you see? How can you scale that? And this is a question I think the education reform
1:26:10 movement’s been struggling with for decades. And I watched that journey and was on the journey along
1:26:16 with many other philanthropists of, is it small schools? Is it better principals? Is it better
1:26:22 teachers? Is it the curriculum? Is it technology? All these things kind of bouncing from one idea to the
1:26:29 next, trying to find what’s the idea that scales and creates structural change. And so we’re still
1:26:37 involved in K-12. I think it’s just the most fundamental issue facing long-term health and viability
1:26:46 of this country. And when you talk to almost any social service provider, they always refer back to
1:26:53 education. And so I think it’s one that we’ve spent a lot of time thinking about and happy to get into
1:26:57 that if you want. But it was the first and it continues to be a major effort of the foundation.
1:27:05 And I know that you’ve worked with, as you said, others. I think City Fund has sort of largely,
1:27:07 a lot of your efforts have morphed into that, correct?
1:27:14 Right. So I guess I’ll give you the theory of change that drives our work of late in K-12.
1:27:22 And that’s that strong and robust systems of any kind have the attributes of biological evolution,
1:27:28 right? And so in living organisms, that’s the phenotypic variation. Do you have variance amongst
1:27:35 the organisms, the differential fitness? Is there a different rate of survival and reproduction? And then
1:27:41 the heritability of fitness? And I think this is true of any organization. It’s true of businesses.
1:27:46 It’s true of any system. And it’s true of the healthcare system, the criminal justice system.
1:27:52 It’s true of the school system. So you need to have a strong, robust system that’s getting better over
1:27:58 time. You need those three traits. And the traditional public school system does not have them. So if you
1:28:07 think of a school district that is a monopoly in its area, it doesn’t have much variance. It might have
1:28:12 a school that’s Spanish emerging. It might have a school that’s for the talented and gifted. It might
1:28:18 have another school that’s a magnet of something. But generally, it’s the same curriculum, the same
1:28:25 process, the same way of hiring, of training, of trying to develop teachers, how your principal
1:28:30 development is, right? You don’t have that variation. The differential fitness of do things that are
1:28:36 working, do they grow or do they go away? Yeah, there’s no pressure. The good stuff in public
1:28:42 education, there’s no natural mechanism for that to grow. And there’s no mechanism that really works in
1:28:49 the public school system for it to go away, for the things that aren’t working to stop. And then
1:28:57 the readability of traits, you need the learning organization aspect of it, which I will tell you
1:29:05 is a school system is not good at, and any government monopoly is not good at quality control. It’s not
1:29:12 good at innovation to provide that variance. And so the theory with CitiFund and the theory of our K-12
1:29:17 work is that the school system needs to become a system of schools, that the natural role for
1:29:24 government is not to be the service provider. The natural role should be the regulator. And right now,
1:29:32 those two functions are bundled together into one, and no system can regulate itself. And too often
1:29:36 today, I think those systems are structured to regulate themselves. And so you don’t get that
1:29:42 innovation. You don’t get the quality control. And so the vision is, and what we saw in New Orleans
1:29:49 after Katrina was this change of going from the school system to the system of third-party
1:29:56 nonprofit operators that are given the chance to have the resources and responsibility to educate
1:30:04 kids, K-12 kids. And the theory, again, if it works well, that the parents, the kids have real choice,
1:30:10 get to choose what type of model they want, whether it is a immersion program, whether they want high
1:30:17 discipline or regular discipline, whether they want an art school, et cetera. That demand, if you’re
1:30:22 given real choice to the kids, to the parents, that that’s the best quality control that can happen.
1:30:28 And then the government as the regulator needs to make sure that all kids are served, because we need
1:30:34 to make sure that ideal, that every kid is properly served, but is largely out of the business of providing
1:30:40 the service of education. So let’s put some numbers to this, John, more broadly. So maybe think of it in
1:30:46 terms of GDP. How much is private? How much is public slash government? How much is nonprofit? What’s the
1:30:53 approximate breakdown of the dollars that get allocated in the world, or in the country, I’m sorry, along those
1:30:54 three divisions?
1:31:01 Of the total economy, the private sector is approximately 60%. Government’s approximately 40%.
1:31:09 The philanthropic sector is about 2%. Now, when you take out giving to museums, to religious
1:31:14 organizations, to the arts in general, and religious organizations, you get down to about 1% of the
1:31:18 economy is philanthropy for social services or social goods.
1:31:23 Okay. So you’re stripping out basically what I used to call maybe erroneously brick and mortar
1:31:29 philanthropy. And you’re saying sort of 50% of it, the 50% that remains is this type of philanthropy
1:31:34 that people like you work on, people like Bill Gates works on. No, it’s not just the brick and mortar.
1:31:39 No, no. So I’m including like gifts to food banks, gifts to the hospital system to build a building.
1:31:40 Oh, okay. Okay.
1:31:46 This is about 1% of the economy, right? So one of the things we’ve thought about is what’s the role
1:31:54 of philanthropy? Because the government is giving a benefit to people who give money to nonprofits.
1:32:02 There’s a tax deduction. And so there is a stake, there is some type of tie that I think exists
1:32:09 between the donor and what that money should be going for. And so we’ve thought about how should that
1:32:16 1% of philanthropic funds, what’s the best use of that? And you can think about, or we think about,
1:32:24 it can either supplement government services. So by providing more money to the homeless shelter,
1:32:28 a service that the government already provides, but you can supplement that with more resources.
1:32:34 And that’s typically described as charity, trying to solve today’s problems. And then there’s the,
1:32:39 what some would describe as strategic philanthropy of trying to get at the core roots of issues to
1:32:45 prevent those problems from developing tomorrow. Both are really important. There’s not a priority
1:32:52 or hierarchy between those two. We give some charitable dollars. You give money to the food bank. We give
1:32:58 money to the homeless shelter in town. You do have to meet those needs, but there is a rule for how does
1:33:04 the philanthropic money compliment government services to make them better? What is the market failure as to
1:33:12 why government is not working as well as many people believe it should? How can the school system be better
1:33:18 while the school system now is so focused on, is already budget constrained, is so focused on just
1:33:25 providing the day-to-day activities? And the same of all these nonprofit social providers is that they’re so
1:33:33 focused on the day-to-day job that they don’t get to experiment like they should.
1:33:39 And so there is this rule for strategic philanthropy to come in and say, how can these actors and these
1:33:45 systems perform better? And I think that’s where we’ve largely focused on our giving is looking at
1:33:52 systems change. It’s structural and it’s scalable to a way that just providing another dollar for a
1:33:58 program largely is not. There’s different roles for different types of givers. Anybody can write the
1:34:01 check to the food bank. And again, we write the check to the food bank, but the smallest giver can also
1:34:09 write the check to the food bank. Looking at the strategic side, which requires a lot of manpower
1:34:15 and expertise and hiring experts and getting access to experts and thinking about, here are the ideas
1:34:19 that have been tried in the past, what’s worked, what hasn’t, here are the current ideas, what’s the
1:34:24 theoretical framework for those ideas and why they could work? What are the potential second order
1:34:31 effects of those? And making those decisions, it’s really, it’s hard for the small donor to do that.
1:34:35 It’s really geared towards the large national foundations. And so that’s really where we see
1:34:42 our role. Were you humbled by how difficult that is, how difficult it is to, someone could easily listen
1:34:46 to this and say, how hard is it to give away $400 million a year? You’re just, you’re writing big
1:34:51 checks. But the way you just described that, actually, it sounds very difficult to give away a lot of money
1:34:57 if it’s trying to mostly be philanthropic and not charity driven. Because as you said, the philanthropic
1:35:03 one is the one that’s strategic. It’s the one that you’re trying to scale and be maximally leveraged in
1:35:09 the silo of another agent, for example, in the case of what the government’s already doing or what the
1:35:13 private sector is already doing. I mean, it just strikes me as very difficult. How long did it take,
1:35:17 A, do you agree with that? And then B, how long did it take you to come to that realization that your
1:35:23 second career is probably harder than your first? We have about 120 employees at the foundation today.
1:35:33 We had no desire or interest to have 120 employees 10 years ago. That was not by design. We thought
1:35:41 giving would be easy. I remember very specifically thinking our giving was going to be find the five
1:35:49 highest social return projects or organizations and just write those five big checks every year. Make it easy.
1:35:55 Make it fairly passive. We started down this route and I started pulling the research. I had kind of metrics
1:36:01 background in college. I was smart enough to read the papers. I could figure out what they were saying. And so
1:36:07 start with a topic like preschool. You see three papers that say preschool is amazing. It generates all these
1:36:13 outcomes later in life. And then you see one evaluation of the Head Start program that shows it doesn’t really
1:36:21 have an effect. And then as you dig deeper in, start seeing there’s huge battles within this research
1:36:29 sector about what the evidence really shows, what it demonstrates, and the quality of the evidence that’s
1:36:36 going into all these claims about success. And I think in every area that we thought of, look at
1:36:44 work training programs. The first scan through, everything works. It’s all great. Writing checks
1:36:50 there is a great way to invest money. And then you dig deeper and start getting into, okay, the problems
1:36:55 with those research that organizations are holding up saying, here’s our evidence that we’re successful.
1:36:59 And it got very frustrating because the more we would study, the less we knew
1:37:09 about what worked, what didn’t. One of the learnings was very few programs worked or new programs. So
1:37:16 the things that work are generally already part of the fabric of society, like K-12 education. We know
1:37:23 that works, what works. These programs that have clear evidence of success are generally already funded
1:37:27 by government, already part of fabric of society. So what’s our role? Are we just going to supplement
1:37:33 with a few extra dollars on the side? And I didn’t want to do that. So where could our dollars go the
1:37:40 best? And that really led us down this issue of how do you change and improve the system and the
1:37:46 incentives and the rules of a system rather than what’s the next program we can fund? Because the
1:37:49 frustration of trying to find that program just became immense.
1:37:54 So speaking of a system that I think almost anybody who spent any length of time thinking
1:37:59 about it will pretty quickly come to the conclusion is broken, is the criminal justice system.
1:38:04 When did that system come to your and Laura’s radar?
1:38:11 Laura really drove us entering this field. She was a lawyer by training, although on the corporate side,
1:38:16 I think she was just from having the legal background, you could see the world in a different way.
1:38:21 And one of the first organizations that we started sending some checks to was the Innocence Project.
1:38:26 And we had met the head of the Innocence Project, Barry Schecht, at some event and start hearing the
1:38:34 stories that will just tear your heart. Someone who’s been wrongfully convicted and was going to die
1:38:38 except for the actions of the Innocence Project.
1:38:45 And we started funding that just because it was the right thing to do. It was a way to help save a life
1:38:51 that was going to be terminated without that. I have great respect for the Innocence Project because
1:38:59 as they started building up dozens and into hundreds of examples of people that they got off death row or
1:39:04 out of prison for wrongful convictions, they started looking at the policy angle as well. So it wasn’t just
1:39:10 about the one person or the hundred people that they were saving, although they’re massively important.
1:39:15 They started thinking more strategically about how do we change the system so that the wrongful
1:39:18 convictions don’t happen in the first place.
1:39:25 Right. Because you have to believe that for the amount of effort it takes to take one person off death
1:39:31 row, one wrongly convicted person off death row, having followed a few of these cases,
1:39:39 it can take decades. And I mean, it can consume the effort of tens of people, tens of thousands of hours.
1:39:47 And you would say, well, it’s wonderful that we’ve saved that life. What if we put an equal amount of
1:39:51 resources on the other side of the equation, which is getting few of these people into the system?
1:39:58 In other words, you start to think about where’s the asymmetry on this one? And it seems a lot of it’s
1:40:03 on the front end, right? I mean, you could have a hundred innocence projects, you will still never
1:40:07 fully be able to rectify the situation, notwithstanding the fact that you can’t undo
1:40:13 retroactively all the harm that is done by the time the person is set free.
1:40:19 Exactly. A couple of examples like that really led us again to like, okay, the systems change,
1:40:25 the policy focus is where we want to spend the time, that there’s higher potential reward.
1:40:35 It is harder work. The chance of success is lower, but the impact, if successful, is so much higher
1:40:41 if you can improve how the system works. And so we started looking at kind of a number of areas of
1:40:47 the criminal justice system. First, we spent a year and hired someone to lead that work. We spent a year
1:40:54 just thinking about all the ways, the inefficiencies in the system that lead to bad outcomes that don’t
1:41:00 promote public safety, that destroy neighborhoods that aren’t fair and equitable for those that are
1:41:06 charged or convicted of a crime, et cetera. And where could we as a foundation, where could we be effective?
1:41:11 Let’s pause on that for a moment. Because again, I think that’s just a very interesting approach that
1:41:16 is a bit counterintuitive. You decide this is something you’re passionate about, but you don’t
1:41:22 go right into it, both guns blazing. There’s a humility that says, why don’t we bring an internal
1:41:29 team in that we’ll hire that’ll spend a year helping us get up to speed on this and identify
1:41:37 the specific targets that we can focus on. Do you find that to be a period of impatience for you?
1:41:43 Or do you find that to be a period of great enjoyment as you are on the upswing of another
1:41:50 learning curve? It’s certainly impatience. We have all this money sitting in the account.
1:41:57 The goal is to do good with it. And we’d rather figure out how to do the most good today rather
1:42:01 than waiting until tomorrow. So there was this natural impatience. But I think we’ve been smart
1:42:09 enough to realize that it’s smarter to invest wisely tomorrow than do something that’s unlikely to have
1:42:16 impact today. And so that’s just kind of a necessary function of it is bring in some experts, but really
1:42:21 study where is the leverage that a foundation can have on the problem. It’s very different from the
1:42:25 other actors that are already in the system. It’s different from what politicians can do or government
1:42:35 policy makers or judges or police or everybody has a role. And the question is, how can a philanthropy
1:42:42 or foundation that is not a natural actor in the system, but has a checkbook, how can that create
1:42:48 some leverage to try to steer the system and improve it? Now, in your first version of the foundation,
1:42:53 there were two versions, right? There was a C3 and a C4. And I believe currently the entire
1:43:01 foundation is a C3. Is that correct? We’ve always realized that the goal is not to just do research
1:43:09 or just do idea generation. The goal is to have real positive policy change and policy change requires
1:43:16 some advocacy, political action. It just does. And so we used to have those, the C4, which is the
1:43:23 advocacy arm as a separate tax vehicle. And there had to be a Chinese wall between the C3 and C4,
1:43:30 with the C3 being the traditional philanthropic vehicle. And what we realized was that having that
1:43:38 Chinese wall really was harming our ability to have positive impact. And so we combined the two entities
1:43:46 into an LLC so that the same employee who was the expert in fines and fees and the options on how to
1:43:51 change fines and fees to make them more equitable and just could also go sit there and talk to a
1:43:58 legislator about why the problem existed and what the optimal solutions were.
1:44:03 So what were some of the things that you and the team learned when it came to understanding how the
1:44:08 criminal justice system could be so broken? And I say that, again, not knowing much about it, but
1:44:15 knowing a little bit about it, right? Which is, there seems to be an enormous racial disparity that
1:44:23 exists. There also, certainly by state, certainly seems to be great difficulties in appealing, even in the
1:44:29 presence of evidence that the first trial may not have been a great trial. The amount of coercion that
1:44:34 goes into convictions that turn out to be, I mean, there’s so, you could just rattle off, you don’t have to
1:44:41 know anything, as clearly I don’t, to still rattle off five or six structural problems. How did you decide
1:44:46 which ones were the most important and or which were the ones that you could have the greatest impact in?
1:44:53 I think it was important to figure out how we got to the current system. And in this world of real
1:45:03 partisanship was a bipartisan response to the growing violent crime that was happening starting post-World
1:45:11 War II and then really peaked late 80s, early 90s, that got everybody, all politicians, concerned and
1:45:18 scared. And they felt they were being elected based upon crime rates, based upon the amount of violent
1:45:24 crime and trying to get a handle on that. So the violent crime was also destroying communities.
1:45:31 And so you had Democrats, Republicans, whites, blacks, Hispanics, all come together and start this
1:45:38 tough on crime mantra, which was, we’re going to jack up our number of police. We’re going to jack up
1:45:46 the penalties for any criminal act, have it severely intensify the war on drugs. And then all the
1:45:52 second and third order effects that came with it happened. Now, crime ended up peaking in the early
1:45:58 90s. And some of it was because of some of the policies passed, but a lot of it wasn’t. So you can
1:46:05 see different areas that adopted policies at different times. And it seems like the drop in crime was
1:46:13 relatively independent of when communities, both across America as well as globally, adopted some of
1:46:20 these policies. So why did crime go down over the past 30 years is still a mystery to some.
1:46:24 Some great researchers have looked at this and tried to figure it out. And it’s a lot of like,
1:46:29 okay, a small piece of it’s this, small piece of it’s this, et cetera. But the times have changed.
1:46:36 So we still had on the books, the reaction from an environment that was very different. And the
1:46:43 question is we’ve seen what those policies did to neighborhoods and we’ve seen the financial costs
1:46:49 of those policies and the trade-offs associated with some of those policies. And I think you saw
1:46:54 both Republicans and Democrats come together trying to rethink what’s the right way to structure the
1:47:01 criminal justice system, all aspects from policing and courts and prisons and re-entry. What’s the right
1:47:04 way that we should do given the environment that we’re in right now?
1:47:11 Now, thinking back to those late eighties, early nineties, when everybody came together and said,
1:47:14 we just can’t handle this amount of violent crime. We’re going to get tough on crime.
1:47:18 We’re going to create more prison beds. We’re going to put more police officers on the street,
1:47:23 et cetera, et cetera. Was it sort of a combination of things that led to where we are now? Was it basically
1:47:30 more police, more arrests, stiffer sentences, less leniency around parole, lower tolerance on parole
1:47:36 violations? Was there any one thing or even three things that stood out as the most damning factors
1:47:42 that led to mass incarceration? What is your assessment of that? And I would be curious to hear
1:47:47 your thoughts because I think your thoughts would be more informed than mine or just the average person
1:47:54 on what other factors could have accounted for the reduction in crime, if not the increase in
1:48:00 incarceration. Yeah. I’ll take the latter question first. The best report I’ve seen on this is from
1:48:04 the Brennan Center that really looked at, spent a significant amount of time trying to piece
1:48:11 together what were different responses and how much of it was just kind of demographic trends,
1:48:17 how much of it was economic growth and drop in better education, better skilled police tactics,
1:48:23 all these different avenues. And I’m doing a short shift on all the things that they’ve assigned
1:48:33 some causation to. I think the summary is it’s hard to see any one of them being really causal in the
1:48:40 shift in crime. It was most tellingly, you saw this same trends happening globally. Different countries
1:48:48 had different reactions to this and they all had that move up in crime over time into the nineties and then
1:48:54 this downward trend. And so people were scratching their head trying to say, well, what caused it?
1:48:58 And part of it, I’m not sure we’ll ever know. And then to the first question about, which I’ll
1:49:04 reiterate just in case you forgot, is basically of all the mechanisms or tactics that would lead to an
1:49:11 increase in incarceration, do you have a sense of which of those were perhaps most responsible?
1:49:17 I don’t want to get too far over my ski tips on this and misrepresent the research. I think part of it
1:49:23 has been longer sentences. Part of it has been the conviction rate. So once you’re arrested, we can
1:49:31 get convicted. What percent of the people are done so? And it leads into the system is built to demand
1:49:37 a plea bargain. We just don’t have the court resources, the defense attorneys, the prosecutors,
1:49:44 the judges, the court systems to hear a vast majority of cases. And so it ends up being less
1:49:51 than 5% of cases actually go in front of a judge. Most of them just get pled out. And for a long time,
1:49:56 because those resources don’t exist, there’s been incentives that have been built into the system
1:50:03 that almost coerce people to plead guilty to crimes that they may not have committed. Because just from a
1:50:11 risk reward, it is, I didn’t commit this crime, but there’s a 20% chance I get found guilty,
1:50:18 I get a 20-year sentence, or I can serve, I can plead down to a lesser charge and get six months,
1:50:23 of which I’ve already been here for three months. So three more months and I’m out, or my life’s over.
1:50:27 Going back to your days of trading, that’s a no-brainer calculation.
1:50:35 Yeah. And it’s really hard to see how you solve that problem without a massive infusion of resources
1:50:40 into the courts and into prosecutors and defense attorneys, which is not where we want to be spending
1:50:47 money. We’d rather spend money on preventing crime on social services to not have that problem to begin
1:50:55 with. And so how do you get rid of this culture where the system can’t handle everybody going to trial?
1:50:58 One of the biggest challenges that nobody has a great answer for.
1:51:03 Now, I don’t know if this has been a focus at all of your foundation within criminal justice work,
1:51:08 but obviously in the last few months, it’s quite topical with respect to
1:51:14 the relationship between the police and race and the role of systemic racism within law enforcement.
1:51:23 How much does that factor into the economics of it beyond the obvious, which is disproportionately
1:51:30 arresting, presumably disproportionately convicting, just based on what you just said, the stats you
1:51:36 just laid out. I mean, I would have never guessed that 95% of cases would be pled. And if that’s the
1:51:40 case, then yeah, I just answered my own question, which is if you’re going to arrest disproportionately
1:51:45 minorities, then you’re going to convict or at least put in prison disproportionately
1:51:50 minorities. And certainly the few times I have visited prison, it’s disproportionately
1:51:56 minorities. Take all of that and try to package it into a question. What is the role for philanthropy,
1:52:03 if there is one, to try to address the questions of racism within law enforcement? Does that factor
1:52:09 into a tool for criminal justice reform? There’s obviously been a lot of debate or discussion
1:52:16 this year on that very topic. And there’s no doubt the disproportionate nature of the criminal justice
1:52:23 system on minorities and particularly on the black community. For so long, the political incentive and
1:52:31 so much of the focus has been just on crime rates with no regard for the secondary effects that the
1:52:36 criminal justice system causes on these communities and on families. And I think that’s one of the
1:52:41 things that we as a society are trying to grapple with now, not for the first time, but for the first
1:52:46 time, this has gone into a mainstream discussion.
1:52:50 Sorry, just to make sure, you’re saying we all acknowledge and have acknowledged historically
1:52:58 that it’s disproportionately black men that go to prison, but we’re now taking a more broad look at
1:53:03 the implication on, for example, children that are now left without a father. Is that what you mean,
1:53:05 as an example of the impact on the family?
1:53:12 Right. And the psychological effects of being a black man in America, especially in a low income
1:53:18 neighborhood that has, and especially if it’s an aggressive police force there. I think one of the
1:53:25 dilemmas has been that minority communities have felt both over-policed and under-policed at the same
1:53:31 time. They feel over-policed with the techniques that the police are using in their neighborhoods. So
1:53:39 the random stops, certainly back in the era, stop and frisk, and a presumption of guilt and that people,
1:53:48 especially young black men, are likely to be up to something bad. However, there is still a crime
1:53:56 problem. Most crime is committed in one’s own community. We’re in the very near geographic area around the
1:54:03 community. And there is a huge cost to society of violent crime. So nobody wants the police to leave
1:54:11 entirely. There still has to be that function of deterrence and trying to clear cases that have been committed.
1:54:20 So how do you create a policing system that tries to address both of those, that treats people more
1:54:28 equitably, more justly, recognizes their constitutional rights while protecting those communities? Because
1:54:34 the cost of policing on communities is high. The cost of violent crime on communities is high as well.
1:54:39 That’s the struggle with the policing reforms. And there’s things that we absolutely should do. A lot
1:54:45 of those are getting enacted now, or at least being discussed now. But it’s not just, problem doesn’t
1:54:52 get solved just by passing one new policy. These problems got created over decades, over centuries,
1:54:58 over decades of policing techniques, over centuries of disinvestment in these communities. And the question is,
1:55:05 kind of how do you both provide the public safety while not causing the damage that some policing
1:55:06 techniques cause today?
1:55:11 So then shifting gears a little bit within the criminal justice system, how much of your effort
1:55:18 has focused on the other side, which is recidivism? I mean, one of the things that I was most struck
1:55:28 with when I visited prison was the lack of what appeared to be logic around why somebody was in prison.
1:55:35 So again, maybe I’m being overly simplistic, but the way I would view it is there are sort
1:55:41 of not that many reasons to put someone in prison. One reason to put somebody in prison is to protect
1:55:47 the public from them. Another reason to put someone in prison is to punish them for something they have
1:55:54 done. And yet a final reason to put somebody into prison that would factor into the first two,
1:56:00 should they be released again, is to provide them with a set of skills to reintegrate into society
1:56:06 in a better way. So you’ve got these, call it two pillars and then a foundation.
1:56:12 And I was very surprised. Admittedly, I was in a maximum security prison, but nevertheless,
1:56:17 at least half the men that were there were going to be out of jail in their lifetime.
1:56:24 I was very surprised at how there was virtually no effort into the rehabilitative part. So even if
1:56:32 you took a long view on protection and punishment, the lack of rehabilitation almost guaranteed recidivism.
1:56:40 Again, going to your point, if 95% of people are pleading out of something, many of which are things
1:56:46 they didn’t do. What they don’t realize in that VAR calculation is, yeah, I’m going to be out of jail
1:56:53 in three months, but I’m going to have a very difficult path to getting a job. I’ve now moved
1:57:01 off the track of non-felon to I am a felon, and that’s a very different path. So is there an opportunity
1:57:07 for strategic philanthropy to play a role in the rehabilitative side of incarceration?
1:57:15 Yes. I agree with everything you said. It’s very hard to design effective recidivism programs
1:57:23 after someone’s come out. They just, we’ve tried this as a society in many different forms and shapes
1:57:31 for a long time. And the evidence is very poor that they have. You study it in a diligent way
1:57:38 that these programs work. It’s a very tough problem. And so there’s a theory, which I believe,
1:57:45 and kind of going on what you said, that the nature of prisons has to change. That if you wait until the
1:57:50 day someone’s released, that’s way too late. It’s like if you wait until someone drops out of school
1:57:59 to step in with some more social services, it’s too late. And so we have a couple projects trying to
1:58:07 reimagine prisons, think about exactly what you said about what’s the role of prisons? What do we want
1:58:16 society to do? The struggle is that states and cities, states and counties that fund this are often
1:58:23 constrained financially. And so they’re trying to figure out how do I meet today’s problem, which is
1:58:31 I got a lot of people in prison versus how can I make investments to improve outcomes over the long
1:58:36 term? And how much of the budget can go to improving outcomes over the long term while we have to meet
1:58:43 today’s needs? And anytime that there’s a financial shock, you stop investing in the investments
1:58:50 because you try to meet today’s needs. And so I think so much of the public money has gone to
1:58:57 the day-to-day work of it, that not enough is trying to step back and think, how could a system be
1:59:03 redesigned? What should people who are stuck behind the bars, what should they be doing with their day?
1:59:09 How can we try to maximize the percent chance that they don’t come back here when they’re released?
1:59:16 Because the recidivism rate is incredibly high. And again, we just haven’t found ways to lower that
1:59:19 through programs that reach people when they are released.
1:59:26 So part of the problem with that, I think, is you could certainly make an ROI case that if you invest
1:59:31 more now, you’ll save much more tomorrow. But so in other words, if you have a hundred people in prison
1:59:38 that are going to get out every year and ordinarily, 80 of them are going to be back within five years and
1:59:43 you can make it, 20 of them are going to be back within five years. Oh my God, the cost saving,
1:59:48 you could almost invest anything you wanted to make that happen and it would pay itself off. The problem
1:59:51 is it won’t pay itself off for five years. Is that a fair statement?
1:59:57 Right. So in the private sector, they would make that investment every day. But in the public sector,
2:00:03 it’s on a cash accounting. You have to balance the books this year and you have a fixed amount of
2:00:09 money. We can raise taxes and raise revenues, but it’s hard. Nobody likes to raise taxes. And so you
2:00:15 have a fixed amount of money. So how much money goes to the investment, even if it has a strong ROI?
2:00:23 And I think that’s where the philanthropic sector can be an active player or actor in this system is by
2:00:30 providing the funds to experiment with different ideas, different programs in prison, and then funding
2:00:38 the high quality evaluation to see what is the ROI. Can we get good data so that we can go to the state and
2:00:44 say, look, this program has a very positive ROI. I know it’s hard in the short term to deviate
2:00:48 money away from just the way we’re doing it now. And it’s going to be hard to find the funds
2:00:54 today to make that investment. But there’s great evidence if you can find those funds that
2:00:58 five years from now, everybody’s going to be better off. The state’s going to be better off. Society’s
2:01:03 going to be better off. The person entering society is going to be better off. And so you’ve got to make
2:01:08 that argument, but you have to be able to provide that high quality evidence of effectiveness because
2:01:13 everybody shows up saying, my program works. My program works.
2:01:18 Is that exactly the type of work you guys are doing in this space, which is basically
2:01:25 trying to design the best quote unquote trials or experiments that could at least allow for
2:01:29 an evidence-based decision with respect to how to handle these things?
2:01:37 that’s certainly a line of the work. Some of it is more about values. And it’s, should we keep
2:01:46 someone detained in jail before they’ve gone to their court date because they don’t have the money
2:01:53 to pay bail? I think that’s just a value. So the criminal justice is, has this mix of things that
2:02:00 you can talk to ROIs on some things? Other things, it’s just, is this how our society should be
2:02:06 functioning? Is that a right thing? Is that balance the interests of the system? I think a lot of times
2:02:12 when you sit down with people and you’re like, is this an American value? Is this an American ideal
2:02:19 that the system works this way? They will say no. Okay. Then how do we fix it more closely represents
2:02:25 American values without, while minimizing any potential second order effects, negative second
2:02:30 order effects? So let’s pivot to another area that is enormous for the foundation, which is health
2:02:36 policy. This might be, I don’t know, this is easily one of the most complicated systems in this
2:02:42 country. How are you thinking about it and where are you trying to apply yourself? Because it’s
2:02:47 just too big. This strikes me as sort of the hedge fund problem you alluded to earlier.
2:02:54 You could potentially try to spread yourself too thin, try to play in every area of it and get nothing
2:03:00 done. So knowing you, though, I don’t know where you’ve chosen to invest your time lately. I’m guessing
2:03:04 you have some clarity about the precision with which you want to think about that.
2:03:11 Yeah. And you’re right. It’s just such a big issue, complex, the number of things that
2:03:18 one could work on and health policy is immense. And so I did the same thing. We’re thinking about
2:03:25 where in health policy should we be focused? We started working in this area about eight years ago.
2:03:31 And after doing that same type of canvassing that we did in criminal justice work, we realized that our
2:03:37 first area should be on drug prices. Kind of identified that as an area where kind of very
2:03:44 obvious flaws in the existing system, that there were ideas that were one could conceive of being
2:03:52 enacted on how to fix it. And that the political window might open in the future such that there was
2:04:00 demand by the public and thus by politicians to actually adopt some of this stuff. And so using those
2:04:08 three criteria, we ended up with how do we create a more rational system to price pharmaceuticals that
2:04:13 balances interest, balances incentives that are necessary for the private sector to do the
2:04:19 innovation that they’re doing. It balances the financial interests of the state and the federal
2:04:25 government that’s largely paying for a lot of this stuff and that maximizes access for the patient.
2:04:31 So if I understood you correctly, you’re basically saying, look, let’s look at what solutions could
2:04:37 look like, even though if today the political will to make changes isn’t there, this is going to take
2:04:42 us a while to figure out what to do. And maybe in 10 years, the water has gotten hot enough that the
2:04:46 frog is willing to jump out. We’ll at least have something in place. Is that kind of how you went
2:04:48 about thinking about thinking about it? Was taking a long-term view?
2:04:55 Yes. It was that the political window wasn’t open eight years ago when we started the work.
2:05:01 We could see cracks in it. We could see cracks in that window. And I think that’s one thing that we’ve
2:05:07 been good at at a foundation is trying to identify where’s the political window going to open up in the
2:05:14 future, whether it’s in changing the bill system, whether that’s in doing pension reform or in
2:05:20 pharmaceutical prices. We’ve gone to these areas and we were early. And so when the window opened,
2:05:28 we had evidence-based ideas that we could present to policymakers and could properly document the
2:05:36 problem. There was a whole effort on communications to both individuals, to society, about what the abuses in
2:05:43 the system are in any of these areas and including in drug pricing, but then also had ideas that you
2:05:49 could go to them and say, here are the three things you need to do. Now, the pharmaceutical industry is
2:05:56 perhaps the most complex industry of any. And so there aren’t the three things that should be done.
2:06:02 There’s the 20 things that should be done because it is just such a broad and complex system with so
2:06:08 many loopholes and bad incentives that’s driving bad behavior. That to get at it is not,
2:06:13 here’s the one thing, it’s here’s the 20 things. The downside is you start to lose policymakers when
2:06:17 you hit number four because they only want to speak in lists of three.
2:06:23 So how optimistic are you? Because this is an area where I know a little bit. I’ve had Marty
2:06:27 Macri on the podcast before. I know you know Marty and we’ve spoken about this. We have an entire episode
2:06:32 on this topic. I’ve had Catherine Eben on before to talk about a different angle here, which is
2:06:36 basically just the difference between the, basically the corruption within the generic drug industry,
2:06:40 which is a totally different problem from the one you’re addressing. For as much as I know about
2:06:45 this, I feel like I still don’t understand it, which I think speaks to exactly what you just said.
2:06:52 If a problem has 21 bullet points to fix it, it’s a complicated problem. What is your level of
2:06:57 optimism? I mean, to be blunt, do you feel like you are spinning your wheels for eight years and this is
2:07:02 a problem that will only get fixed when we are on the verge of bankruptcy in this country? Because as you
2:07:07 said, this is largely a government spend problem. This is my view, by the way, this is my little rant on
2:07:15 the United States. So we basically carry two enormous burdens for the world. There are two
2:07:22 things we disproportionately pay, but our taxes disproportionately go to on some level subsidize
2:07:27 things in the world. And one is military spend and the other is healthcare spend. And you might say,
2:07:30 well, gosh, why would healthcare spend in the United States be a subsidy for the world? But it’s
2:07:37 effectively that we pay so much more for drugs here than our neighbors do that we in effect
2:07:43 subsidize the cost of R&D to the point where the incentives are to make the drugs here,
2:07:47 to distribute them here and elsewhere, but we disproportionately pay. Do you agree with that
2:07:51 assessment or is it overly simplistic? Right. We’re 3% of the world’s population. United States,
2:08:02 3% of the world’s population. We pay 50% of the pharmaceutical revenues of the world. So there’s no doubt
2:08:10 that. The prices that we’re paying is helping and creating incentive for more medicines that others
2:08:17 then get to benefit from. But one of the talking points I have in this is the NIH spends so much
2:08:24 money on the basic science that’s required to get these drugs started. And in return, the pharmaceutical
2:08:30 companies charge us 2x, 3x the prices of other countries. We shouldn’t be getting a discount
2:08:37 because the United States taxpayer is funding some of the basic science, much of the basic science,
2:08:42 but some of the total cost of developing these drugs. But rather than we don’t get the discount,
2:08:46 we don’t even get the same prices. We get the highest prices in the world by a large measure.
2:08:51 So it comes back to this notion of you’ll hear people say things all the time like this is not
2:08:54 sustainable. Our cost of healthcare is not sustainable, blah, blah, blah. And I remember hearing
2:08:58 somebody say something once and I don’t remember who it was, but I really agreed with the point he made,
2:09:03 which was nonsense. It’s totally sustainable because we’re still doing it. I mean, it’s going
2:09:10 to be sustainable until it’s no longer sustainable. Until we default on our debt as the largest sovereign
2:09:17 default, this ridiculous system is totally sustainable. So then my question is, what will
2:09:24 it take to change this? Given the complexity of it, given all of the bad incentives, given everything that
2:09:31 you and I just said, what would it take for us to not be spending 15, 16, 17% of our GDP on healthcare
2:09:36 at a clip that’s probably increasing at 5% per year in relative growth?
2:09:43 Right. We spoke earlier about the downsides of the state having to balance the budget, and that’s that
2:09:50 it can’t make the high ROI investments that it should. The upside is that it forces the states to
2:09:57 consider trade-offs. They can spend a dollar on healthcare or a dollar on roads or a dollar on
2:10:03 education or a dollar on social services, and they have to decide where’s the highest value and they
2:10:10 look to save money. The federal government, without that constraint, at least in today’s environment,
2:10:17 doesn’t have to make that trade-off. So any proposed legislation where somebody gets harmed,
2:10:26 unless it’s only or concentrated mostly in the other party’s constituency, that will not pass
2:10:34 because no hard decisions want to get made. And so the ramification of that is enormous budget
2:10:42 deficits today and an enormous debt that has had a lot of people sounding alarms for decades.
2:10:49 Now, those alarms and those concerns about the debt and what it’s going to lead to have not come true
2:10:56 today. It doesn’t mean they’re not going to come true in the future. And I think that’s the greatest
2:11:00 concern is that the United States is not going to default on the debt. We can just print the money.
2:11:06 But what can happen is high inflation. And again, people have been talking about this for years,
2:11:12 and I don’t know if it ever comes true or not. But we in this country now have a fiscal or monetary
2:11:21 response to every problem. And the one problem you can’t solve from fiscal and monetary tools is
2:11:27 inflation. And in fact, you have to go the other way. And that’s when things get really bad is when
2:11:33 you have to be cutting fiscal spending, when you have to be increasing interest rates to try to
2:11:37 combat inflation. And so I don’t know if the inflation comes, I don’t know if it ever comes.
2:11:44 As someone who thought a lot about risk in their career, I’m very concerned about the downside,
2:11:51 should it come? We just don’t have a political environment now where tough decisions can get made.
2:11:56 And so what happens if we start seeing high inflation then forces up interest rates that
2:12:02 causes all the repercussions, negative repercussions of that? Because we have the system now so levered
2:12:08 with debt at the household level, at the business level, at cities and states, at the federal level.
2:12:13 So what would we do, John? Help me understand that. So right now we can get away with printing money
2:12:19 because the interest rate that the government pays is very low. If inflation hits and the interest
2:12:24 rate goes up, I mean, as it stands now, the United States government’s debt service is a staggering
2:12:29 number. You probably know it. I certainly don’t. I try to block numbers I really, really hate out of
2:12:34 my mind, by the way. So I think at one point I knew how much the United States paid per day in debt,
2:12:39 and I quickly buried it somewhere in, I don’t know, somewhere in my spinal cord. It’s not even in my
2:12:43 brain anymore. But at some point, as you said, if inflation hits and interest rates rise,
2:12:49 that debt service could overwhelm our GDP, yes? Yeah, it could. The debt, people argue we should
2:12:55 do more deficit spending today because interest rates are low. We can borrow for 10 years at very
2:13:01 low rates. The reality is we borrow generally short term, but even if we put all the borrowing at 10
2:13:07 years or 30 years, we never actually pay off the debt. It’s just accumulating. So as long as GDP is
2:13:14 growing faster than real inflation, it’s okay. Because on a real basis, it declines. But that’s
2:13:19 not what happens. Debt’s increasing much faster than real GDP. And so the real debt is increasing,
2:13:24 and we never pay it off. And we’re not sure whether the low interest rates are going to be around forever
2:13:31 or not. It was 2007 when interest rates were close to 5%. Just imagine that now if interest rates went
2:13:37 back to 5%, what it would do to stock prices, to businesses who are so levered, to cities and
2:13:44 states, to everybody, to households, if you raise the cost of borrowing. Historically, 5% is not
2:13:49 astronomical either. No. And we’ve certainly seen double digits. And you’ve got to go back 40 years
2:13:54 now. But we’ve seen double digit interest rates before in this country. And the decimation that would
2:14:02 take place, if that happened again, is immense. And so I always think about, I want to help the
2:14:09 world. I want to solve problems. But if the answer is just shovel more money at it, that’s not a
2:14:15 sustainable answer in my mind. So everything becomes, how do we improve the system without spending more
2:14:20 money? Or how do we improve the allocation of resources today? And that gets us back to pharma,
2:14:26 is that a dollar spent on pharma, which some portion of that goes to innovation and creates
2:14:32 incentive for innovation. Well, innovation is great. In a world of no trade-offs, there’s no problem
2:14:38 with that. And if you believe that there are no trade-offs with how we spend our resources, then
2:14:43 pharma prices are fine. In fact, double them, triple them. There’ll be more incentive for innovation
2:14:48 in that world. But that’s not the world that I believe we live in. I believe there is a trade-off in
2:14:54 that a dollar put into pharma innovation is a dollar less for everything else. It could be other
2:14:58 healthcare innovation or healthcare services that aren’t getting provided today. Or it could be in
2:15:04 education. It could be in making our prisons better so that there’s less recidivism. All these ways in
2:15:10 that somehow the pharma industry has been able to create this island. Every other industry has to fight
2:15:16 for the dollars and try to convince the state and federal government, give me an extra dollar. Here’s why.
2:15:19 And the pharma system has just been able to create this island where they don’t have to compete with
2:15:25 anybody. They got their own rules. And it’s a messed up set of rules that incentivizes the wrong thing.
2:15:30 So even within that, we’re not getting the drugs that we should be getting. We get a lot of
2:15:36 marginal oncology drugs that probably don’t provide any real benefit versus the current drugs.
2:15:41 And we’re not investing in the antibiotics. We’re not investing in vaccines because the financial
2:15:46 incentive isn’t there for lows. So we’re spending tons of money as a society and not even getting
2:15:48 good returns for it. Sorry, that’s my rant.
2:15:56 It’s very disheartening to see just how low that ROI is. I mean, I think, again, it comes back to this
2:16:03 question of where does the crack finally have to occur? I love this expression. I don’t know who
2:16:09 it’s attributed to, and I’m probably paraphrasing it, but it’s like change happens very slowly and then it
2:16:15 happens very quickly. It’s like the stonemason that is banging, banging, banging away on the stone
2:16:20 for hours and hours and hours. And to the outside world, nothing is happening. And then with one more
2:16:29 strike, it splits. And I feel like a lot of your philanthropy is like that. It is years of banging
2:16:35 away at something that seems unchangeable. And there’s a belief, there has to be a belief that
2:16:43 at some point that nth strike is going to split that rock. Is this a skill that you, because that seems
2:16:48 like the opposite of trading in some ways. Trading was in a relatively short period of time, you’re
2:16:53 going to find out if you were right or wrong. Again, you always had the advantage of being able
2:16:59 to adjust your positions in the presence of new information, but at least you had a feedback loop
2:17:05 that was relatively short. Here, your feedback loop is much longer. Does that pose a challenge for you
2:17:12 emotionally? Absolutely. And you’re right that the trading world has that instantaneous feedback about
2:17:20 whether you’re right or not. And you used to have the P&L marker up in the corner of the computer screen
2:17:27 that would tell you at every moment in time what the market was telling you about your position.
2:17:33 And a lot of these efforts that were involved in on policy change, number one, it’d take a long time.
2:17:40 And second, as you described, you don’t know if you’re making progress often, because it feels like
2:17:45 you’re just have the hammer against the wall, have the hammer against the wall, driving yourself crazy
2:17:52 and wasting money. And then all of a sudden, it happens. There’s a great book I read, it was written by
2:17:56 an advocate who was trying to get rid of the don’t ask, don’t tell policy in the military and allow
2:18:03 gays to openly serve. And this turned out to be close to a 20-year campaign for him. The first
2:18:11 decade, his wins were so small. His advances in it, it was like he was trying to get invited to give a
2:18:19 talk at a class at the military academy, was a step forward. And you could see at any given time,
2:18:25 he could have spent five years with very little visible progress and just stopped and said,
2:18:30 I’m pushing this rock. I’ve been hitting the wall. I’m not making any progress. This is a waste of my
2:18:35 time. I should be doing something else. And gone and done something else and not achieve success.
2:18:40 But he stuck with it. And the second decade, he ended up getting the policy reversed. And it led the
2:18:47 effort. And I think about that story a lot of, it’s hard to know, but during that time, like five years
2:18:53 in, are we wasting our time and this is never going to pass? Or is the wall going to crack tomorrow?
2:18:58 And you just don’t have that feedback mechanism in this work that you had in the market and the
2:19:00 complete opposites end of the spectrum.
2:19:07 And I guess that’s why the research that you do, the time that you take, the amount of deliberation that
2:19:13 goes into your philanthropy at least gives you a greater foundation of confidence. Interviewed someone by the
2:19:19 name of Rick Doblin, who’s been singularly focused on the legalization of MDMA since about 1986.
2:19:24 Again, it’s staggering to me to think 34 years he has worked on the exact same problem. And
2:19:30 I just had a call with Rick yesterday. And I guess I don’t know if I’m going to be careful what I am
2:19:35 allowed to say or not say. But I think I can say with some confidence that he is probably closer than
2:19:41 ever to achieving that goal through his organization, MAPS, the Multidisciplinary Association for
2:19:47 Psychedelic Studies. And again, I just think that people who can do what you can do, who can do what
2:19:52 Rick Doblin can do, who can do what a lot of great philanthropists can do, it’s not just writing the
2:19:58 check. That’s amazing. That is unbelievable to be able to write the check. It’s equally amazing to
2:20:03 be able to stick on a problem. Speaking of problems, there’s one problem you and I have never discussed,
2:20:09 but it seems so up your alley. I wonder if you have evaluated it and decided it’s not worth,
2:20:14 you don’t have the assets, you don’t have sort of the problem-solving asset to go after it,
2:20:18 or you think enough people are on it. But I’m very curious as to what thought you guys have given to
2:20:23 climate change. Again, given your understanding of energy, which is, you know, at least a third of
2:20:31 the problem, tell me how that’s come across your radar. Yeah, we do a little bit on climate change.
2:20:38 I think as a trader, and again, someone who thinks about risk, it’s a problem where the downside
2:20:46 possibilities are so enormous that it makes sense as a society for us to make the investments today to
2:20:53 try to decrease the probability of those downside scenarios. I don’t know what probability it is of
2:21:00 those downside scenarios that are truly catastrophic from an economic standpoint, from a life standpoint
2:21:06 that change how humans really live, but it’s greater than zero. It’s less than a hundred percent. It’s
2:21:12 somewhere in there, but the downside is so great that society needs to make that investment. So we typically
2:21:18 get drawn to the areas where I’d call them orphan areas where there’s not much focus, especially
2:21:25 philanthropic focus. Things like public pension reform or changing how elections are conducted or
2:21:32 the pharmaceutical pricing or surprise billing. Things where the day we enter it, we probably have
2:21:39 committed the most money of any other philanthropic actor in the system already. What strikes me about
2:21:46 the climate field is that there are remarkable people, there’s brilliant people who are working on this
2:21:55 today or very thoughtful philanthropists who are working on this today, who oftentimes either make
2:22:02 this their single issue or one of two or three issues that they’ll be working on. So I always think about
2:22:10 what’s our additionality into the problem. And one of them is that I think because we work with both the
2:22:16 left and the right, and we’re not a political organization, and many of those who are both the
2:22:22 researchers, the advocates, the funders in the climate space do come from the left, that I think we can try to
2:22:29 support those efforts, those organizations and politicians that are on the right, who want to start taking the
2:22:39 steps. Because this has to be a bipartisan effort to solve. It’s hard to imagine today how that happens.
2:22:47 But Republican Party is moving slowly, very slowly, but you start to see some people with real credibility
2:22:52 within the Republican Party, and there are thought highly of, start to think about there’s acknowledgement
2:23:01 that there’s a problem. There is dispute about what level of investment is merited to deal with it.
2:23:07 And I think that Democrats don’t help Republicans get there. When you put the whole Democratic platform
2:23:16 into a climate change bill, I don’t think it helps Republicans talk about the issue and be a productive
2:23:22 partner. And I think it’s going to have to be, again, it has to be bipartisan for it to be sustainable.
2:23:29 sustainable. Perhaps Democrats win the White House to perhaps Democrats win the Senate for 2021. It might
2:23:35 take down the filibuster. But what happens when that changes? And do those rules and laws stay enacted or
2:23:41 do they get repealed? And so that’s why I think all these things that we work on need to be done in a
2:23:46 bipartisan way, including the pharma. We got a bill passed in the Senate Finance Committee, Republicans,
2:23:52 Democrats come together, get this close, and we just can’t get it onto the floor. That’s where we are.
2:24:01 So, John, your kids are, I’m guessing, they probably don’t, even your oldest probably doesn’t remember
2:24:08 you being a traitor. So your kids are going to grow up and they’re going to think of mom and dad’s job is
2:24:17 philanthropy. What’s the impact that that has on them? I mean, I suspect it’s pretty profound. They see how
2:24:21 seriously their parents think about this stuff. Do they come to you with questions about the work
2:24:27 that you have? Do they have their own interests? They’re obviously not that young anymore and they’re
2:24:31 obviously very smart kids. They must be thinking about, hey, mom and dad, why aren’t you guys working
2:24:35 on this problem? Or what do you think about this problem? I mean, how does your curiosity for the
2:24:40 world trickle down to them? And how deliberate a part of that, of raising your kids is that?
2:24:46 They certainly understand kind of high principles about what we do. We’re philanthropists. They know
2:24:50 what that means. They know that we give money, trying to make the world a better place. But we do have
2:24:58 those conversations when we walk past a homeless individual who’s asking for a dollar. And my daughter
2:25:03 says, we need to give him a dollar, right? And having those conversations about, okay, do we give
2:25:10 this dollar here or do we give it to someone trying to be in a more philanthropic or more strategic way
2:25:12 to try to get at the root of the problem, right?
2:25:17 Do we give the dollar here or do we give it to the food bank down the street that hopefully he can
2:25:20 go to and get the same meal that we would want him to get or something like that?
2:25:29 Right. And it ends up being both. I think you need to teach kids about humanity, about the love of the
2:25:37 individual. So we can’t say no every time, but also have to teach him about not going to give all the
2:25:44 money away dollar by dollar to somebody on the street. We’ve thought a lot about what’s the kid’s
2:25:50 role in this going forward. And Laura and I are very much on the same page here. We don’t want their
2:25:58 lives to be defined by their parents. So we don’t want them working at the foundation. We don’t want
2:26:02 them at least when they’re in their twenties and probably in their thirties to be working at the
2:26:08 foundation. If it’s still open then we want them to go have their own life experiences, define their
2:26:14 own, create their own life. And then after they’ve done that, if they want to come join the work here,
2:26:19 that’s great. But it’s really important that they’re not part of the foundation.
2:26:26 at a young age, because there’s a downside and, and it’s whenever you have that checkbook, people
2:26:34 look at you differently and treat you differently. Your jokes are funnier and people have a sense of
2:26:42 their own best behavior around you because there’s always something that they want funded or that
2:26:47 they’re involved in and are going to come with an ask at some point. And we minimize this largely
2:26:52 because of the types of things we fund and we’ve made it very clear about what we do fund.
2:26:59 But if somebody is growing up in their teens and their twenties and is looked at by the rest of the
2:27:05 world as a checkbook first, I think that’s a very damaging way to grow up. It’s not reality. Like the
2:27:11 twenties is the time when you need to be kissing somebody else’s butt. You need to be going to get the
2:27:17 lunches for everybody else, not vice versa. You need to be trying to climb up to the organization,
2:27:21 not be gifted the checkbook on day one.
2:27:29 So what advice would you give to people who were where you were 25 years ago, which is they’re going
2:27:35 to be writing three figure checks or maybe a four figure or five figure check to an organization.
2:27:40 They’re not going to be able to set up their own foundation. They have the same tug that you have,
2:27:46 which is, Hey, whatever stage of my life I’m at, whatever my means are at, I know that giving away
2:27:51 some of my money makes the world a better place. I just want to make sure I do it as intelligently
2:27:51 as possible.
2:27:59 Yeah. In many ways, what we’re doing is not remarkable. So many people in this world or
2:28:05 especially in the United States are very generous with time, with resources relative to what they
2:28:09 have, relative to the time that they have, relative to the money that they have. So it can just be done
2:28:14 at a different scale. But I think there are some people who are much more altruistic than we are.
2:28:18 There’s people who give away 10% of their money when they’re making a hundred thousand dollars or
2:28:24 fifty thousand dollars that changes their quality of life. There’s a sacrifice, a trade-off by doing
2:28:29 that. And they still do it. And there’s a small movement called further pledge where you pledge to
2:28:36 give everything above a relatively small salary, like 30,000, maybe up to 50,000 to charity. And knowing
2:28:43 that that dollar you’re giving is creating more total good than you spending it. And that’s huge.
2:28:50 And I think we, as a society, benefit when our community around us is stronger. And that’s why
2:28:55 people do it. Whenever we have the needs of our family, whenever our family is secure,
2:29:02 then I think it’s natural, it’s human nature to start thinking about your community and however you
2:29:09 define your community, whether it’s your group of friends, your city, your country, might be shared
2:29:15 experiences. But everybody kind of goes through that process of defining his or her own community and then
2:29:21 uses the resources of time and money to try to help that community to the best extent they have.
2:29:27 There’s no right answer in how you define your community. There’s no right answer as to how you
2:29:33 improve your community. But it is remarkable, just this culture of giving and philanthropy that exists in
2:29:37 this nation. I think largely because we are a wealthy nation, right? More people are more secure
2:29:46 here. People have more likely to have the needs of their family set aside or in line of sight. And so
2:29:51 they’re able to do these things. And that’s one of the reasons that make this country so great. I don’t
2:29:52 know if I answered your question.
2:29:57 No, you really did actually. I mean, certainly what I took away from that was you pointed out
2:30:00 something that I think doesn’t get enough appreciation, which is you’re absolutely right
2:30:05 for you to give away $400 million a year is less. I mean, I’m not minimizing that at all,
2:30:11 but you’re right. It’s less of a sacrifice than someone who makes $50,000 a year giving away $5,000.
2:30:16 The incremental $5,000 to someone making $50,000 is staggering if you’re trying to raise a family or do
2:30:22 anything else. And the other thing I took away was this idea of giving locally. I think the way you
2:30:28 define locally is very important. It doesn’t mean necessarily if I live in this city, I only give to
2:30:34 this city. I can broaden my definition of local. Local could mean I’m a veteran and therefore my
2:30:41 giving back to veterans affairs or other vets is what I define my community as. I think that’s an
2:30:43 elegant way to think about it. I think the other thing that comes with that is frankly,
2:30:48 giving to your community means you can probably make a more informed gift. You have a better sense
2:30:51 of potentially what the needs are of your own community. Absolutely.
2:30:56 John, I’m going to be honest with you, man. We’ve been talking here for like over two and a half
2:31:00 hours. I took a bunch of notes before we spoke. We haven’t got through half what I want to talk about,
2:31:06 but I also can’t keep one of the world’s busiest philanthropists wasting any more of his time
2:31:11 talking with me. So I’m going to honor my commitment to you to keep this relatively short,
2:31:16 not make it a seven hour discussion. I’m going to let you go. We might have to do a part two at some
2:31:21 point, but I want to thank you very much for first and foremost, just set aside the time today,
2:31:27 but more importantly, just for the work that you do. I know personally how seriously you take this work
2:31:33 and the world is definitely a better place for having the best natural gas trader of all time,
2:31:34 no longer trading natural gas.
2:31:38 Well, thank you. It’s been a fun experience. Looking forward to part two.
2:32:07 Hey guys, this is Tim again. Just one more thing before you take off. And that is five bullet Friday. Would you enjoy getting a short email from me every Friday that provides a little fun before the weekend? Between one and a half and two million people subscribe to my free newsletter, my super short newsletter called five bullet Friday, easy to sign up, easy to cancel. It is basically a half page that I send out every Friday to share the coolest things I’ve found or discovered.
2:32:37 Or have started exploring over that week. It’s kind of like my diary of cool things. It often includes articles I’m reading, books I’m reading, albums, perhaps gadgets, gizmos, all sorts of tech tricks and so on that get sent to me by my friends, including a lot of podcast guests. And these strange esoteric things end up in my field. And then I test them and then I share them with you. So if that sounds fun, again, it’s very short, a little tiny bite of goodness before you head off for the weekend.
2:32:49 Something to think about. If you’d like to try it out, just go to Tim dot blog slash Friday, type that into your browser, Tim dot blog slash Friday, drop in your email and you’ll get the very next one. Thanks for listening.
2:33:19 Sleep is the key to it all. It is the foundation. Many of you heard me talk about how today’s sponsor eight sleep has improved my sleep with its pod cover. Well, they just launched their latest product, the pod five. I cannot wait to try it out. And here’s why the pod five introduces eight sleep latest product, the blanket, which uses the same technology as the pods cover to extend temperature regulation across the entire body. So if you’re too hot, too cold, you can fix it. If you’re a couple and one of you is hot, one of you is cold. You can fix it as well. It all fits right over your existing.
2:33:33 Mattress like a fitted sheet. On average, members report the pod has helped them fall asleep 44% faster, 34% deeper sleep and given them up to one added hour of sleep each night. Also, the pod snoring detection.
2:33:49 My friend Albert might be interested in this and automatic elevating platform have reduced user snoring by 45%. So it does a lot. You’ll also get a personalized report each morning, allowing you to track your sleep stages, heart rate variability, respiratory rate, and more all without having any devices strapped onto you.
2:34:16 So head over to eight sleep.com slash Tim and use code Tim to get $350 off of your very own pod five ultra. You can try it at home for 30 days and return it if you don’t like it. So why not give it a shot? Sleep is everything. Again, that’s eight sleep.com slash Tim. You can spell it out eight sleep.com slash Tim for $350 off shipping is available to many countries worldwide. One more time, eight sleep.com slash Tim.
2:34:47 I don’t know about you guys, but I have seen a lot of crazy stuff in the last few weeks. I saw an AI generated video. It looks like a video of an otter on a flight, tapping away on a keyboard, having a stewardess ask him if you would like a drink. And it goes on from there. And this was generated with AI and it looks photorealistic, basically. I mean, it would have cost hundreds of thousands, millions of dollars to do in the past, taken forever. And now it’s boom, snap of the fingers. It’s crazy.
2:35:03 So AI is changing everything. We know that it is also changing the way startups and small businesses operate. Things are going to get crazier. The rate of change is only going to get faster. And while a lot of good is going to come of that, it also means security and compliance headaches for one thing.
2:35:23 And that is where today’s sponsor Vanta comes in. I’d already heard a lot about them before they ever became a sponsor. Just like 10,000 plus other companies that rely on Vanta, my friends at Duolingo, shout out Duolingo and Ramp, shout out Ramp, one of this podcast sponsors and an ultra fast growing company use Vanta to handle security compliance.
2:35:34 So why would they do that? Well, Vanta automates compliance for frameworks like SOC 2, ISO 27001, and HIPAA, making it simple and fast to get enterprise grade compliant.
2:35:46 But what does that mean? It adds up to impressive results. Companies can save up to 85% of costs, get compliant in weeks instead of months, and complete security questionnaires up to five times faster.
2:35:58 So check it out. Vanta.com slash Tim. That’s V-A-N-T-A, like Santa with a V. Vanta.com slash Tim to see how Vanta can help you level up your security program.
2:36:05 My listeners, that’s you, can get $1,000 off. So check it out. Vanta.com slash Tim.
0:00:09 episode of the Tim Ferriss Show, where it is my job, each episode typically, to sit down with
0:00:13 world-class performers of all different types, from all different industries, from all different
0:00:19 fields, to tease out the habits, routines, favorite books, influences, and so on, that you can, in some
0:00:24 fashion, emulate or test and apply in your own life. This time around in this episode, we have
0:00:30 a slightly different format, which I’m super excited about. I will not be the one doing the
0:00:37 deconstructing. Instead, we have my good friend, Peter Attia, taking my place. In this episode,
0:00:42 we have Peter interviewing the legendary John Arnold. As many listeners know, and many probably
0:00:49 don’t know, Dr. Peter Attia, on Twitter and Instagram, at Peter Attia, A-T-T-I-A-M-D, is a
0:00:55 former ultra-endurance athlete, so he’s done swimming races of 25 miles, etc., a compulsive
0:00:59 self-experimenter, so we get along well, and one of the most fascinating human beings I know.
0:01:07 He is also one of my go-to doctors for anything related to performance and longevity, because
0:01:13 blending the two is quite a sophisticated and subtle business. Peter also hosts The Drive,
0:01:18 a weekly ultra-deep-dive podcast focusing on maximizing health, longevity, critical thinking,
0:01:24 and a few other things. He really gets into the weeds with specialists on his show. Topics include
0:01:28 fasting, ketosis, Alzheimer’s disease, cancer, mental health, and much more. You can subscribe
0:01:33 to The Drive on Apple Podcasts, Spotify, or wherever you listen to podcasts, and you can find links to
0:01:38 all of this in the show notes for this episode at tim.blog forward slash podcast, and just search
0:01:44 atia, A-T-T-I-A. I will let Peter take it from here to give John’s full bio and introduce the episode.
0:01:50 This is one not to miss. I really enjoyed it, and hope you do as well. Thanks for listening.
0:01:56 But first, just a few quick words from our sponsors who make this show possible.
0:02:02 I don’t know about you guys, but I have seen a lot of crazy stuff in the last few weeks. I saw an AI
0:02:09 generated video. It looks like a video of an otter on a flight, tapping away on a keyboard,
0:02:14 having a stewardess ask him if he would like a drink, and it goes on from there. And this was generated
0:02:22 with AI, and it looks photorealistic, basically. I mean, it would have cost hundreds of thousands,
0:02:27 millions of dollars to do in the past, taken forever, and now it’s, boom, snap of the fingers.
0:02:32 It’s crazy. So AI is changing everything. We know that. It is also changing the way startups and small
0:02:37 businesses operate. Things are going to get crazier. The rate of change is only going to get faster.
0:02:43 And while a lot of good is going to come of that, it also means security and compliance headaches,
0:02:48 for one thing. And that is where today’s sponsor, Vanta, comes in. I’d already heard a lot about
0:02:54 them before they ever became a sponsor. Just like 10,000 plus other companies that rely on Vanta,
0:02:59 my friends at Duolingo, shout out Duolingo, and Ramp, shout out Ramp, one of this podcast sponsors,
0:03:04 and an ultra-fast-growing company, use Vanta to handle security compliance. Why would they do that?
0:03:12 Well, Vanta automates compliance for frameworks like SOC 2, ISO 27001, and HIPAA, making it simple
0:03:17 and fast to get enterprise-grade compliant. But what does that mean? It adds up to impressive
0:03:24 results. Companies can save up to 85% of costs, get compliant in weeks instead of months, and complete
0:03:32 security questionnaires up to five times faster. So check it out. Vanta.com slash Tim. That’s V-A-N-T-A,
0:03:38 like Santa with a V. Vanta.com slash Tim to see how Vanta can help you level up your security program.
0:03:45 My listeners, that’s you, can get $1,000 off. So check it out. Vanta.com slash Tim.
0:03:52 Sleep is the key to it all. It is the foundation. Many of you heard me talk about how today’s sponsor,
0:03:56 Eight Sleep, has improved my sleep with its pod cover. Well, they just launched their latest product,
0:04:02 the Pod 5. I cannot wait to try it out. And here’s why. The Pod 5 introduces Eight Sleep’s latest product,
0:04:07 the blanket, which uses the same technology as the pod’s cover to extend temperature regulation across
0:04:12 the entire body. So if you’re too hot, too cold, you can fix it. If you’re a couple and one of you is hot,
0:04:17 one of you is cold, you can fix it as well. It all fits right over your existing mattress like a fitted
0:04:24 sheet. On average, members report the pod has helped them fall asleep 44% faster, 34% deeper sleep,
0:04:29 and given them up to one added hour of sleep each night. Also, the pod’s snoring detection,
0:04:34 my friend Albert might be interested in this, and automatic elevating platform have reduced user
0:04:38 snoring by 45%. So it does a lot. You’ll also get a personalized report each morning,
0:04:43 allowing you to track your sleep stages, heart rate variability, respiratory rate, and more,
0:04:49 all without having any devices strapped onto you. So head over to eightsleep.com slash Tim and use
0:04:56 code Tim to get $350 off of your very own Pod 5 Ultra. You can try it at home for 30 days and return it if
0:05:02 you don’t like it. So why not give it a shot? Sleep is everything. Again, that’s eightsleep.com slash Tim.
0:05:08 You can spell it out, eightsleep.com slash Tim for $350 off. Shipping is available to many
0:05:12 countries worldwide. One more time, eightsleep.com slash Tim.
0:05:13 Optimal minimal.
0:05:18 At this altitude, I can run flat out for a half mile before my hands start shaking.
0:05:20 Can I ask you a personal question?
0:05:23 Now would it seem to be a perfect time?
0:05:24 What if I did the opposite?
0:05:28 I’m a cybernetic organism living tissue over a metal endoskeleton.
0:05:44 I guess this week is John Arnold. John is probably the guy that’ll go down in history as the most
0:05:51 successful natural gas trader of all time. And we spend the first part of this episode explaining
0:05:54 that story. And you might think, well, what does that have to do with anything? Well,
0:06:03 it’s only by understanding how John came to amass a fortune of billions of dollars trading natural
0:06:09 gas. Can you understand the second part of this discussion, which is how at the age of about 37 or
0:06:17 38, he shut it all down and turned all of his attention to the full-time craft slash business slash art
0:06:25 philanthropy. John’s philanthropy is as serious as his natural gas trading. And his foundation,
0:06:31 Arnold Ventures, which he is the co-chair of along with his wife, Laura, focuses on really the hardest
0:06:37 social problems imaginable. And in this episode, John discusses at great length where philanthropy
0:06:43 fits into the broader picture of the nonprofit sector, differentiating it from charity and how that
0:06:47 fits into even the broader umbrella of public or government spending and even private spending.
0:06:52 And it’s only by understanding that lens that you can really understand how someone like John
0:06:59 thinks about deploying the types of resources they do, which are legion to be clear. The foundation
0:07:08 currently spends about $400 million a year in grants. And John’s goal is to basically spend their entire
0:07:14 fortune in their lifetime solving very hard problems, problems like criminal justice reform, health policy
0:07:21 reform, K through 12 reform, public finance, things like that. We obviously don’t go nearly as deep as
0:07:27 I would love to go into all of these topics. And yet somehow this podcast managed to be probably two
0:07:32 and a half hours, if not slightly more, which certainly leaves ample room for a part two of this at some
0:07:38 point in time. I guess one thing I would say about this is I’m obviously fascinated by this topic and
0:07:42 could sit here and talk about natural gas trading forever. If that subject matter, isn’t that
0:07:46 interesting to you? What I would suggest is paying close attention to the timestamps in your podcast
0:07:51 player. You’ll probably want to listen to the first part of this because it’s, I think John’s
0:07:56 background and growing up and his card trading business, his baseball card trading business. I think that
0:08:01 stuff is really important to kind of understand John’s mentality. You may actually want to skip his
0:08:06 career where he goes from college to work at Enron and don’t worry, he’s one of the good guys at Enron.
0:08:12 And then you may want to sort of skip to the part where he decides to shut his own hedge fund down
0:08:16 and instead focus on philanthropy. Again, I’ll leave it up to you, but I guess the point I want to make
0:08:20 is I wouldn’t be put off by the fact that if you’re not interested in natural gas, you won’t find this
0:08:25 episode interesting. I think this episode is interesting start to finish, but there may be some people who only
0:08:30 find one part in string or another. So, so just pay attention to where that is. So without further delay,
0:08:32 please enjoy my conversation with John Arnold.
0:08:43 Hey John, awesome to sit down with you. I’m bummed we are not able to do this in person because anytime
0:08:49 we sit down in person, it is a long and fruitful discussion where I just feel like I’m learning at
0:08:55 a geometric rate. But nevertheless, I’m excited that we’re finally getting to sit down and talk because
0:09:00 there’s so many things on my mind. Now, a lot of people listening to this podcast will not really
0:09:07 know who you are. And I’ve struggled to think about the best way to introduce you. So I thought one of
0:09:12 the funniest ways to introduce you is to do so through the tweet that you have pinned at the top of your
0:09:16 page. So remind me your handle on Twitter is, is it John Arnold Foundation?
0:09:18 John Arnold Foundation. Yeah.
0:09:22 Okay. And what is it that you have pinned at the very top of that?
0:09:30 So it’s essentially that I’ve been called the next Koch brother by the far left. And I’ve been labeled
0:09:36 the next George Soros for by the far right. And I think I write that I’m an equal opportunity,
0:09:43 special interest pot stirrer. And I think it does label me a couple of ways versus our actions at the
0:09:51 foundation, which has been kind of in its current form for about 10 years, have led to getting into
0:09:56 a lot of squabbles with both the left and the right. And at times it’s been frustrating, at times it’s
0:10:02 been liberating, but it has brought a lot of conflict, which one doesn’t normally think about when you think
0:10:08 about philanthropy and a philanthropist about having conflict and fights and battles with a lot of these
0:10:14 issues. And that’s generally been a component of our work, not by design, but by necessity.
0:10:22 And then I think the second part of it that I like is that we don’t approach all problems with the same
0:10:29 ideology. I think problems are different. Problems are complex and the type of solution for each problem
0:10:34 is different. So we don’t say that the free market is the right answer for everything. Don’t say government
0:10:40 is the right answer for everything, but it depends on the makeup of the problem, the actors, the market
0:10:45 failures, et cetera, as to what the right solution is. And therefore over the years have managed to
0:10:49 make mad both the left and the right, and sometimes simultaneously.
0:10:54 And by extension, I think there are many times that the right and the left also think you were doing the
0:10:59 greatest work on earth. I mean, I think that’s the corollary of that, which is there are times when
0:11:02 you were in lockstep agreement with both sides as well, correct?
0:11:04 Yes. Although whenever-
0:11:05 Not simultaneously.
0:11:10 They tend to be louder whenever you’re in conflict with them than when they’re showing appreciation.
0:11:11 Yeah.
0:11:18 I think part of how we’ve chosen issues to work on is we’re looking for these system problems that have a
0:11:25 lot of impact in people’s lives, where the two sides, the left and the right, have historically
0:11:31 been divided for some reason and that they’re starting to come together. Like there’s a reason
0:11:37 why there can be a solution that’s viable today that wasn’t viable five years ago or 10 years ago.
0:11:42 And that ends up being a component of almost every issue we work on is that the left and the right
0:11:49 are coming together. And so we need to be able to work with both sides. And so we’ve tried to tamp
0:11:56 down the politics, both personally and professionally over the years and try to see in the Venn diagram of
0:11:59 things that the left will support and the things the right will support, even if it’s for different
0:12:04 reasons or different motivations. Let’s explore those territories and see what can be done.
0:12:09 And I think we’re going to explore one of those in greater detail, perhaps than others,
0:12:13 which will be criminal justice. But currently the foundation I know focuses very heavily on health
0:12:18 policy, public finance platforms and criminal justice. And I think at least one of those,
0:12:22 and I don’t know why I just personally find criminal justice to be such an important one,
0:12:27 maybe we’ll come back to it because it is one where I think maybe the left and right have a different
0:12:32 ultimate motivation for establishing it, but the solutions can certainly benefit society and both
0:12:37 sides. Let’s take a step back because to put the magnitude of your philanthropy and scale,
0:12:43 the foundation is deploying what type of assets per year? Can you put some numbers to this
0:12:48 for people? We give about 400 million a year. The assets in the foundation are a little over
0:12:54 2 billion. And then we have a couple other giving vehicles, specifically a DAF. We contribute money
0:13:01 every year as well. So we have a high spend rate, but one of our philanthropic intent is to give away
0:13:06 the vast majority of our money during our lifetimes. Yeah. And you’re very young, John, you’re in your
0:13:12 mid forties. You and your wife, Laura have been at this, as you said, since you’re in your thirties and yeah,
0:13:17 you’re sort of on a mission to spend this enormous sum of money during your lifetime. That’s something
0:13:22 I want to come back to because it’s also not a typical path to philanthropy. Many people are
0:13:27 thinking about serious philanthropy at a slightly later stage of their life. Let’s start with the
0:13:30 first half of the story, which is where did this money come from? You didn’t have a trust fund to
0:13:36 my recollection, right? I did not. I did not. So where did you grow up? I grew up in Dallas
0:13:43 and a very boring, great upper middle-class lifestyle in Dallas. Went to Dallas public schools,
0:13:49 ended up going to Vanderbilt. Well, let’s go before Vanderbilt. What was your first business?
0:13:55 First business. So probably mowing lawns. I was sitting around one summer and said,
0:14:03 I want to make some money. So what can a 12 year old do to try to make a dollar? Not much. And so
0:14:09 went knocking on every neighbor’s door and tried to find a lawn to mow and realized that everybody
0:14:14 either cut it themselves or had a lawn service already set up. And so that wasn’t going to be
0:14:22 my path to riches. And then kind of around age 14, I ended up getting into the baseball card business
0:14:31 pretty actively. So this was right around 1988, 89, 90, when the sports card business was taking off.
0:14:37 And I had a small collection at the time, but I always thought of it more as an asset rather than
0:14:43 a collectible that I wanted to put on my desk and look at every day. And so the first experience was
0:14:50 just renting a table at a local trade show for $30 and going and putting a lot of the collection on the
0:14:57 table and trying to sell it. And again, the sports card business was booming. And so came home with maybe
0:15:04 $100 from the $30 investment. Now, of course, the cost of goods sold was, it didn’t really factor that in.
0:15:10 Maybe that was a sunk cost at the time, but it started getting me interested in this as a potential business.
0:15:17 And I kind of quickly figured out, I didn’t want to be spending my weekends sitting at the local trade
0:15:22 fair and couldn’t, I played highly competitive soccer. So I had things to do on the weekend,
0:15:28 but there was a wholesale market that didn’t require as much time. And so this is really kind of the,
0:15:33 again, during the start of the bulletin boards of ways where people would transact.
0:15:41 And there was a small bulletin board of baseball card dealers where they would do the wholesale trading.
0:15:47 And the market was so volatile at the time. If a particular player went on a good streak for two
0:15:55 weeks, that card would get hot, especially in the region he played. And you’d start seeing number one,
0:16:02 volatility in prices and second kind of geographic differentiation in prices. So the market for hockey
0:16:08 cards was very strong in the Northeast and in Canada, a little in Michigan, they would sell them
0:16:13 across the nation. Now the guys that bought them in Texas, there wasn’t much of a local market.
0:16:21 So I could go buy the hockey cards there, ship them up to a dealer in New York and make a few dollars.
0:16:27 And that few dollars, I would then reinvest and do it more than the sports card business was going
0:16:33 parabolic at the time. And so kind of one thing led to another, and I ended up spending a couple summers,
0:16:39 just kind of full time on this baseball card, really geographic arbitrage and information arbitrage
0:16:47 that I would have a sense of who the best buyer was for every product, wherever they were in the
0:16:55 United States, or even into Canada, and would go around and try to find any bargains I could in the
0:17:02 Texas, Oklahoma, Louisiana, tri-state area, kind of do day trips down to Houston and go to the big
0:17:07 fairs down here, would go canvas all the dealers. And that was really my first business.
0:17:14 And how were you able to drive around so young? This was pretty unusual for a kid your age to be
0:17:21 able to track that circle of geography, right? It was. I got my driver’s license at a young age.
0:17:27 I think it was at 14. My father at the time was going through an illness. He had Crohn’s disease
0:17:34 through his life and kind of a chronic condition that, especially in my teen years, became a bit
0:17:40 debilitating for him. And so I was able to get, I forget what the name of that particular license
0:17:48 was, but because there was a kind of family hurdle, family handicap that I was able to start driving
0:17:53 when I was 14. Did you know what the word arbitrage actually meant when you were conducting it?
0:17:57 Great question. And I don’t remember.
0:18:01 Can you explain to people, I mean, you’ve effectively explained it in concept because
0:18:06 it’s such a big part of your ultimate business. Can you explain it more formally and technically to
0:18:06 people?
0:18:14 I would describe arbitrage as taking advantage of price differences with little to no risk.
0:18:19 They think true arbitrage is no risk where you bought it for one and you’ve sold it at two
0:18:24 and you’ve taken no risk in doing so. In reality, there’s always a little bit of risk.
0:18:32 And so by knowing that the market in New York valued something at $20 and it was trading in Texas at $15,
0:18:39 I could take advantage of what I call geographic arbitrage there, that the market in Texas was
0:18:43 different from the market in New York. Now, of course, today with the internet, a lot of those
0:18:49 arbitrages and inefficiencies, pricing inefficiencies have gone away or have been, what we call in the trade,
0:18:56 arbed out. And so now you see the high-frequency traders trying to make a hundredth of a penny on a
0:19:02 share of stock and have huge incentive to do so and do so at massive volume. But it’s like buying and
0:19:05 selling same item with little to no risk.
0:19:12 Which is a theme we’ll obviously come back to at length. So you go to Vanderbilt. You studied, if I recall,
0:19:12 economics, yes?
0:19:14 Econ and math.
0:19:17 Do you have a sense of what you wanted to do when you were finished college?
0:19:24 I remember reading Liar’s Poker and I think Barbarians at the Gate, both classic books about
0:19:32 Wall Street. And although growing up in Dallas with my mom as an accountant, my dad as a corporate lawyer,
0:19:38 I didn’t have a sense as to what Wall Street was except through these books, except by reading Wall Street
0:19:46 Journal every day. And it seemed like that was the biggest game around. I got drawn to that game or the
0:19:53 desire to enter that game. And so my goal throughout college was to get the job and the classic post-college
0:19:56 analyst job at a big Wall Street bank.
0:20:02 So then how did that pan out? And I also recall from our discussions that you blazed through college.
0:20:06 I think you got your degree in three years by taking summer classes and just being kind of
0:20:08 maniacally focused on your degree. Is that right?
0:20:16 Yeah, I’d take 18 hours every semester, did summer school one summer, came in with some credits, and I was the guy
0:20:22 that was trying to get out of there and into the game as quickly as possible. Every day I was at college,
0:20:29 it was one less day that I had to be in the game. And I think my grades probably reflected that. I was not
0:20:35 academically focused, either in high school or in college. I think academics came relatively easy to me.
0:20:41 So it didn’t instill a great work ethic at school, but I just wanted to move on. It was a task to
0:20:43 complete to get me to the next stage.
0:20:47 So do you start interviewing for a bunch of Wall Street firms when you’re in your senior year or junior
0:20:47 year, I guess?
0:20:55 I did. So at the time, Vanderbilt was probably a tier lower than it’s considered today as a school. And
0:21:01 the investment banks didn’t do much recruiting there. So there was maybe one or two in some of the
0:21:06 regional banks. And then I was able to talk my way into a couple of interviews, but I didn’t get
0:21:13 those jobs. So I was a bit crushed. Here’s what I want to do. And I got things that were close to that
0:21:20 working at the regional investment bank. And then one of the jobs I got, which I thought was closest to
0:21:26 what I wanted to do to being in that game, was at the company Enron. And Enron at the time was in
0:21:32 this transformation, trying to become essentially an investment bank to the energy industry and
0:21:34 specifically the natural gas and electricity industry.
0:21:36 What year was that?
0:21:40 So I started at that job in 95, 1995.
0:21:44 So at 95, nobody knows Enron. They’re a pretty unsexy company, right?
0:21:45 Correct.
0:21:51 They’re basically doing disintermediation, like their market making on energy. And that’s about it.
0:21:55 They’re not this darling of Wall Street that they would become before their fall. Is that,
0:21:56 do I have my era right?
0:22:03 Right. It was historically a pipeline company. And over the decades, natural gas, which went from a
0:22:08 highly regulated business and all the troubles associated with trying to regulate a commodity,
0:22:14 right? That you end up having these huge booms and busts, way too much supply or way too little
0:22:23 supply was deregulated. And that deregulation ended in 1992. And that was really the emergence of
0:22:29 Enron, as it became the late stage company, was that previous to then you had the pipeline was
0:22:35 responsible for providing the merchant services to the buyer and seller. So the producer of gas would
0:22:41 sell to the pipeline and then the pipeline would transport the gas and sell it to the customer.
0:22:46 It was viewed that this was negative because pipelines are natural monopolies frequently.
0:22:54 And so the services and the costs of those services were too high. And so 92, they deregulate and here’s
0:22:56 Enron as the gas merchant.
0:23:02 Only because they become relevant later in this story. So was Ken Lay the CEO at that time of
0:23:06 deregulation? And when you came on board, or was Jeff Skilling there at that point in time? Not that you
0:23:10 would have had any interaction with those guys as a lowly first year guy.
0:23:19 So Ken Lay was chairman CEO. Shortly after I joined, I joined, I think, May of 95, there had been two
0:23:23 aspects of the company. It had the historical pipeline business, and then it had this new,
0:23:32 it’s called investment bank side. And there was what I later came to realize was the great decision
0:23:37 point for the company was who was going to be the number two at Enron. Was it going to be the head of
0:23:43 the pipeline business? Or was it going to be Jeff Skilling, who is the head of the energy bank? And so
0:23:50 shortly after I joined, Jeff was promoted up and Rich Kinder ended up leaving and starting Kinder Morgan.
0:23:56 And obviously, that promotion was based just as much on perhaps who they were as the direction that the
0:23:57 company was going to go in.
0:24:06 Right. I think this was a trend in corporate America then was go asset light. So get rid of your big assets.
0:24:12 Coca-Cola spins off as bottling business. They just become the seller of the syrup because that’s
0:24:18 lighter on assets. But your return on equity is higher if you have fewer assets. And so that was
0:24:21 the direction of corporate America generally and the one that Enron took.
0:24:26 So I love that you show up in May of 95, not even taking a month off like any other kid would.
0:24:29 And what is your first job at Enron? Where do they stick you?
0:24:36 It’s very rare for someone at Enron and even someone at an investment bank to be put on the
0:24:43 trading floor. Mistakes are expensive on the trading floor. And so they don’t want the kid
0:24:47 that’s a few days out of college. That would be the equivalent of we’re going to take kids out of
0:24:53 medical school and you’re going to get to start operating even simple operations without supervision.
0:24:54 That would be catastrophic.
0:24:56 Organ transplant is your first thing, right?
0:24:56 Right.
0:25:01 But I had expressed interest on the trading side when I went through the interview process
0:25:07 and they called me in April and said, a couple of people recently left our oil trading group.
0:25:14 If you can start immediately, you can start in trading. And I said, well, I graduate in 10 days.
0:25:21 How about 12 days from now? I’ll be there. And so I literally graduated, drove from Nashville to Houston
0:25:25 that weekend. And that Monday show up at work in the oil trading group at Enron.
0:25:32 So what did that mean? What did an oil trader do without as much supervision or experience as maybe
0:25:34 you would ideally want of a trader?
0:25:38 Right. So I certainly was not trading. I was kind of an assistant on the desk,
0:25:44 which meant doing a lot of spreadsheets of running analytical studies and correlation studies,
0:25:51 building models, getting lunch, doing all the things that first years do, right? Trying to learn
0:25:51 the business.
0:25:59 And at what point did your bosses there start to realize that this kid that just came out of
0:26:03 Vanderbilt a year younger than everybody else has a knack for this game?
0:26:08 Or maybe asked another way, when did you first realize you had a knack for it?
0:26:14 Quickly. I look back at all the good timings and kind of good decisions that went into my career.
0:26:22 And one of them was, I found the perfect job for my skillset as my first job. And I think that’s
0:26:29 pretty rare. And it happened by accident. Could have very easily ended up a mergers and acquisition
0:26:33 investment banker at Merrill Lynch. But I ended up trading commodities.
0:26:38 At a relative upstart of a company. That was just the perfect spot for my skillset.
0:26:46 So tell me a little bit more about that. So oil is a very complicated thing. Gas, perhaps less so,
0:26:52 at least at the time. Were those two viewed as the same trading desk at Enron? Or did you shuttle
0:26:54 back and forth between them and find yourself eventually at gas?
0:27:02 Enron, by its nature, was always a gas company. It was gas focused. The oil group was small. It was
0:27:08 kind of the redheaded stepchild. It didn’t make much money. It was necessary because some customers wanted
0:27:12 to transact on oil with the same company that they were doing their gas transactions with. But it was
0:27:18 always a small group. So then how did you work up the ranks in natural gas trading? And when did you
0:27:26 actually start to go from modeling to actually making some trades and by extension, then earning Enron some
0:27:35 money? So early 1996, I was supposed to be on a formal rotation, six months on one desk, six months on a
0:27:40 different business within Enron and kind of rotate for rotations over the two years and then go back to
0:27:46 business school. And after six months, I think the team there liked me and I liked being there and kind
0:27:53 of got made to be an exception. So I didn’t have to rotate. But kind of shortly thereafter, one of the
0:27:59 traders, I was speaking earlier about mistakes are costly in the trading side. And there was an older
0:28:04 gentleman who kind of made a mistake, kind of did a trade that ended up going bad. And they
0:28:10 reorganized the whole group. And the new boss came up and I worked for him for a couple months.
0:28:16 And one day he pulls me aside and says, I have to blow up this group. I like you. It’s not going to
0:28:20 be good for your career to be here. You need to find a different group. And he gave me two options. One
0:28:28 was go to London and work in the oil group there or go downstairs and work in the natural gas trading
0:28:34 group. And as a 21-year-old getting offered an expat package to go to UK, it was
0:28:38 extraordinarily tempting because I’m thinking I’m going back to business school anyway.
0:28:44 It was a hard decision, but I realized the core of this company is natural gas. That’s where I need
0:28:49 to be. I need to learn that. And so I went downstairs and started natural gas. And that was on its own,
0:28:55 just very fortuitous timing. I spoke about in 1992 was when the full deregulation happened.
0:29:05 The winter of 96 was the first time that natural gas prices really blew out. It was extremely cold
0:29:15 winter. And all the historical relationships that gas had just completely changed. And so going down
0:29:21 there, I knew nothing about gas, but people who had spent their career in gas wasn’t sure if they knew
0:29:25 anything about gas either. They knew the fundamentals about the physical molecules,
0:29:31 but what the historical pricing relationships were, it was a whole new game. So I went down
0:29:36 there knowing nothing, but it felt like the whole industry was trying to figure out what does the
0:29:39 world of natural gas look like today going forward, given everything’s changed.
0:29:44 How did you rise through those ranks there? Because that’s a pretty interesting situation where
0:29:47 it’s not necessarily the person with the most historical knowledge that’s going to bring the
0:29:51 most value. It’s probably the person who can learn the quickest spot patterns, the quickest,
0:29:54 and basically morph to a new environment.
0:30:02 Right. So my first job in the Nat gas division was they put me as an assistant trader with a gentleman
0:30:07 who had expertise on the physical side of the business. Didn’t know anything about trading,
0:30:12 but he knew natural gas. And I knew nothing about natural gas, but knew something about trading
0:30:17 and was good with numbers. And they essentially put the two of us together and said, you guys were
0:30:24 go figure this out, work together and run this book. And so that was my first real trading job
0:30:29 where, although I was an assistant trader on the book, but where I was involved in the trading.
0:30:36 At this time, Enron started to become a darling. And it was certainly within the energy side and within
0:30:42 the pipeline business had become this darling. Its stock was higher than all other stocks. So every
0:30:47 other company was trying to figure out how do I be more like Enron. So what’s the easy way to be more
0:30:55 like Enron is go hire Enron people, go hire someone kind of mid-level, give them a promotion and a raise
0:31:01 and have them come over to your company. And so that was happening all the time, which was great for the
0:31:09 young guy at Enron because the guy above you was leaving to go get a better job. And so it was an
0:31:18 environment where if you could prove that you were responsible and that you were smart, you could rise
0:31:25 much faster than you could at a mature company or in a mature industry. And so that next four years for me
0:31:32 was really the roller coaster where every nine months or so I would get a promotion again, like much faster
0:31:41 than I would have gotten had I been at a more mature company and ended up by the time I was 25, I was the
0:31:47 head natural gas trader at the largest natural gas trading company in the industry.
0:31:52 It’s hard. It’s almost hard to believe that that’s possible, especially now when I look at what I was doing when I was
0:31:59 25. Right, right. It is almost hard to believe it was a company that was very merit focused. I think
0:32:07 by giving out that responsibility, it was fantastic to work at a place like that. I think it ended up being
0:32:12 the downfall of the company as well as there just wasn’t the controls on people who were given too much
0:32:20 responsibility, too much of the company’s balance sheet to use without their adequate controls on it.
0:32:26 Just a quick thanks to one of our sponsors and we’ll be right back to the show.
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0:33:45 What was the stress like that you felt just in a self-imposed manner? I mean, were you,
0:33:50 if you’re 25 years old, and just give me a sense of, as a head trader at Enron,
0:33:56 we’re the largest gas trading company. We’re talking in the billions of dollars worth of potential profits
0:33:57 and losses here, correct?
0:34:05 In a given day, I was trading billions of dollars of notional value of gas. So a lot of it was trying
0:34:13 to buy it at $2, trying to sell it at $2.5 penny for enormous volumes. And so Enron was the largest
0:34:18 market maker. It was the largest speculative trader of gas. It had the most customer business coming
0:34:24 through it. And so being at the center of that, being the head trader there, it was just from the
0:34:32 moment you sat down in the morning until about 3, 4 o’clock. It was just nonstop trading. Someone would
0:34:38 bring food and put it in front of me, run to the bathroom and run back. Internet trading was starting
0:34:45 to take off then. So there was still the trading in the pit on the trading floor, like trading places
0:34:50 style. So there was that. There was trading that was happening on the internet. There was trading that
0:34:55 was happening with other people within the company that they had customers or somebody needed to put
0:35:00 a hedge on because of another deal that they did. And so it was just nonstop action. And the stress
0:35:08 level was intense. I think I’m very good at handling stress. The stress level was intense to a point of
0:35:14 not being healthy. And I think this is true of many trading floors, especially back in those days.
0:35:21 I think it’s why traders generally have short lives, trading lives, trading careers. It’s hard for
0:35:26 the body to handle that level of stress for decades and decades.
0:35:32 Were you seeing this creep out into other areas of your life? Did you have difficulty sleeping? Were you
0:35:37 able to exercise in the periods of time, like presumably in the evenings would be your only windowed
0:35:42 exercise? Were you eating like crap? I mean, you’re a very fit, healthy guy today. Is this what
0:35:45 John Arnold looked like when he was the head of trading?
0:35:51 No, I didn’t realize it. Kind of looking back probably after, after I eventually lost the weight
0:35:56 that I gained during those years and cut down on some of the drinking, started exercising a lot more.
0:36:03 Looking back at the health of my life was a bit telling, even like going and putting on some of the
0:36:09 clothes that I used to wear, seeing how I’m so differently built today than I was back then.
0:36:12 You had to find some method to relieve stress.
0:36:17 And unfortunately for a lot of traders, that’s pretty negative behaviors, right? It’s more drinking,
0:36:19 more partying, more gambling or whatever.
0:36:25 Exactly. Exactly. It is not a healthy lifestyle. As I grew up, I was able, I learned how to handle
0:36:31 the stress better. I got tired of the drinking and partying and gambling and especially kind of
0:36:37 as I got into my 30s, as I got married, as I had kids, that all starts changing. But it also can be a
0:36:44 reason why people start to get repulsed by that career. It’s the lifestyle that doesn’t necessarily
0:36:47 go along with it, but oftentimes does.
0:36:51 I want to go back to just something before we leave this topic, which is, did you get a sense of
0:36:57 an addiction to trading? Because I’ve spoken with many friends of mine who are, have at some point in
0:37:04 their life been in that field. And for some of them, the addiction, the high, the physiologic response
0:37:12 that they get to a good trade is easily on par with what the most indebted gambler feels when they’re
0:37:18 sitting at a blackjack table or with the drive that someone has to drink who is so disproportionately
0:37:25 dysregulated by alcohol. I mean, did you personally get that? Or was it more of an intellectual exercise
0:37:33 for you? How much of this was just purely limbic system, dopamine surging versus more of a calculus?
0:37:40 So I definitely seen traders where they had that dopamine aspect to their trading personality.
0:37:47 I’ve gotten the question many times, why were you a good trader? Why were you considered one of the
0:37:53 best traders in the market? And it’s always been hard for me to answer. I think part of it is I had
0:38:00 this emotional detachment from the business. So if I was having one of my best days or having one of my
0:38:08 worst days, if you walked by me, you couldn’t tell. It was just 100% focus on executing the process.
0:38:16 And so my views would change, but the process of how you look at the market can easily get swayed by
0:38:24 whenever, and there’s the phrase fear and greed that drives a lot of price trends in financial
0:38:31 assets. You’re either greedy or you’re fearful and that’s driving your behavior. And to the extent I
0:38:37 think that you can eliminate those two emotions from the trading and from the process, you get better.
0:38:42 And you know me well enough, you wouldn’t describe me as an emotional guy.
0:38:48 So does that mean it was natural for you, John, that this superpower, because that is probably a
0:38:54 trading superpower. Is that something you had to cultivate or spend any energy training in yourself?
0:39:01 Was it the product or byproduct of something in your childhood? Or was it simply as innate to you as
0:39:02 your hair color and height?
0:39:07 I think it was just innate. I think this is how I was born. I have that detachment from the emotions
0:39:14 that doesn’t affect my decision-making process. And so I think that’s one of the two superpowers
0:39:23 that I had. I think I also fell perfectly on the confidence spectrum. And I say that it takes a
0:39:28 certain amount of arrogance to be a trader because the market’s usually right. And to be a trader,
0:39:33 you have to say, I think I’m smarter than the market here. I think the market is wrong. I think
0:39:40 I am right. So it takes that arrogance in order to be willing to put on a trade. And I’ve seen people
0:39:45 just get paralyzed where they just say they’re so concerned about the downside and of being wrong
0:39:51 that they can’t do anything. So you have to be arrogant, but you can be too arrogant. And that’s been
0:39:59 the destroyer of many trading careers is if you stick with it, I am right. The market is wrong,
0:40:05 then you’re going to blow up. And so it’s, how do you have the right level where it’s like,
0:40:09 I’m confident in my view on this, but I know I might be wrong.
0:40:14 That’s amazing. When we get to talking about the second half of your career professionally,
0:40:20 which is now your full-time work in philanthropy, especially the type of bets that you make and the
0:40:27 scope and magnitude of problems that you go after. I think those two traits that made you,
0:40:32 I think most people would argue the greatest natural gas trader of all time, probably serve
0:40:35 you just as well in your philanthropy. Would you agree?
0:40:41 I think you said that well. The notion of going in saying, I think we’re right about this,
0:40:48 but it might not work, or we might be wrong. Let’s kind of write down our theory and test it along
0:40:55 the way and see if it’s playing out the way it should and not get wedded to this theory that
0:41:02 everything we’re doing in the foundation is evidence-based, but the evidence is never perfect.
0:41:08 So we’re taking the best available information and saying, how much risk should society be willing
0:41:10 to take to test a different idea?
0:41:17 So bringing the Enron chapter of your career to a close, help me understand how you and your
0:41:27 colleagues under your direction are making so much money. And yet by 2001, Enron is going bankrupt.
0:41:29 How are those things happening simultaneously?
0:41:35 I don’t have the right answer for that. I knew things in the company and other divisions. I had
0:41:39 friends that worked in other divisions. We would go have a beer after work. I would hear their stories
0:41:47 about some crazy deal that their division was doing that they thought was stupid. I would hear stories
0:41:53 about this, but our day-to-day in the trading group was just so focused on the one activity
0:41:58 that we didn’t have firsthand knowledge of any of that. It was always kind of the hearsay,
0:42:06 but the trading group was making so much money that there was a thought, I think, that we could actually
0:42:13 see this whenever earnings would get released, that the trading group could support the other divisions
0:42:18 until they stopped making the dumb mistakes and became profitable on their own. I can’t speak
0:42:21 exactly about why the trading group was making so much money.
0:42:25 There were some really dumb ideas. In retrospect, when you look at the documentaries, I mean,
0:42:30 I remember reading the book, The Smartest Guys in the Room in 2006 or whenever it came out and being
0:42:36 like completely fixated on this thing. But the whole broadband water idea, the Indian power plant that
0:42:41 didn’t seem to make any sense. I mean, there were a lot of ideas that, and again, I’m not saying this
0:42:46 like I would have known at the time these were dumb ideas. I’m sure I wouldn’t have. So hindsight,
0:42:52 of course, offers that luxury. But I mean, these were really, really half-baked at best, right?
0:42:59 It’s always easy in retrospect. Yeah. I think the disintermediation, which not only Enron was doing,
0:43:07 but was a broad theme in the business world at the time, was real. And the investment community
0:43:13 was valuing companies who were disintermediating, right? The same way that they do today in the
0:43:19 tech sector. There’s a lot of value to be created if you can disintermediate a business chain.
0:43:25 I think Enron, trying to approach it from the commodity side and trying to do it with water,
0:43:33 trying to do it with electricity, doing it globally in places where the quality of law and of
0:43:39 intellectual protections isn’t what it was in America, and then having the culture of never
0:43:46 being able to admit failure that existed not only in Enron, but again, in many other companies at the
0:43:53 time as well, meant that whenever mistakes were made, there wasn’t the admittance to Wall Street
0:43:58 that this was a mistake and we’re going to change. It was swept under the rug.
0:44:06 And Enron, the process of bankruptcy kind of happened so quickly because all these financial
0:44:11 businesses, which at the time Enron had morphed into a financial business, is completely contingent
0:44:17 upon having the faith of your creditors, having the faith of Wall Street. And once Wall Street
0:44:23 loses faith in you and refuses to fund you on a day, the business is toast. And that’s what happened.
0:44:28 And it happened, as you said, precipitously. I mean, I could certainly sit here for another four
0:44:33 hours and talk to you about mark-to-market and all of that, but I think we’ll let the listeners who are
0:44:38 really interested in that go back and either read the books, watch the documentaries, or go deeper on
0:44:43 that. Let’s bring it back to you, which is at what point do you realize your career at Enron is going to
0:44:49 be cut short? So despite the fact that you’ve had your head down, you’ve been, I think you could make the
0:44:55 case the single most profitable human at that company. If the company goes under, you’re out of a job.
0:45:00 When was that apparent to you? And then what were your next moves? And how did you consider the decisions
0:45:01 you had to make?
0:45:09 It happened so quickly that there was damage control that I could see from my perspective in the company.
0:45:13 Again, my perspective was sitting at a desk with two phones in my ear for most of the day.
0:45:19 Didn’t get a much of a sense of what was going on outside of what natural gas prices were ticking up.
0:45:26 So it happened so quickly that there wasn’t much to be done from the trading side perspective. This was
0:45:32 all kind of, all those decisions end up in the finance side, the CFO’s office of how do we raise
0:45:42 money? And so when it finally kind of November of 2001 was kind of shortly after 9-11 and that caused
0:45:47 some havoc in the financial markets. And then that’s when Wall Street was not going to give you a second
0:45:54 chance in that environment. And Enron arguably didn’t deserve one. And so it all happened so fast that
0:45:59 whenever Enron lost credit worthiness in the business, then it just, it was over. Business over.
0:46:06 There was some time spent trying to find a credit worthy JV partner to come in and Enron would
0:46:10 contribute the intellectual assets and someone would contribute new money and keep the trading
0:46:17 operation going because it had been so profitable. If it was just swept away in bankruptcy, it was a loss
0:46:23 of a lot of potential value to what was then the estate of Enron, the creditors of Enron. And so there
0:46:27 was a lot of focus on trying to cut that deal and a deal was eventually cut with the New York bank.
0:46:32 And I looked around and I looked at the deal and kind of for the first time stepped back and
0:46:36 started thinking like, what do I want to do with my life? And that’s where the decision was.
0:46:42 I don’t want to go with this entity. I have different views on how this business should proceed in the
0:46:50 future. And I want to go try it somewhere else. So you take your bonus check, you take some money
0:46:54 from a few other folks and you set up your own hedge fund in early 2002, right?
0:46:57 Yeah. Mid, mid, mid 2002.
0:47:02 Again, you’re the perfect guy to do it because you’re not too stressed about it. You’ve got a
0:47:07 proven track record. I guess you’re somewhat toxic because even though you come from the part of Enron
0:47:13 that is fully legitimate, you still have that name on your back. Did that hurt you when you were,
0:47:16 I mean, were you trying to raise capital? How did that factor into your hedge fund?
0:47:22 So it was an interesting time to say the least. So right after Enron declared kind of the first
0:47:29 quarter of 2002, I was getting calls by a lot of people, people I didn’t know saying,
0:47:36 if you are going to do your own thing, I have interest in investing with you. And my intent was
0:47:42 to try to raise $50 million of day one capital and just start there and let it grow organically and
0:47:48 increase over time. And I thought I’d be cutting people back. I thought fundraising would be very
0:47:53 easy. There was going to be $200 million of interest and I was going to cut everybody. You can
0:47:59 invest 25% of what you want to. Second quarter, 2002, dramatic change. This is when a lot of the
0:48:06 investigations into Enron start to bear fruit, if you will, and the headlines come out. And the
0:48:13 headlines are, they’d say every week there’s a new scandal that’s coming out. And now the people who
0:48:20 had called me, one, they don’t know if the profits that were posted in the New York Times, whether those
0:48:28 are real or not, whether I was going to jail or not, all these questions. And so everybody who was
0:48:33 banging on my door to invest pulls back. But meanwhile, I’ve rented office space, I’ve hired
0:48:40 employees, I’ve bought computers and telecom systems, and I got to move forward. I have almost no money to do
0:48:48 this now. I ended up starting in August of 2002 with $8 million of capital, some of which was mine, and I had
0:48:49 two outside investors.
0:48:56 So talk about pressure. $8 million of assets under management is not exactly what you had in mind.
0:49:00 As far as you know, basically the only way you’re going to grow your fund at this point is by
0:49:05 organic returns. You’re going to have to return your way into more money. You’re not going to be out
0:49:05 there fundraising.
0:49:10 Right. So one of the things after Enron went bankrupt is Wall Street started looking at
0:49:17 all the copycat Enrons. So all the other pipeline companies and electric utilities who had started
0:49:23 out these merchant businesses or trading businesses. And Wall Street essentially says, we’re not funding
0:49:29 those businesses anymore. There’s too much risk. And so what happened was that there is great need
0:49:36 for risk intermediation and for risk warehousing in the business. And half of the largest players
0:49:45 are out of that business over the first six months of 2002. And so the market became incredibly
0:49:54 inefficient and was willing to pay for the task of intermediation at a very high rate. And so just by
0:50:01 setting up the computer, there was, going back to the arbitrage, it was very low risk or arbitrage type
0:50:09 trades that shouldn’t exist in a normal functioning market that existed for that next year, just because
0:50:17 the market players had been so decimated. So the first month, I was up 36%. On a percentage basis is
0:50:23 high on an actual dollar basis and made $3 million. But also to put a point on what you just said a
0:50:29 second ago, you’re up 36% in a month at a very low risk. So it’s not just the value, it’s the value at
0:50:33 risk here that matters. Exactly. Value at risk, I like the term.
0:50:38 Well, I was a McKinsey guy, remember. Risk practice, right? So we think a lot about VAR as well.
0:50:45 Yeah. So then second month, I’m up 33%. Third month, I’m up 38%. And I’m sending the notes out,
0:50:50 the investor notes out to everybody that was in my Rolodex that expressed interest. And now all of a
0:50:56 sudden, three months in, I’m up, what’s the compound rate? Probably 150% in three months. And so some of the
0:51:02 people will start calling me back and saying, hey, maybe I’ll send you some money. And so those
0:51:09 first few years, it was doing a lot of the low risk trading to create the base and this upward trend in
0:51:17 profitability, and then layering on some speculative trading on top of that. And I was able to play
0:51:24 bigger than my asset size because I had this upward trend in profitability. If I was wrong on my market
0:51:29 call, I wouldn’t be decimated because I was still making money on the market making arbitrage
0:51:30 side of the business.
0:51:36 Your spec market initially was actually quite small. You switched those 10 years later. We’re
0:51:41 basically doing the opposite. But at the beginning, it was an amazing, you described it to me in the past
0:51:44 as I think the perfect time to be a natural gas.
0:51:45 Yes.
0:51:47 Based on that inefficiency.
0:51:53 Yeah. It was just risk reward. It was don’t even bother about taking risk. Yeah. There’s so much
0:51:58 free money in the market by providing that service. Just do that. You can think about the business as
0:52:04 a bundled product. One was the market making, providing liquidity and getting paid for that
0:52:10 service, warehousing some risk. And the second was trying to make a call on where natural gas prices
0:52:15 were going next. There’s some synergy of having those together. There’s a lot of synergy in having
0:52:18 those together, but that’s the two strands of the business.
0:52:24 And most people, myself included, when they think about gas trading are only thinking about the
0:52:31 speculative business, which is my former countryman, Brian Hunter, very, very famously blew up in fall of
0:52:36 2006. A hedge fund called Amaranth at the time was probably one of the biggest blowups in all of
0:52:38 energy. We’ll come to that because you were on the other side of that trade, if I recall.
0:52:44 But it’s those stories that get most people thinking about that’s how you make or lose money
0:52:49 in natural gas trading. But you were doing something, you know, I always talk about risk to people. I sort
0:52:53 of explain it as a two by two. Are you picking up bitcoins? Are you picking up pennies? And are you
0:52:58 doing it in front of a bulldozer? Are you doing it in front of a tricycle? You want to think through
0:53:02 that two by two very clearly. It might be worth picking up a Bitcoin in front of a bulldozer,
0:53:07 but it is not worth picking up a penny in front of a bulldozer or a bullet train or something like
0:53:13 that. And so you sort of have to understand that’s this idea of risk and return. So at what point,
0:53:20 I mean, I just want to kind of go back to John, the guy who’s on this ride that seems hard to believe,
0:53:27 but anybody who’s made the type of money you’ve made in life goes from being, I mean, I guess I’m
0:53:32 asking this question in a weird way. Is there a moment at which you realize you’re not going to have
0:53:35 to worry about money anymore? I don’t know what that dollar amount is. And I’m guessing for different
0:53:40 people, it’s a different amount. I’ve had people tell me that this is going to sound ridiculous too,
0:53:46 but I’ve had people explain to me that until you have $600 million in your bank, you will never feel
0:53:51 totally secure, which I find that ridiculous. And I disagree with that idea though. I will never have
0:53:56 $600 million in my bank, but there must be some number at which you realize, Oh, my life and the
0:54:01 life of my family is going to be very different. Do you remember that occurring for you?
0:54:08 Yeah. So that first year was remarkable and for many reasons, but one of the things that happened was
0:54:16 that the gas market ended up being very tight. That demand was high and supply wasn’t keeping up.
0:54:24 And so the outright level of inventories was okay, but the trend was that we were drawing inventories
0:54:30 or not putting gas in the ground like we should have been doing. And again, had the market been more
0:54:35 efficient than I think other traders, other traders did notice this and others put it on,
0:54:40 but there were some trades that were, I thought were very misvalued from a risk reward perspective.
0:54:48 And that was that if we were to have a cold winter, that first one, 2002, 2003, if that winter was cold,
0:54:55 the gas market could experience some significant shortages and the price spikes that would correspond
0:55:02 to those shortages. Now the weather event was maybe a one out of five probability, but I think the
0:55:11 bets were pricing them at, that it was one out of 50. And so as I’m making money on market making and
0:55:15 providing liquidity, I was putting on some of these trades, just putting a little bit of money into
0:55:20 this trade at various points. And that winter ended up being the one in five weather event.
0:55:24 And there was a two day stretch in late February.
0:55:25 February 2003, right?
0:55:26 February 2003.
0:55:27 Yeah.
0:55:30 One of the three highest gas prices we’ve had in the last 20 years, right?
0:55:36 I think so. Yeah. It all starts to blur together now, but you had this massive spike in price of
0:55:44 gas, I think approximately doubled in if two days. And that was the day the fund also kind of more than
0:55:51 doubled in those two days in terms of, of assets. And that was the day when it was like, I feel rich
0:55:54 for the first time. I am set for life today.
0:55:57 Did you call anybody?
0:56:02 I remember calling my mom, pretty much saying those words that we’re set. We have financial
0:56:05 security now forever, regardless of what happens.
0:56:13 So doing the math, you’re in your late twenties at this point. Did you have any sense at that moment
0:56:20 that you were going to be out of the game in 10 years and full-time working as a philanthropist,
0:56:23 or was that not a clear part of your vision yet?
0:56:30 I always recognized the limited social value of trading. I think there is a need for someone to
0:56:38 provide risk warehousing and liquidity to markets, but they trying to tell the story about how I was
0:56:45 adding value or contributing to society was hard. And that always bothered me. So when I first started
0:56:52 getting my first hundred thousand dollar bonus back when I was at Enron, I shortly thereafter was at a
0:57:00 supermarket and I see a magazine that says top 50 nonprofits in America. And I pick it up and throw
0:57:07 it into my, my grocery basket and take it home and immediately turn to the education section. I think
0:57:13 a lot of younger philanthropists, a lot of people from the finance industry get drawn to K-12 education.
0:57:18 One of the organizations was based in Houston. It was KIP, KIP charter schools. And so I called them up
0:57:26 and got scheduled to go do a tour, went, did a tour. They had no idea who I was at the time. I wasn’t a
0:57:32 rich guy back then, but I came home and, and wrote them a check, a five figure check. And I get a call
0:57:37 from the founder who I had not met on the, on that original tour a couple of days later. And this was back
0:57:44 kind of five figures was really significant to the organization. And he said, thank you. And who are
0:57:50 you? And I need to cultivate this relationship. And that was the start of my very long journey thinking
0:57:58 about K-12 education in the country. And so in this time, 2002, 2003, I was getting more interested
0:58:03 in it and my check size was going up, but it was something I thought about 1% of the time.
0:58:13 So as your hedge fund is growing and growing and growing, at what point are you now getting the
0:58:20 attention of basically everybody who wants to come in and you’re doing the opposite? You’re probably
0:58:22 starting to force distributions at some point.
0:58:30 There was a trading magazine that came up with a list of highest paid traders. And that was from
0:58:37 specifically from the hedge fund world where most of the highest paid traders existed. And it was not
0:58:43 only what was the return on your investment in the fund, but what was your incentive fees and kind of
0:58:49 trying to estimate that. And they would create these lists of top 100 for the year. And I don’t remember
0:58:57 what year it was, but somehow they got ahold of my returns and started doing the math on it and figured
0:59:05 out that I was not only one of the top 100, but I think top five that year. And that was the first time
0:59:14 in a broadcast to the world that I was making big money, but also was a broadcast to the rest of the
0:59:22 industry that something’s going on in natural gas and all the other hedge funds should, it was a signal
0:59:27 to them, go figure out what’s going on over there. How’s he making this much money and see if there’s
0:59:32 something for us to do. So during that time, as will happen in any market, whenever there’s kind of
0:59:38 above market returns going on in a field, new entrants come in. And that’s certainly what happened
0:59:46 during that time. I made a very deliberate decision that I was going to keep the focus of the business
0:59:54 narrow, which I wanted to be the best in the world at North American natural gas and power trading.
1:00:00 That was the business. Didn’t want to trade oil. Didn’t want to trade natural gas stocks or natural
1:00:07 gas bonds. Didn’t want to trade agriculture. Stick to our expertise. Don’t try to build an empire here.
1:00:15 Just do this one thing. And I think by doing so, I think it, by keeping focus and it allowed us to
1:00:22 achieve that mission of being the best in the field. I think it also started, it put a natural limit as to
1:00:28 the amount of assets that we could manage. So we just couldn’t be too big relative to the market.
1:00:33 And the amount of money that we were making was significant. And so we started sending back money
1:00:40 to investors. What was the greatest you allowed your AUM to swell to, to allow yourself to stay so
1:00:46 narrowly focused? At the peak, it got to about $6 billion. That’s a staggering sum of money. There
1:00:51 are lots of hedge funds that have ballooned to $20 and $30 billion in assets under management. And your
1:00:56 point is, yeah, that sounds great. And you’re going to collect a lot of fees on that if you’re the fund
1:01:02 manager, but you may be spreading yourself too thin into areas that you don’t have the deepest,
1:01:07 deepest domain expertise. Right. From very shortly after I started, I was the largest investor in the
1:01:14 fund. And I was in it for the return on my money. That’s how I managed the fund. And that’s how we would
1:01:23 pitch it to central investors was, I think this is a great investment opportunity. This is where I want
1:01:31 my money. This is the risk, where I am on the risk spectrum for my money. And if you want to join on
1:01:38 that journey, I’d be happy to have you, but I’m going to run a risky business. And you have to be
1:01:45 prepared for that going on because I wasn’t in it to make the management fees. That’s not how I wanted
1:01:50 to, that wasn’t my business. Right, right. If you’re more than 50% of the AUM, you can’t make money on
1:01:55 yourself. You can’t make fees on your own money. Right, right. So it was, it was always driven by
1:02:01 how do I want my money managed? What do I think is a good investment for me? And then if other people
1:02:07 want to put money alongside, that’s great. So by the way, I want to go back to one thing. Talk to me
1:02:11 about the 06 Amaranth trade. Explain for people that given the historical significance of that was
1:02:15 pretty significant and the fallout of that has reverberated for many years as far as the amount
1:02:21 of money that was lost and things. Who is Brian Hunter? What did he do so well in 2005? How did that
1:02:28 speculation sort of go the other way in 06? 2005, I hope I get all these facts right. My memory gets a
1:02:35 bit cloudy from those days, but 2005 was Hurricane Katrina. It came in and caused significant damage
1:02:41 on the offshore natural gas production as well as the processing, natural gas processing facilities that
1:02:48 were onshore Louisiana. And because of that, the price of gas spiked significantly. People were short
1:02:54 supplies. I looked this up yesterday, John. That is both unadjusted and adjusted for inflation,
1:03:01 the greatest peak in natural gas pricing of the last, I think, 30 years. That’s September 05,
1:03:07 right after Katrina. Yeah. And after that time, I think two things happened. First was as ocean
1:03:12 temperatures were rising, there started to be a belief, the number of hurricanes and the intensity
1:03:18 of hurricanes, and thus the damage from hurricanes to the energy sector and natural gas sector was
1:03:27 structurally increasing. And second, that there’d be a great fear amongst any trader to be short during
1:03:36 that time period, the hurricane season and August and September peak hurricane season. So he had done
1:03:42 very well in 2005. This is Brian Hunter. Brian Hunter. In 2005, he was long during that time and made a lot of
1:03:48 money for his fund. And at the time, he worked for a fund, Amaranth Advisors, which was a macro hedge fund,
1:03:54 meaning they do everything. They trade stocks, they trade bonds. Brian Hunter was the natural gas trader for
1:04:01 them. Now in 2005, as I understand it, he was by far the most profitable trading desk and trader at
1:04:08 a large hedge fund. And so he was given a lot more position size or capital to trade with. And I think
1:04:15 he had the belief that something similar would happen or at least a big scare would happen next year and
1:04:20 would cause the same type of move. The difference was partially in reaction to the spike in prices that
1:04:28 we saw in 2005. It sent the signal to every producer to increase supplies. So every producer
1:04:33 gets that price signal. Every producer puts more money into drilling for gas. You start to see that
1:04:41 in 2006, that supplies are ramping up. And talked about earlier that the supply demand was tight in 2002.
1:04:48 Supply demand got very loose in 2006. And so the market was just oversupplied. It was a very bearish
1:04:55 market. But Brian Hunter kept this trade on, this very bullish trade on, and kept the prices supported
1:05:01 even though the fundamental picture was deteriorating by continuing to buy more and more and more of this
1:05:09 one product. And to put a long story short, he distorted the relative values in that market so much.
1:05:16 It gets told now that the trade was me versus him. And that’s very not much the case. It was the whole
1:05:23 market versus him because he was such a large position in this as it started to get into the
1:05:28 first, the very early part of hurricane season and there was no hurricane and then prices were starting
1:05:34 to collapse and he couldn’t hold it anymore. So he kind of single-handedly, that position bankrupted
1:05:42 this macro hedge fund. And I did well during that trade. I think I may have had on 25% of the
1:05:48 opposing position. I was very cognizant that it is possible that a hurricane comes and has a short-term
1:05:54 price spike. And I don’t want to blow up if and when that happens. So I need to size this appropriately.
1:05:58 And I don’t think he had sized it appropriately given the alternative scenario.
1:06:03 And that’s an interesting thing because it wasn’t just that you guys were betting against each
1:06:08 other in terms of climate or weather, for which I would say three months out, that becomes an
1:06:14 unwinnable bet. Nobody can have more or better information on that. It’s the second order bet
1:06:21 that’s interesting to me, which is, okay, he’s taking a position on climate or weather, but it’s really,
1:06:26 you’re taking a position on the more important question, which is supply. And you’re saying,
1:06:32 even if we are hit with a demand shock, I believe the market is better able to bear this now than it
1:06:38 was in 2005. And ultimately, that’s really what the bet comes down to. It’s true, a hurricane didn’t hit
1:06:44 that year and the price collapsed. But it’s also possible that if a more mild hurricane than Katrina
1:06:47 had come, we probably wouldn’t have seen the price shock we saw in 2005.
1:06:54 Right, right. The market was so scared. And so people were hesitant. People were only going to
1:07:00 put on that short trade if they thought the market had already priced that in. And I used to think
1:07:07 about it as you have this unknown weather event. How cold is the winter going to be? What’s the hurricane
1:07:11 situation going to be? And you can think about it, you have this probability distribution function
1:07:18 of the possible outcomes. And then think about, okay, under each outcome, how would I think about
1:07:23 what fair value is of the commodity at that time? And then did your simple math and come to expected
1:07:31 value? And that really simplifies the process down much too simplistically. But that was the type of
1:07:37 thought process that would go in is, okay, if it’s 80th percentile hurricane damage, what is that? If
1:07:43 it’s 90th percentile, it’s 99th percentile. What if it’s 10th percentile, right? And think about all
1:07:48 these and then how’s the market price today? Certainly at that time, there were people who
1:07:53 weren’t allowed to be short. There were people who were only going to be short if it was way mispriced
1:08:00 relative to expected value. And I think that’s what got him was that it was already so mispriced to
1:08:07 expected value that even had you had this supply shock happen, what’s the upside now? We’re already
1:08:13 priced for that. Yep. When you explain it that way, it’s a much sadder story than just two guys
1:08:18 betting against weather and one guy’s got to be right and one guy’s got to be wrong. You realize
1:08:23 that it was probably a bit more of an error and hubris as well, which goes back to your point about
1:08:27 maybe being a little too confident in your ability to predict what’s going to happen.
1:08:33 You spent a lot of your time doing research. I mean, again, we’ve already talked about you having
1:08:38 two superpowers, but having known you for a while, I would add to that list, maybe a third superpower,
1:08:45 which I believe also has come to serve you very well in your philanthropy, which is you have an
1:08:52 insatiable bordering on pathological obsession for knowing everything. And I say that in the kindest way
1:08:57 as someone who shares part of that affliction. And I remember once you explaining to me some of the
1:09:01 details you would study about natural gas pipelines. It’s like, look, if I’m going to be
1:09:07 the best trader in this commodity, I have to know everything. I have to know exactly what this
1:09:12 pipeline looks like. How does it cross this type of part of the country? What type of bolt are they
1:09:16 using in it here? And what happens to it during this type of weather? I mean, how much of your time went
1:09:24 into understanding every piece of the minutia of how the system worked that you were basically going to
1:09:27 dominate in terms of arbitrage and speculation?
1:09:34 So by being a hedge fund structure and not being in the physical business, not dealing with customers
1:09:40 and dealing with pipelines, we were at an information disadvantage going in. When we were thinking,
1:09:48 think about whenever I trade against a counterparty and they’re putting on the opposite trade I am,
1:09:56 what are they thinking? What do they know? Can I replicate as best I can the knowledge that they have
1:10:01 so that I can make an educated and confident decision? Do I want to be on the other side
1:10:10 of this bet? And to do so, we were at an information handicap just in terms of BP had more information that
1:10:17 would come through their shop than we did. So we had to make it up by having better analysis and
1:10:24 knowing where to get third-party information and how to analyze that information, how to craft better
1:10:32 models that described what the past was and thus what the future is going to be, and then try to overlay
1:10:40 some good smart trading and structuring of trades on top of that to get the above average returns.
1:10:45 But I think we were always fundamentally focused. And this came from the days at Enron, which was the
1:10:53 largest physical mover, shipper of gas, was count the molecules. Try to count as many molecules as you
1:10:59 can. Where did it come from? Where did it travel? How was it consumed? And so you can build a molecule
1:11:05 about, if you know how every molecule behaved yesterday, you can model how those molecules are going to
1:11:10 behave tomorrow and how those molecules can behave in six months. Now, your confidence level is not as
1:11:15 good in the six-month model, but you can start doing that. And then you can start doing the speculative
1:11:22 trading on top of it. And so I think we probably had the biggest fundamental research department of any
1:11:29 competitor in this space at Centaurus. And that was really what I thought our advantage was, was that
1:11:35 we’re going to invest in the fundamentals more than anybody else is, and then overlay that with some
1:11:40 good trading. You just alluded to something which I guess I hadn’t picked up on before, or at least it
1:11:46 just occurred to me now when you said that. Earlier, you said natural gas was easier than oil. When you just
1:11:53 gave that explanation, you talked about being able to count every molecule of gas. I suspect that that’s what
1:11:59 allows an island like North America to be easier to trade gas than oil, because we have more insight
1:12:06 into where gas is coming from. LNG was not a big part of gas. So gas was being locally produced and
1:12:12 consumed. It’s not like with oil where, my God, it’s coming from everywhere and it’s going everywhere,
1:12:16 right? Is that a fundamental difference between natural gas and oil trading, at least at that time?
1:12:21 I mean, I know natural gas is more complicated now with shale, with liquefied natural gas that can go
1:12:26 offshore, but is that part of why you made that statement earlier? Yeah, I think there’s three main
1:12:32 differences that made natural gas a great product to trade. One was, it was this closed system that you
1:12:37 described, that the molecules for the most part were just stayed in North America. There was a little bit
1:12:43 of LNG business, it was mostly baseload, so it was easy to predict what those flows were going to be in the
1:12:50 future. That wasn’t a big variable that was going to cause price moves in the future. And because it was this
1:12:57 closed system, you can model it with much better accuracy. Second was that the deregulation that got
1:13:03 the pipelines out of the business and the pipelines had to be third parties that couldn’t take ownership
1:13:09 of the gas. The only service that they could provide was transportation. And by doing so, they didn’t have
1:13:15 the pipelines, which had the most fundamental information about where the gas came from and where it was
1:13:22 going. They had to publish all this information in a way that was publicly accessible, and they couldn’t
1:13:27 trade on it. So there had to be the Chinese wall between the trading group. And when you compare that
1:13:35 versus oil, Exxon can own the oil platform in the Gulf of Mexico, stick it in on an Exxon ship, take it to an
1:13:42 Exxon-owned refinery and put it in Exxon gas stations. And so as an outsider trying to figure out and track
1:13:49 those molecules, it’s impossible. And that’s why the best and most profitable oil traders have to be in the
1:13:55 physical business, have to be moving molecules. And the third is that natural gas, because it was a
1:14:03 seasonal product, you store it during the summer, getting ready for the peak winter demand, that there
1:14:10 was a window of storage that the industry almost required when you go into the winter. And there was
1:14:18 a window of what it should be when you exit the winter. And so twice a year, there was a mechanism
1:14:26 to get you back close to fair value. And if you compare that to a tech stock today, I have all these
1:14:31 debates about some stock, there’s nothing that necessarily has to get that tech stock back to
1:14:38 one’s belief of fair value. There’s not that forcing mechanism. And if you’re talking about gold,
1:14:43 there’s no forcing mechanism in gold. If you have a surplus of gold, you’re going to stick it in a safe
1:14:50 place. But with limited storage in natural gas, and the need to have a certain amount of storage when
1:14:55 you enter the winter, it caused that forcing mechanism, which got you back to fair value. So
1:15:03 while price could deviate from fundamental value for parts of the time of the year, twice a year,
1:15:08 it kind of had to go back to that, which was great as a fundamental trader. There’s a lot of commodities
1:15:12 where they don’t necessarily have to go back to that fair value.
1:15:21 So the country is entering a recession, 2008, 2009. You are still staggeringly profitable.
1:15:27 Where at this point in time is your head with respect to philanthropy? So we’ve established the
1:15:33 fact that when you were making $100,000 bonus as an early trader at Enron, even before you became head
1:15:39 trader, you’re already spending 1% of your energy thinking about how you want to utilize your wealth
1:15:47 down the line. But now let’s talk 2009, 2010. You’re almost a decade into running your own fund,
1:15:51 which will probably go down in time as one of the most profitable hedge funds of all time,
1:15:56 certainly in this space. Are you, what are you, 10% now thinking about philanthropy? I mean,
1:16:00 how are you now thinking about chapter two of your career?
1:16:09 Yeah. So I met my wife in early 2006 and she had moved to Houston. She was a mergers and acquisitions
1:16:17 lawyer and had moved to Houston to help start an energy company and spent, I forget exactly how long,
1:16:22 but call it 18 months on that job. She and I had started in the meantime, we’d gotten married
1:16:29 and we’re starting to think about what should we do with our lives now. We had this momentous event of
1:16:33 marriage. What does she want to be doing? What do I want to be doing? We have the financial resources
1:16:40 to do what we want with our time. And so she answered that question by saying, I don’t want to work at the
1:16:46 energy company anymore. I want to focus on our philanthropic activities, which we had both been
1:16:54 doing a little bit on the side. At this point, call it 2006, I was spending maybe 3% of my energy on
1:17:04 philanthropy and she the same. And by 2008, she had gone full-time with our nascent foundation and we
1:17:12 started hiring a few people. And I was starting to spend more of my energy, call it 10%, 15% of my energy
1:17:21 energy on the foundation, which became troubling a little bit because it’s obviously markets are
1:17:27 efficient in the longterm. The markets are smart. The competitors are smart. Competitors entered,
1:17:34 had to keep finding new ways to stay above the competition. And one of those was you have to be
1:17:42 100% focused on this job. It’s too competitive to not be 100% focused. And when I went 90%, then it got
1:17:49 harder. As the preceding years happened and I started thinking more about giving the money away than
1:17:54 making more of it. That was really the signal to me that I want to be spending my time on the other
1:18:02 side of the table. And I’m physically and mentally, emotionally exhausted with trading natural gas. It’s
1:18:08 the only thing I had done as a professional, again, from a few days after graduating college. And here I am
1:18:14 17 years later, I’m still doing pretty much the same thing. And I want to do something else with my life.
1:18:19 And so that was 2012. And that’s when I decided it’s time to shut this down.
1:18:24 I’m guessing that, I mean, I’ve spoken with some of the greatest scientists in the world and
1:18:30 not everybody says this, but there are some that do, that they say they can’t stop thinking about what it
1:18:37 is they’re working on. Anytime they get to a stoplight, that’s where their mind wanders. When
1:18:41 they’re in the shower, that’s where their mind wanders as to the problem, as to the questions that
1:18:46 they’re trying to ask, as the problem they’re trying to solve. Is it safe to say that you probably felt
1:18:53 the same way until you hit that inflection point? Absolutely. And this was spent more than a decade
1:18:58 living, breathing. I would, after work, go out with other people in the industry and talk about
1:19:03 natural gas, dream about natural gas. I would wake up in the morning. First thing you do is
1:19:08 check the prices, get in the shower, think about it. What could go wrong? What do I want to do today?
1:19:13 What’s the plan? And it was just all encompassing in life. I think to be successful in these competitive
1:19:20 fields, whether it’s in health research or in trading, you have to give it that a hundred percent
1:19:25 focus. And if you don’t, you’re going to see it in the results. It’s just too competitive.
1:19:32 So was it a hard decision for you then to shut your fund down, return the capital to people and
1:19:38 become a full-time philanthropist? Or was it actually quite easy once you accepted, I’m no longer giving
1:19:46 a hundred percent of my brain power to this other thing? It was hard. That’s who I was as certainly a
1:19:54 professional and who I was largely defined as a person as well, was as a natural gas trader.
1:19:59 Had been the place where I’d had the most success of anything I had tried to do in my life. And so
1:20:06 starting in about 2010, I knew this was the decision I needed to make. It was hard. It was a hard decision
1:20:14 to make. It got easier because things had changed in the market. So if you look at the graph of natural
1:20:22 gas prices, you see them peaking about July of 2008, maybe late June, 2008, and just being on a steady
1:20:28 decline and the volatility starts to change as well. The shale revolution took the market from one that
1:20:34 was ever increasing demand and harder and harder to get the next molecule of gas out of the ground.
1:20:40 So having to try to balance that through price, which becomes very volatile and needs to booms and
1:20:46 bus to one that was in perpetual oversupply and kind of bouncing around marginal costs to produce.
1:20:51 And so the opportunity had changed. And so I’d given back at $3 billion back to investors.
1:20:58 And I was at the point where by 2012, I was at, I need to give back another 50% down to a billion and a
1:21:03 half, just the market opportunity is not there. And it’s hard when you’ve been playing in Vegas with,
1:21:08 at the $25 table to go back down to the $5 table. It’s just like not as emotionally
1:21:16 interesting. And so that happened. I’d gotten married. We had kids. The regulation in the business
1:21:22 partially, in fact, maybe largely due to the Brian Hunter episodes that had, when the price distortions
1:21:29 that wasn’t good for the market had just become harder. And I had just lost the focus of my interest
1:21:33 in the foundation side. And so all these things came together and it still took me two years to
1:21:40 really figure out to try to make that call that it’s time. It’s time to close us up and go find
1:21:46 happiness somewhere else. And I think part of that struggle was I had seen many other people in the
1:21:52 industry who had, who had had similar thoughts along the years that they want to go do something else.
1:22:00 And a lot of times those people left and couldn’t find what to do or couldn’t find satisfaction at
1:22:05 their lives doing something else. And so even though that they were unhappy in the trading business,
1:22:11 they ended up back in the trading business because they were even more unhappy what the other thing
1:22:16 that they had tried to go do. And so that was my fear. It was that a year from when I close up,
1:22:21 I’m going to miss it and I’m not going to find satisfaction in this other thing.
1:22:27 And then what, what do I do then? Do I, am I really going to go start it up again? And like,
1:22:33 that took me those 24 months to really get the confidence to say, I can’t find happiness here.
1:22:36 I can find other things to do and to close it down.
1:22:43 So talk me through some of those early days. Then Laura has obviously been well up and running.
1:22:50 She’s been on this full time for several years now. You both have a great number of interests at the
1:22:56 time. How do you begin to make that transformation? We’ve already talked a little bit about what the
1:23:02 skills are that you brought to bear. And again, I’d reiterate them as kind of an emotional temperament
1:23:08 for it to not let your feelings get in the way of what you’re doing. The second one being kind of the
1:23:12 right amount of confidence to say, yeah, this is a huge and hard problem, but we should go after it,
1:23:17 but maybe not too much confidence to say we’re going to solve this problem no matter what. And
1:23:23 then I think the third one being probably one that gets overlooked a bit, but basically an ability to
1:23:27 become an expert in something in a relatively short period of time. I mean, I think people who are
1:23:32 familiar with Bill Gates just watched the documentary about him and not read much about him. You’ll realize
1:23:37 he’s not just a guy that revolutionized the computer industry, but when you look at the voracious
1:23:43 appetite with which he has explored other topics, I mean, I’ve only met Bill in person once and I’ll
1:23:48 share that the subject matter that we were speaking on, which was something in my wheelhouse and not
1:23:55 his, it only took me about 10 minutes to realize I was talking to someone who knew as much about this
1:24:00 topic as almost anyone I had spoken with. And that’s saying something, because this is not something you
1:24:05 would assume that a person would know a lot about. I mean, this was at the beginning of the discussion,
1:24:10 I’m using terms that I would use with a lay person. And he’s like, yep, yep, yep, yep, yep. He’s like,
1:24:15 no, no, no. You just go straight to shorthand for me. And I was like, but he wasn’t doing it from a
1:24:20 place that was anything other than totally genuine. You knew that this is a guy who really knew the
1:24:27 subject matter. Again, you share that trait, which is, I don’t know, that’s, that allows people,
1:24:28 I think, to have a bigger impact in their philanthropy.
1:24:35 Well, I appreciate the comparison, but it’s not close. I agree with, I’ve gotten to know
1:24:43 Bill over the years and agree with your assessment of him, that his breadth and depth of knowledge is
1:24:49 something that I have never seen in somebody else. And it incredibly impressive in that he knows the
1:24:56 background and knows the issues of almost anything that you can think of in a way that is scary.
1:24:59 And I am certainly not that way.
1:25:06 Well, I will agree to disagree on that, John. So talk to me about the first problem that you
1:25:11 decided to turn your attention to once you became a full-time philanthropist.
1:25:19 As I said, I’d gotten my start in giving with K-12 education and kind of over the years,
1:25:25 I’ve just gotten deeper and deeper into those questions of why does one school have different
1:25:31 results from a school down the street serving a very similar population of kids? And what’s the
1:25:37 theory of change in K-12? It is such a massive system that’s broken down at the school level.
1:25:45 And how can we as a country try to get results that we’re happier with? Knowing all the hurdles that go
1:25:54 into that and all the factors that go into education and behavior. So how does that scale? How does those
1:26:02 small gems that you see? How can you scale that? And this is a question I think the education reform
1:26:10 movement’s been struggling with for decades. And I watched that journey and was on the journey along
1:26:16 with many other philanthropists of, is it small schools? Is it better principals? Is it better
1:26:22 teachers? Is it the curriculum? Is it technology? All these things kind of bouncing from one idea to the
1:26:29 next, trying to find what’s the idea that scales and creates structural change. And so we’re still
1:26:37 involved in K-12. I think it’s just the most fundamental issue facing long-term health and viability
1:26:46 of this country. And when you talk to almost any social service provider, they always refer back to
1:26:53 education. And so I think it’s one that we’ve spent a lot of time thinking about and happy to get into
1:26:57 that if you want. But it was the first and it continues to be a major effort of the foundation.
1:27:05 And I know that you’ve worked with, as you said, others. I think City Fund has sort of largely,
1:27:07 a lot of your efforts have morphed into that, correct?
1:27:14 Right. So I guess I’ll give you the theory of change that drives our work of late in K-12.
1:27:22 And that’s that strong and robust systems of any kind have the attributes of biological evolution,
1:27:28 right? And so in living organisms, that’s the phenotypic variation. Do you have variance amongst
1:27:35 the organisms, the differential fitness? Is there a different rate of survival and reproduction? And then
1:27:41 the heritability of fitness? And I think this is true of any organization. It’s true of businesses.
1:27:46 It’s true of any system. And it’s true of the healthcare system, the criminal justice system.
1:27:52 It’s true of the school system. So you need to have a strong, robust system that’s getting better over
1:27:58 time. You need those three traits. And the traditional public school system does not have them. So if you
1:28:07 think of a school district that is a monopoly in its area, it doesn’t have much variance. It might have
1:28:12 a school that’s Spanish emerging. It might have a school that’s for the talented and gifted. It might
1:28:18 have another school that’s a magnet of something. But generally, it’s the same curriculum, the same
1:28:25 process, the same way of hiring, of training, of trying to develop teachers, how your principal
1:28:30 development is, right? You don’t have that variation. The differential fitness of do things that are
1:28:36 working, do they grow or do they go away? Yeah, there’s no pressure. The good stuff in public
1:28:42 education, there’s no natural mechanism for that to grow. And there’s no mechanism that really works in
1:28:49 the public school system for it to go away, for the things that aren’t working to stop. And then
1:28:57 the readability of traits, you need the learning organization aspect of it, which I will tell you
1:29:05 is a school system is not good at, and any government monopoly is not good at quality control. It’s not
1:29:12 good at innovation to provide that variance. And so the theory with CitiFund and the theory of our K-12
1:29:17 work is that the school system needs to become a system of schools, that the natural role for
1:29:24 government is not to be the service provider. The natural role should be the regulator. And right now,
1:29:32 those two functions are bundled together into one, and no system can regulate itself. And too often
1:29:36 today, I think those systems are structured to regulate themselves. And so you don’t get that
1:29:42 innovation. You don’t get the quality control. And so the vision is, and what we saw in New Orleans
1:29:49 after Katrina was this change of going from the school system to the system of third-party
1:29:56 nonprofit operators that are given the chance to have the resources and responsibility to educate
1:30:04 kids, K-12 kids. And the theory, again, if it works well, that the parents, the kids have real choice,
1:30:10 get to choose what type of model they want, whether it is a immersion program, whether they want high
1:30:17 discipline or regular discipline, whether they want an art school, et cetera. That demand, if you’re
1:30:22 given real choice to the kids, to the parents, that that’s the best quality control that can happen.
1:30:28 And then the government as the regulator needs to make sure that all kids are served, because we need
1:30:34 to make sure that ideal, that every kid is properly served, but is largely out of the business of providing
1:30:40 the service of education. So let’s put some numbers to this, John, more broadly. So maybe think of it in
1:30:46 terms of GDP. How much is private? How much is public slash government? How much is nonprofit? What’s the
1:30:53 approximate breakdown of the dollars that get allocated in the world, or in the country, I’m sorry, along those
1:30:54 three divisions?
1:31:01 Of the total economy, the private sector is approximately 60%. Government’s approximately 40%.
1:31:09 The philanthropic sector is about 2%. Now, when you take out giving to museums, to religious
1:31:14 organizations, to the arts in general, and religious organizations, you get down to about 1% of the
1:31:18 economy is philanthropy for social services or social goods.
1:31:23 Okay. So you’re stripping out basically what I used to call maybe erroneously brick and mortar
1:31:29 philanthropy. And you’re saying sort of 50% of it, the 50% that remains is this type of philanthropy
1:31:34 that people like you work on, people like Bill Gates works on. No, it’s not just the brick and mortar.
1:31:39 No, no. So I’m including like gifts to food banks, gifts to the hospital system to build a building.
1:31:40 Oh, okay. Okay.
1:31:46 This is about 1% of the economy, right? So one of the things we’ve thought about is what’s the role
1:31:54 of philanthropy? Because the government is giving a benefit to people who give money to nonprofits.
1:32:02 There’s a tax deduction. And so there is a stake, there is some type of tie that I think exists
1:32:09 between the donor and what that money should be going for. And so we’ve thought about how should that
1:32:16 1% of philanthropic funds, what’s the best use of that? And you can think about, or we think about,
1:32:24 it can either supplement government services. So by providing more money to the homeless shelter,
1:32:28 a service that the government already provides, but you can supplement that with more resources.
1:32:34 And that’s typically described as charity, trying to solve today’s problems. And then there’s the,
1:32:39 what some would describe as strategic philanthropy of trying to get at the core roots of issues to
1:32:45 prevent those problems from developing tomorrow. Both are really important. There’s not a priority
1:32:52 or hierarchy between those two. We give some charitable dollars. You give money to the food bank. We give
1:32:58 money to the homeless shelter in town. You do have to meet those needs, but there is a rule for how does
1:33:04 the philanthropic money compliment government services to make them better? What is the market failure as to
1:33:12 why government is not working as well as many people believe it should? How can the school system be better
1:33:18 while the school system now is so focused on, is already budget constrained, is so focused on just
1:33:25 providing the day-to-day activities? And the same of all these nonprofit social providers is that they’re so
1:33:33 focused on the day-to-day job that they don’t get to experiment like they should.
1:33:39 And so there is this rule for strategic philanthropy to come in and say, how can these actors and these
1:33:45 systems perform better? And I think that’s where we’ve largely focused on our giving is looking at
1:33:52 systems change. It’s structural and it’s scalable to a way that just providing another dollar for a
1:33:58 program largely is not. There’s different roles for different types of givers. Anybody can write the
1:34:01 check to the food bank. And again, we write the check to the food bank, but the smallest giver can also
1:34:09 write the check to the food bank. Looking at the strategic side, which requires a lot of manpower
1:34:15 and expertise and hiring experts and getting access to experts and thinking about, here are the ideas
1:34:19 that have been tried in the past, what’s worked, what hasn’t, here are the current ideas, what’s the
1:34:24 theoretical framework for those ideas and why they could work? What are the potential second order
1:34:31 effects of those? And making those decisions, it’s really, it’s hard for the small donor to do that.
1:34:35 It’s really geared towards the large national foundations. And so that’s really where we see
1:34:42 our role. Were you humbled by how difficult that is, how difficult it is to, someone could easily listen
1:34:46 to this and say, how hard is it to give away $400 million a year? You’re just, you’re writing big
1:34:51 checks. But the way you just described that, actually, it sounds very difficult to give away a lot of money
1:34:57 if it’s trying to mostly be philanthropic and not charity driven. Because as you said, the philanthropic
1:35:03 one is the one that’s strategic. It’s the one that you’re trying to scale and be maximally leveraged in
1:35:09 the silo of another agent, for example, in the case of what the government’s already doing or what the
1:35:13 private sector is already doing. I mean, it just strikes me as very difficult. How long did it take,
1:35:17 A, do you agree with that? And then B, how long did it take you to come to that realization that your
1:35:23 second career is probably harder than your first? We have about 120 employees at the foundation today.
1:35:33 We had no desire or interest to have 120 employees 10 years ago. That was not by design. We thought
1:35:41 giving would be easy. I remember very specifically thinking our giving was going to be find the five
1:35:49 highest social return projects or organizations and just write those five big checks every year. Make it easy.
1:35:55 Make it fairly passive. We started down this route and I started pulling the research. I had kind of metrics
1:36:01 background in college. I was smart enough to read the papers. I could figure out what they were saying. And so
1:36:07 start with a topic like preschool. You see three papers that say preschool is amazing. It generates all these
1:36:13 outcomes later in life. And then you see one evaluation of the Head Start program that shows it doesn’t really
1:36:21 have an effect. And then as you dig deeper in, start seeing there’s huge battles within this research
1:36:29 sector about what the evidence really shows, what it demonstrates, and the quality of the evidence that’s
1:36:36 going into all these claims about success. And I think in every area that we thought of, look at
1:36:44 work training programs. The first scan through, everything works. It’s all great. Writing checks
1:36:50 there is a great way to invest money. And then you dig deeper and start getting into, okay, the problems
1:36:55 with those research that organizations are holding up saying, here’s our evidence that we’re successful.
1:36:59 And it got very frustrating because the more we would study, the less we knew
1:37:09 about what worked, what didn’t. One of the learnings was very few programs worked or new programs. So
1:37:16 the things that work are generally already part of the fabric of society, like K-12 education. We know
1:37:23 that works, what works. These programs that have clear evidence of success are generally already funded
1:37:27 by government, already part of fabric of society. So what’s our role? Are we just going to supplement
1:37:33 with a few extra dollars on the side? And I didn’t want to do that. So where could our dollars go the
1:37:40 best? And that really led us down this issue of how do you change and improve the system and the
1:37:46 incentives and the rules of a system rather than what’s the next program we can fund? Because the
1:37:49 frustration of trying to find that program just became immense.
1:37:54 So speaking of a system that I think almost anybody who spent any length of time thinking
1:37:59 about it will pretty quickly come to the conclusion is broken, is the criminal justice system.
1:38:04 When did that system come to your and Laura’s radar?
1:38:11 Laura really drove us entering this field. She was a lawyer by training, although on the corporate side,
1:38:16 I think she was just from having the legal background, you could see the world in a different way.
1:38:21 And one of the first organizations that we started sending some checks to was the Innocence Project.
1:38:26 And we had met the head of the Innocence Project, Barry Schecht, at some event and start hearing the
1:38:34 stories that will just tear your heart. Someone who’s been wrongfully convicted and was going to die
1:38:38 except for the actions of the Innocence Project.
1:38:45 And we started funding that just because it was the right thing to do. It was a way to help save a life
1:38:51 that was going to be terminated without that. I have great respect for the Innocence Project because
1:38:59 as they started building up dozens and into hundreds of examples of people that they got off death row or
1:39:04 out of prison for wrongful convictions, they started looking at the policy angle as well. So it wasn’t just
1:39:10 about the one person or the hundred people that they were saving, although they’re massively important.
1:39:15 They started thinking more strategically about how do we change the system so that the wrongful
1:39:18 convictions don’t happen in the first place.
1:39:25 Right. Because you have to believe that for the amount of effort it takes to take one person off death
1:39:31 row, one wrongly convicted person off death row, having followed a few of these cases,
1:39:39 it can take decades. And I mean, it can consume the effort of tens of people, tens of thousands of hours.
1:39:47 And you would say, well, it’s wonderful that we’ve saved that life. What if we put an equal amount of
1:39:51 resources on the other side of the equation, which is getting few of these people into the system?
1:39:58 In other words, you start to think about where’s the asymmetry on this one? And it seems a lot of it’s
1:40:03 on the front end, right? I mean, you could have a hundred innocence projects, you will still never
1:40:07 fully be able to rectify the situation, notwithstanding the fact that you can’t undo
1:40:13 retroactively all the harm that is done by the time the person is set free.
1:40:19 Exactly. A couple of examples like that really led us again to like, okay, the systems change,
1:40:25 the policy focus is where we want to spend the time, that there’s higher potential reward.
1:40:35 It is harder work. The chance of success is lower, but the impact, if successful, is so much higher
1:40:41 if you can improve how the system works. And so we started looking at kind of a number of areas of
1:40:47 the criminal justice system. First, we spent a year and hired someone to lead that work. We spent a year
1:40:54 just thinking about all the ways, the inefficiencies in the system that lead to bad outcomes that don’t
1:41:00 promote public safety, that destroy neighborhoods that aren’t fair and equitable for those that are
1:41:06 charged or convicted of a crime, et cetera. And where could we as a foundation, where could we be effective?
1:41:11 Let’s pause on that for a moment. Because again, I think that’s just a very interesting approach that
1:41:16 is a bit counterintuitive. You decide this is something you’re passionate about, but you don’t
1:41:22 go right into it, both guns blazing. There’s a humility that says, why don’t we bring an internal
1:41:29 team in that we’ll hire that’ll spend a year helping us get up to speed on this and identify
1:41:37 the specific targets that we can focus on. Do you find that to be a period of impatience for you?
1:41:43 Or do you find that to be a period of great enjoyment as you are on the upswing of another
1:41:50 learning curve? It’s certainly impatience. We have all this money sitting in the account.
1:41:57 The goal is to do good with it. And we’d rather figure out how to do the most good today rather
1:42:01 than waiting until tomorrow. So there was this natural impatience. But I think we’ve been smart
1:42:09 enough to realize that it’s smarter to invest wisely tomorrow than do something that’s unlikely to have
1:42:16 impact today. And so that’s just kind of a necessary function of it is bring in some experts, but really
1:42:21 study where is the leverage that a foundation can have on the problem. It’s very different from the
1:42:25 other actors that are already in the system. It’s different from what politicians can do or government
1:42:35 policy makers or judges or police or everybody has a role. And the question is, how can a philanthropy
1:42:42 or foundation that is not a natural actor in the system, but has a checkbook, how can that create
1:42:48 some leverage to try to steer the system and improve it? Now, in your first version of the foundation,
1:42:53 there were two versions, right? There was a C3 and a C4. And I believe currently the entire
1:43:01 foundation is a C3. Is that correct? We’ve always realized that the goal is not to just do research
1:43:09 or just do idea generation. The goal is to have real positive policy change and policy change requires
1:43:16 some advocacy, political action. It just does. And so we used to have those, the C4, which is the
1:43:23 advocacy arm as a separate tax vehicle. And there had to be a Chinese wall between the C3 and C4,
1:43:30 with the C3 being the traditional philanthropic vehicle. And what we realized was that having that
1:43:38 Chinese wall really was harming our ability to have positive impact. And so we combined the two entities
1:43:46 into an LLC so that the same employee who was the expert in fines and fees and the options on how to
1:43:51 change fines and fees to make them more equitable and just could also go sit there and talk to a
1:43:58 legislator about why the problem existed and what the optimal solutions were.
1:44:03 So what were some of the things that you and the team learned when it came to understanding how the
1:44:08 criminal justice system could be so broken? And I say that, again, not knowing much about it, but
1:44:15 knowing a little bit about it, right? Which is, there seems to be an enormous racial disparity that
1:44:23 exists. There also, certainly by state, certainly seems to be great difficulties in appealing, even in the
1:44:29 presence of evidence that the first trial may not have been a great trial. The amount of coercion that
1:44:34 goes into convictions that turn out to be, I mean, there’s so, you could just rattle off, you don’t have to
1:44:41 know anything, as clearly I don’t, to still rattle off five or six structural problems. How did you decide
1:44:46 which ones were the most important and or which were the ones that you could have the greatest impact in?
1:44:53 I think it was important to figure out how we got to the current system. And in this world of real
1:45:03 partisanship was a bipartisan response to the growing violent crime that was happening starting post-World
1:45:11 War II and then really peaked late 80s, early 90s, that got everybody, all politicians, concerned and
1:45:18 scared. And they felt they were being elected based upon crime rates, based upon the amount of violent
1:45:24 crime and trying to get a handle on that. So the violent crime was also destroying communities.
1:45:31 And so you had Democrats, Republicans, whites, blacks, Hispanics, all come together and start this
1:45:38 tough on crime mantra, which was, we’re going to jack up our number of police. We’re going to jack up
1:45:46 the penalties for any criminal act, have it severely intensify the war on drugs. And then all the
1:45:52 second and third order effects that came with it happened. Now, crime ended up peaking in the early
1:45:58 90s. And some of it was because of some of the policies passed, but a lot of it wasn’t. So you can
1:46:05 see different areas that adopted policies at different times. And it seems like the drop in crime was
1:46:13 relatively independent of when communities, both across America as well as globally, adopted some of
1:46:20 these policies. So why did crime go down over the past 30 years is still a mystery to some.
1:46:24 Some great researchers have looked at this and tried to figure it out. And it’s a lot of like,
1:46:29 okay, a small piece of it’s this, small piece of it’s this, et cetera. But the times have changed.
1:46:36 So we still had on the books, the reaction from an environment that was very different. And the
1:46:43 question is we’ve seen what those policies did to neighborhoods and we’ve seen the financial costs
1:46:49 of those policies and the trade-offs associated with some of those policies. And I think you saw
1:46:54 both Republicans and Democrats come together trying to rethink what’s the right way to structure the
1:47:01 criminal justice system, all aspects from policing and courts and prisons and re-entry. What’s the right
1:47:04 way that we should do given the environment that we’re in right now?
1:47:11 Now, thinking back to those late eighties, early nineties, when everybody came together and said,
1:47:14 we just can’t handle this amount of violent crime. We’re going to get tough on crime.
1:47:18 We’re going to create more prison beds. We’re going to put more police officers on the street,
1:47:23 et cetera, et cetera. Was it sort of a combination of things that led to where we are now? Was it basically
1:47:30 more police, more arrests, stiffer sentences, less leniency around parole, lower tolerance on parole
1:47:36 violations? Was there any one thing or even three things that stood out as the most damning factors
1:47:42 that led to mass incarceration? What is your assessment of that? And I would be curious to hear
1:47:47 your thoughts because I think your thoughts would be more informed than mine or just the average person
1:47:54 on what other factors could have accounted for the reduction in crime, if not the increase in
1:48:00 incarceration. Yeah. I’ll take the latter question first. The best report I’ve seen on this is from
1:48:04 the Brennan Center that really looked at, spent a significant amount of time trying to piece
1:48:11 together what were different responses and how much of it was just kind of demographic trends,
1:48:17 how much of it was economic growth and drop in better education, better skilled police tactics,
1:48:23 all these different avenues. And I’m doing a short shift on all the things that they’ve assigned
1:48:33 some causation to. I think the summary is it’s hard to see any one of them being really causal in the
1:48:40 shift in crime. It was most tellingly, you saw this same trends happening globally. Different countries
1:48:48 had different reactions to this and they all had that move up in crime over time into the nineties and then
1:48:54 this downward trend. And so people were scratching their head trying to say, well, what caused it?
1:48:58 And part of it, I’m not sure we’ll ever know. And then to the first question about, which I’ll
1:49:04 reiterate just in case you forgot, is basically of all the mechanisms or tactics that would lead to an
1:49:11 increase in incarceration, do you have a sense of which of those were perhaps most responsible?
1:49:17 I don’t want to get too far over my ski tips on this and misrepresent the research. I think part of it
1:49:23 has been longer sentences. Part of it has been the conviction rate. So once you’re arrested, we can
1:49:31 get convicted. What percent of the people are done so? And it leads into the system is built to demand
1:49:37 a plea bargain. We just don’t have the court resources, the defense attorneys, the prosecutors,
1:49:44 the judges, the court systems to hear a vast majority of cases. And so it ends up being less
1:49:51 than 5% of cases actually go in front of a judge. Most of them just get pled out. And for a long time,
1:49:56 because those resources don’t exist, there’s been incentives that have been built into the system
1:50:03 that almost coerce people to plead guilty to crimes that they may not have committed. Because just from a
1:50:11 risk reward, it is, I didn’t commit this crime, but there’s a 20% chance I get found guilty,
1:50:18 I get a 20-year sentence, or I can serve, I can plead down to a lesser charge and get six months,
1:50:23 of which I’ve already been here for three months. So three more months and I’m out, or my life’s over.
1:50:27 Going back to your days of trading, that’s a no-brainer calculation.
1:50:35 Yeah. And it’s really hard to see how you solve that problem without a massive infusion of resources
1:50:40 into the courts and into prosecutors and defense attorneys, which is not where we want to be spending
1:50:47 money. We’d rather spend money on preventing crime on social services to not have that problem to begin
1:50:55 with. And so how do you get rid of this culture where the system can’t handle everybody going to trial?
1:50:58 One of the biggest challenges that nobody has a great answer for.
1:51:03 Now, I don’t know if this has been a focus at all of your foundation within criminal justice work,
1:51:08 but obviously in the last few months, it’s quite topical with respect to
1:51:14 the relationship between the police and race and the role of systemic racism within law enforcement.
1:51:23 How much does that factor into the economics of it beyond the obvious, which is disproportionately
1:51:30 arresting, presumably disproportionately convicting, just based on what you just said, the stats you
1:51:36 just laid out. I mean, I would have never guessed that 95% of cases would be pled. And if that’s the
1:51:40 case, then yeah, I just answered my own question, which is if you’re going to arrest disproportionately
1:51:45 minorities, then you’re going to convict or at least put in prison disproportionately
1:51:50 minorities. And certainly the few times I have visited prison, it’s disproportionately
1:51:56 minorities. Take all of that and try to package it into a question. What is the role for philanthropy,
1:52:03 if there is one, to try to address the questions of racism within law enforcement? Does that factor
1:52:09 into a tool for criminal justice reform? There’s obviously been a lot of debate or discussion
1:52:16 this year on that very topic. And there’s no doubt the disproportionate nature of the criminal justice
1:52:23 system on minorities and particularly on the black community. For so long, the political incentive and
1:52:31 so much of the focus has been just on crime rates with no regard for the secondary effects that the
1:52:36 criminal justice system causes on these communities and on families. And I think that’s one of the
1:52:41 things that we as a society are trying to grapple with now, not for the first time, but for the first
1:52:46 time, this has gone into a mainstream discussion.
1:52:50 Sorry, just to make sure, you’re saying we all acknowledge and have acknowledged historically
1:52:58 that it’s disproportionately black men that go to prison, but we’re now taking a more broad look at
1:53:03 the implication on, for example, children that are now left without a father. Is that what you mean,
1:53:05 as an example of the impact on the family?
1:53:12 Right. And the psychological effects of being a black man in America, especially in a low income
1:53:18 neighborhood that has, and especially if it’s an aggressive police force there. I think one of the
1:53:25 dilemmas has been that minority communities have felt both over-policed and under-policed at the same
1:53:31 time. They feel over-policed with the techniques that the police are using in their neighborhoods. So
1:53:39 the random stops, certainly back in the era, stop and frisk, and a presumption of guilt and that people,
1:53:48 especially young black men, are likely to be up to something bad. However, there is still a crime
1:53:56 problem. Most crime is committed in one’s own community. We’re in the very near geographic area around the
1:54:03 community. And there is a huge cost to society of violent crime. So nobody wants the police to leave
1:54:11 entirely. There still has to be that function of deterrence and trying to clear cases that have been committed.
1:54:20 So how do you create a policing system that tries to address both of those, that treats people more
1:54:28 equitably, more justly, recognizes their constitutional rights while protecting those communities? Because
1:54:34 the cost of policing on communities is high. The cost of violent crime on communities is high as well.
1:54:39 That’s the struggle with the policing reforms. And there’s things that we absolutely should do. A lot
1:54:45 of those are getting enacted now, or at least being discussed now. But it’s not just, problem doesn’t
1:54:52 get solved just by passing one new policy. These problems got created over decades, over centuries,
1:54:58 over decades of policing techniques, over centuries of disinvestment in these communities. And the question is,
1:55:05 kind of how do you both provide the public safety while not causing the damage that some policing
1:55:06 techniques cause today?
1:55:11 So then shifting gears a little bit within the criminal justice system, how much of your effort
1:55:18 has focused on the other side, which is recidivism? I mean, one of the things that I was most struck
1:55:28 with when I visited prison was the lack of what appeared to be logic around why somebody was in prison.
1:55:35 So again, maybe I’m being overly simplistic, but the way I would view it is there are sort
1:55:41 of not that many reasons to put someone in prison. One reason to put somebody in prison is to protect
1:55:47 the public from them. Another reason to put someone in prison is to punish them for something they have
1:55:54 done. And yet a final reason to put somebody into prison that would factor into the first two,
1:56:00 should they be released again, is to provide them with a set of skills to reintegrate into society
1:56:06 in a better way. So you’ve got these, call it two pillars and then a foundation.
1:56:12 And I was very surprised. Admittedly, I was in a maximum security prison, but nevertheless,
1:56:17 at least half the men that were there were going to be out of jail in their lifetime.
1:56:24 I was very surprised at how there was virtually no effort into the rehabilitative part. So even if
1:56:32 you took a long view on protection and punishment, the lack of rehabilitation almost guaranteed recidivism.
1:56:40 Again, going to your point, if 95% of people are pleading out of something, many of which are things
1:56:46 they didn’t do. What they don’t realize in that VAR calculation is, yeah, I’m going to be out of jail
1:56:53 in three months, but I’m going to have a very difficult path to getting a job. I’ve now moved
1:57:01 off the track of non-felon to I am a felon, and that’s a very different path. So is there an opportunity
1:57:07 for strategic philanthropy to play a role in the rehabilitative side of incarceration?
1:57:15 Yes. I agree with everything you said. It’s very hard to design effective recidivism programs
1:57:23 after someone’s come out. They just, we’ve tried this as a society in many different forms and shapes
1:57:31 for a long time. And the evidence is very poor that they have. You study it in a diligent way
1:57:38 that these programs work. It’s a very tough problem. And so there’s a theory, which I believe,
1:57:45 and kind of going on what you said, that the nature of prisons has to change. That if you wait until the
1:57:50 day someone’s released, that’s way too late. It’s like if you wait until someone drops out of school
1:57:59 to step in with some more social services, it’s too late. And so we have a couple projects trying to
1:58:07 reimagine prisons, think about exactly what you said about what’s the role of prisons? What do we want
1:58:16 society to do? The struggle is that states and cities, states and counties that fund this are often
1:58:23 constrained financially. And so they’re trying to figure out how do I meet today’s problem, which is
1:58:31 I got a lot of people in prison versus how can I make investments to improve outcomes over the long
1:58:36 term? And how much of the budget can go to improving outcomes over the long term while we have to meet
1:58:43 today’s needs? And anytime that there’s a financial shock, you stop investing in the investments
1:58:50 because you try to meet today’s needs. And so I think so much of the public money has gone to
1:58:57 the day-to-day work of it, that not enough is trying to step back and think, how could a system be
1:59:03 redesigned? What should people who are stuck behind the bars, what should they be doing with their day?
1:59:09 How can we try to maximize the percent chance that they don’t come back here when they’re released?
1:59:16 Because the recidivism rate is incredibly high. And again, we just haven’t found ways to lower that
1:59:19 through programs that reach people when they are released.
1:59:26 So part of the problem with that, I think, is you could certainly make an ROI case that if you invest
1:59:31 more now, you’ll save much more tomorrow. But so in other words, if you have a hundred people in prison
1:59:38 that are going to get out every year and ordinarily, 80 of them are going to be back within five years and
1:59:43 you can make it, 20 of them are going to be back within five years. Oh my God, the cost saving,
1:59:48 you could almost invest anything you wanted to make that happen and it would pay itself off. The problem
1:59:51 is it won’t pay itself off for five years. Is that a fair statement?
1:59:57 Right. So in the private sector, they would make that investment every day. But in the public sector,
2:00:03 it’s on a cash accounting. You have to balance the books this year and you have a fixed amount of
2:00:09 money. We can raise taxes and raise revenues, but it’s hard. Nobody likes to raise taxes. And so you
2:00:15 have a fixed amount of money. So how much money goes to the investment, even if it has a strong ROI?
2:00:23 And I think that’s where the philanthropic sector can be an active player or actor in this system is by
2:00:30 providing the funds to experiment with different ideas, different programs in prison, and then funding
2:00:38 the high quality evaluation to see what is the ROI. Can we get good data so that we can go to the state and
2:00:44 say, look, this program has a very positive ROI. I know it’s hard in the short term to deviate
2:00:48 money away from just the way we’re doing it now. And it’s going to be hard to find the funds
2:00:54 today to make that investment. But there’s great evidence if you can find those funds that
2:00:58 five years from now, everybody’s going to be better off. The state’s going to be better off. Society’s
2:01:03 going to be better off. The person entering society is going to be better off. And so you’ve got to make
2:01:08 that argument, but you have to be able to provide that high quality evidence of effectiveness because
2:01:13 everybody shows up saying, my program works. My program works.
2:01:18 Is that exactly the type of work you guys are doing in this space, which is basically
2:01:25 trying to design the best quote unquote trials or experiments that could at least allow for
2:01:29 an evidence-based decision with respect to how to handle these things?
2:01:37 that’s certainly a line of the work. Some of it is more about values. And it’s, should we keep
2:01:46 someone detained in jail before they’ve gone to their court date because they don’t have the money
2:01:53 to pay bail? I think that’s just a value. So the criminal justice is, has this mix of things that
2:02:00 you can talk to ROIs on some things? Other things, it’s just, is this how our society should be
2:02:06 functioning? Is that a right thing? Is that balance the interests of the system? I think a lot of times
2:02:12 when you sit down with people and you’re like, is this an American value? Is this an American ideal
2:02:19 that the system works this way? They will say no. Okay. Then how do we fix it more closely represents
2:02:25 American values without, while minimizing any potential second order effects, negative second
2:02:30 order effects? So let’s pivot to another area that is enormous for the foundation, which is health
2:02:36 policy. This might be, I don’t know, this is easily one of the most complicated systems in this
2:02:42 country. How are you thinking about it and where are you trying to apply yourself? Because it’s
2:02:47 just too big. This strikes me as sort of the hedge fund problem you alluded to earlier.
2:02:54 You could potentially try to spread yourself too thin, try to play in every area of it and get nothing
2:03:00 done. So knowing you, though, I don’t know where you’ve chosen to invest your time lately. I’m guessing
2:03:04 you have some clarity about the precision with which you want to think about that.
2:03:11 Yeah. And you’re right. It’s just such a big issue, complex, the number of things that
2:03:18 one could work on and health policy is immense. And so I did the same thing. We’re thinking about
2:03:25 where in health policy should we be focused? We started working in this area about eight years ago.
2:03:31 And after doing that same type of canvassing that we did in criminal justice work, we realized that our
2:03:37 first area should be on drug prices. Kind of identified that as an area where kind of very
2:03:44 obvious flaws in the existing system, that there were ideas that were one could conceive of being
2:03:52 enacted on how to fix it. And that the political window might open in the future such that there was
2:04:00 demand by the public and thus by politicians to actually adopt some of this stuff. And so using those
2:04:08 three criteria, we ended up with how do we create a more rational system to price pharmaceuticals that
2:04:13 balances interest, balances incentives that are necessary for the private sector to do the
2:04:19 innovation that they’re doing. It balances the financial interests of the state and the federal
2:04:25 government that’s largely paying for a lot of this stuff and that maximizes access for the patient.
2:04:31 So if I understood you correctly, you’re basically saying, look, let’s look at what solutions could
2:04:37 look like, even though if today the political will to make changes isn’t there, this is going to take
2:04:42 us a while to figure out what to do. And maybe in 10 years, the water has gotten hot enough that the
2:04:46 frog is willing to jump out. We’ll at least have something in place. Is that kind of how you went
2:04:48 about thinking about thinking about it? Was taking a long-term view?
2:04:55 Yes. It was that the political window wasn’t open eight years ago when we started the work.
2:05:01 We could see cracks in it. We could see cracks in that window. And I think that’s one thing that we’ve
2:05:07 been good at at a foundation is trying to identify where’s the political window going to open up in the
2:05:14 future, whether it’s in changing the bill system, whether that’s in doing pension reform or in
2:05:20 pharmaceutical prices. We’ve gone to these areas and we were early. And so when the window opened,
2:05:28 we had evidence-based ideas that we could present to policymakers and could properly document the
2:05:36 problem. There was a whole effort on communications to both individuals, to society, about what the abuses in
2:05:43 the system are in any of these areas and including in drug pricing, but then also had ideas that you
2:05:49 could go to them and say, here are the three things you need to do. Now, the pharmaceutical industry is
2:05:56 perhaps the most complex industry of any. And so there aren’t the three things that should be done.
2:06:02 There’s the 20 things that should be done because it is just such a broad and complex system with so
2:06:08 many loopholes and bad incentives that’s driving bad behavior. That to get at it is not,
2:06:13 here’s the one thing, it’s here’s the 20 things. The downside is you start to lose policymakers when
2:06:17 you hit number four because they only want to speak in lists of three.
2:06:23 So how optimistic are you? Because this is an area where I know a little bit. I’ve had Marty
2:06:27 Macri on the podcast before. I know you know Marty and we’ve spoken about this. We have an entire episode
2:06:32 on this topic. I’ve had Catherine Eben on before to talk about a different angle here, which is
2:06:36 basically just the difference between the, basically the corruption within the generic drug industry,
2:06:40 which is a totally different problem from the one you’re addressing. For as much as I know about
2:06:45 this, I feel like I still don’t understand it, which I think speaks to exactly what you just said.
2:06:52 If a problem has 21 bullet points to fix it, it’s a complicated problem. What is your level of
2:06:57 optimism? I mean, to be blunt, do you feel like you are spinning your wheels for eight years and this is
2:07:02 a problem that will only get fixed when we are on the verge of bankruptcy in this country? Because as you
2:07:07 said, this is largely a government spend problem. This is my view, by the way, this is my little rant on
2:07:15 the United States. So we basically carry two enormous burdens for the world. There are two
2:07:22 things we disproportionately pay, but our taxes disproportionately go to on some level subsidize
2:07:27 things in the world. And one is military spend and the other is healthcare spend. And you might say,
2:07:30 well, gosh, why would healthcare spend in the United States be a subsidy for the world? But it’s
2:07:37 effectively that we pay so much more for drugs here than our neighbors do that we in effect
2:07:43 subsidize the cost of R&D to the point where the incentives are to make the drugs here,
2:07:47 to distribute them here and elsewhere, but we disproportionately pay. Do you agree with that
2:07:51 assessment or is it overly simplistic? Right. We’re 3% of the world’s population. United States,
2:08:02 3% of the world’s population. We pay 50% of the pharmaceutical revenues of the world. So there’s no doubt
2:08:10 that. The prices that we’re paying is helping and creating incentive for more medicines that others
2:08:17 then get to benefit from. But one of the talking points I have in this is the NIH spends so much
2:08:24 money on the basic science that’s required to get these drugs started. And in return, the pharmaceutical
2:08:30 companies charge us 2x, 3x the prices of other countries. We shouldn’t be getting a discount
2:08:37 because the United States taxpayer is funding some of the basic science, much of the basic science,
2:08:42 but some of the total cost of developing these drugs. But rather than we don’t get the discount,
2:08:46 we don’t even get the same prices. We get the highest prices in the world by a large measure.
2:08:51 So it comes back to this notion of you’ll hear people say things all the time like this is not
2:08:54 sustainable. Our cost of healthcare is not sustainable, blah, blah, blah. And I remember hearing
2:08:58 somebody say something once and I don’t remember who it was, but I really agreed with the point he made,
2:09:03 which was nonsense. It’s totally sustainable because we’re still doing it. I mean, it’s going
2:09:10 to be sustainable until it’s no longer sustainable. Until we default on our debt as the largest sovereign
2:09:17 default, this ridiculous system is totally sustainable. So then my question is, what will
2:09:24 it take to change this? Given the complexity of it, given all of the bad incentives, given everything that
2:09:31 you and I just said, what would it take for us to not be spending 15, 16, 17% of our GDP on healthcare
2:09:36 at a clip that’s probably increasing at 5% per year in relative growth?
2:09:43 Right. We spoke earlier about the downsides of the state having to balance the budget, and that’s that
2:09:50 it can’t make the high ROI investments that it should. The upside is that it forces the states to
2:09:57 consider trade-offs. They can spend a dollar on healthcare or a dollar on roads or a dollar on
2:10:03 education or a dollar on social services, and they have to decide where’s the highest value and they
2:10:10 look to save money. The federal government, without that constraint, at least in today’s environment,
2:10:17 doesn’t have to make that trade-off. So any proposed legislation where somebody gets harmed,
2:10:26 unless it’s only or concentrated mostly in the other party’s constituency, that will not pass
2:10:34 because no hard decisions want to get made. And so the ramification of that is enormous budget
2:10:42 deficits today and an enormous debt that has had a lot of people sounding alarms for decades.
2:10:49 Now, those alarms and those concerns about the debt and what it’s going to lead to have not come true
2:10:56 today. It doesn’t mean they’re not going to come true in the future. And I think that’s the greatest
2:11:00 concern is that the United States is not going to default on the debt. We can just print the money.
2:11:06 But what can happen is high inflation. And again, people have been talking about this for years,
2:11:12 and I don’t know if it ever comes true or not. But we in this country now have a fiscal or monetary
2:11:21 response to every problem. And the one problem you can’t solve from fiscal and monetary tools is
2:11:27 inflation. And in fact, you have to go the other way. And that’s when things get really bad is when
2:11:33 you have to be cutting fiscal spending, when you have to be increasing interest rates to try to
2:11:37 combat inflation. And so I don’t know if the inflation comes, I don’t know if it ever comes.
2:11:44 As someone who thought a lot about risk in their career, I’m very concerned about the downside,
2:11:51 should it come? We just don’t have a political environment now where tough decisions can get made.
2:11:56 And so what happens if we start seeing high inflation then forces up interest rates that
2:12:02 causes all the repercussions, negative repercussions of that? Because we have the system now so levered
2:12:08 with debt at the household level, at the business level, at cities and states, at the federal level.
2:12:13 So what would we do, John? Help me understand that. So right now we can get away with printing money
2:12:19 because the interest rate that the government pays is very low. If inflation hits and the interest
2:12:24 rate goes up, I mean, as it stands now, the United States government’s debt service is a staggering
2:12:29 number. You probably know it. I certainly don’t. I try to block numbers I really, really hate out of
2:12:34 my mind, by the way. So I think at one point I knew how much the United States paid per day in debt,
2:12:39 and I quickly buried it somewhere in, I don’t know, somewhere in my spinal cord. It’s not even in my
2:12:43 brain anymore. But at some point, as you said, if inflation hits and interest rates rise,
2:12:49 that debt service could overwhelm our GDP, yes? Yeah, it could. The debt, people argue we should
2:12:55 do more deficit spending today because interest rates are low. We can borrow for 10 years at very
2:13:01 low rates. The reality is we borrow generally short term, but even if we put all the borrowing at 10
2:13:07 years or 30 years, we never actually pay off the debt. It’s just accumulating. So as long as GDP is
2:13:14 growing faster than real inflation, it’s okay. Because on a real basis, it declines. But that’s
2:13:19 not what happens. Debt’s increasing much faster than real GDP. And so the real debt is increasing,
2:13:24 and we never pay it off. And we’re not sure whether the low interest rates are going to be around forever
2:13:31 or not. It was 2007 when interest rates were close to 5%. Just imagine that now if interest rates went
2:13:37 back to 5%, what it would do to stock prices, to businesses who are so levered, to cities and
2:13:44 states, to everybody, to households, if you raise the cost of borrowing. Historically, 5% is not
2:13:49 astronomical either. No. And we’ve certainly seen double digits. And you’ve got to go back 40 years
2:13:54 now. But we’ve seen double digit interest rates before in this country. And the decimation that would
2:14:02 take place, if that happened again, is immense. And so I always think about, I want to help the
2:14:09 world. I want to solve problems. But if the answer is just shovel more money at it, that’s not a
2:14:15 sustainable answer in my mind. So everything becomes, how do we improve the system without spending more
2:14:20 money? Or how do we improve the allocation of resources today? And that gets us back to pharma,
2:14:26 is that a dollar spent on pharma, which some portion of that goes to innovation and creates
2:14:32 incentive for innovation. Well, innovation is great. In a world of no trade-offs, there’s no problem
2:14:38 with that. And if you believe that there are no trade-offs with how we spend our resources, then
2:14:43 pharma prices are fine. In fact, double them, triple them. There’ll be more incentive for innovation
2:14:48 in that world. But that’s not the world that I believe we live in. I believe there is a trade-off in
2:14:54 that a dollar put into pharma innovation is a dollar less for everything else. It could be other
2:14:58 healthcare innovation or healthcare services that aren’t getting provided today. Or it could be in
2:15:04 education. It could be in making our prisons better so that there’s less recidivism. All these ways in
2:15:10 that somehow the pharma industry has been able to create this island. Every other industry has to fight
2:15:16 for the dollars and try to convince the state and federal government, give me an extra dollar. Here’s why.
2:15:19 And the pharma system has just been able to create this island where they don’t have to compete with
2:15:25 anybody. They got their own rules. And it’s a messed up set of rules that incentivizes the wrong thing.
2:15:30 So even within that, we’re not getting the drugs that we should be getting. We get a lot of
2:15:36 marginal oncology drugs that probably don’t provide any real benefit versus the current drugs.
2:15:41 And we’re not investing in the antibiotics. We’re not investing in vaccines because the financial
2:15:46 incentive isn’t there for lows. So we’re spending tons of money as a society and not even getting
2:15:48 good returns for it. Sorry, that’s my rant.
2:15:56 It’s very disheartening to see just how low that ROI is. I mean, I think, again, it comes back to this
2:16:03 question of where does the crack finally have to occur? I love this expression. I don’t know who
2:16:09 it’s attributed to, and I’m probably paraphrasing it, but it’s like change happens very slowly and then it
2:16:15 happens very quickly. It’s like the stonemason that is banging, banging, banging away on the stone
2:16:20 for hours and hours and hours. And to the outside world, nothing is happening. And then with one more
2:16:29 strike, it splits. And I feel like a lot of your philanthropy is like that. It is years of banging
2:16:35 away at something that seems unchangeable. And there’s a belief, there has to be a belief that
2:16:43 at some point that nth strike is going to split that rock. Is this a skill that you, because that seems
2:16:48 like the opposite of trading in some ways. Trading was in a relatively short period of time, you’re
2:16:53 going to find out if you were right or wrong. Again, you always had the advantage of being able
2:16:59 to adjust your positions in the presence of new information, but at least you had a feedback loop
2:17:05 that was relatively short. Here, your feedback loop is much longer. Does that pose a challenge for you
2:17:12 emotionally? Absolutely. And you’re right that the trading world has that instantaneous feedback about
2:17:20 whether you’re right or not. And you used to have the P&L marker up in the corner of the computer screen
2:17:27 that would tell you at every moment in time what the market was telling you about your position.
2:17:33 And a lot of these efforts that were involved in on policy change, number one, it’d take a long time.
2:17:40 And second, as you described, you don’t know if you’re making progress often, because it feels like
2:17:45 you’re just have the hammer against the wall, have the hammer against the wall, driving yourself crazy
2:17:52 and wasting money. And then all of a sudden, it happens. There’s a great book I read, it was written by
2:17:56 an advocate who was trying to get rid of the don’t ask, don’t tell policy in the military and allow
2:18:03 gays to openly serve. And this turned out to be close to a 20-year campaign for him. The first
2:18:11 decade, his wins were so small. His advances in it, it was like he was trying to get invited to give a
2:18:19 talk at a class at the military academy, was a step forward. And you could see at any given time,
2:18:25 he could have spent five years with very little visible progress and just stopped and said,
2:18:30 I’m pushing this rock. I’ve been hitting the wall. I’m not making any progress. This is a waste of my
2:18:35 time. I should be doing something else. And gone and done something else and not achieve success.
2:18:40 But he stuck with it. And the second decade, he ended up getting the policy reversed. And it led the
2:18:47 effort. And I think about that story a lot of, it’s hard to know, but during that time, like five years
2:18:53 in, are we wasting our time and this is never going to pass? Or is the wall going to crack tomorrow?
2:18:58 And you just don’t have that feedback mechanism in this work that you had in the market and the
2:19:00 complete opposites end of the spectrum.
2:19:07 And I guess that’s why the research that you do, the time that you take, the amount of deliberation that
2:19:13 goes into your philanthropy at least gives you a greater foundation of confidence. Interviewed someone by the
2:19:19 name of Rick Doblin, who’s been singularly focused on the legalization of MDMA since about 1986.
2:19:24 Again, it’s staggering to me to think 34 years he has worked on the exact same problem. And
2:19:30 I just had a call with Rick yesterday. And I guess I don’t know if I’m going to be careful what I am
2:19:35 allowed to say or not say. But I think I can say with some confidence that he is probably closer than
2:19:41 ever to achieving that goal through his organization, MAPS, the Multidisciplinary Association for
2:19:47 Psychedelic Studies. And again, I just think that people who can do what you can do, who can do what
2:19:52 Rick Doblin can do, who can do what a lot of great philanthropists can do, it’s not just writing the
2:19:58 check. That’s amazing. That is unbelievable to be able to write the check. It’s equally amazing to
2:20:03 be able to stick on a problem. Speaking of problems, there’s one problem you and I have never discussed,
2:20:09 but it seems so up your alley. I wonder if you have evaluated it and decided it’s not worth,
2:20:14 you don’t have the assets, you don’t have sort of the problem-solving asset to go after it,
2:20:18 or you think enough people are on it. But I’m very curious as to what thought you guys have given to
2:20:23 climate change. Again, given your understanding of energy, which is, you know, at least a third of
2:20:31 the problem, tell me how that’s come across your radar. Yeah, we do a little bit on climate change.
2:20:38 I think as a trader, and again, someone who thinks about risk, it’s a problem where the downside
2:20:46 possibilities are so enormous that it makes sense as a society for us to make the investments today to
2:20:53 try to decrease the probability of those downside scenarios. I don’t know what probability it is of
2:21:00 those downside scenarios that are truly catastrophic from an economic standpoint, from a life standpoint
2:21:06 that change how humans really live, but it’s greater than zero. It’s less than a hundred percent. It’s
2:21:12 somewhere in there, but the downside is so great that society needs to make that investment. So we typically
2:21:18 get drawn to the areas where I’d call them orphan areas where there’s not much focus, especially
2:21:25 philanthropic focus. Things like public pension reform or changing how elections are conducted or
2:21:32 the pharmaceutical pricing or surprise billing. Things where the day we enter it, we probably have
2:21:39 committed the most money of any other philanthropic actor in the system already. What strikes me about
2:21:46 the climate field is that there are remarkable people, there’s brilliant people who are working on this
2:21:55 today or very thoughtful philanthropists who are working on this today, who oftentimes either make
2:22:02 this their single issue or one of two or three issues that they’ll be working on. So I always think about
2:22:10 what’s our additionality into the problem. And one of them is that I think because we work with both the
2:22:16 left and the right, and we’re not a political organization, and many of those who are both the
2:22:22 researchers, the advocates, the funders in the climate space do come from the left, that I think we can try to
2:22:29 support those efforts, those organizations and politicians that are on the right, who want to start taking the
2:22:39 steps. Because this has to be a bipartisan effort to solve. It’s hard to imagine today how that happens.
2:22:47 But Republican Party is moving slowly, very slowly, but you start to see some people with real credibility
2:22:52 within the Republican Party, and there are thought highly of, start to think about there’s acknowledgement
2:23:01 that there’s a problem. There is dispute about what level of investment is merited to deal with it.
2:23:07 And I think that Democrats don’t help Republicans get there. When you put the whole Democratic platform
2:23:16 into a climate change bill, I don’t think it helps Republicans talk about the issue and be a productive
2:23:22 partner. And I think it’s going to have to be, again, it has to be bipartisan for it to be sustainable.
2:23:29 sustainable. Perhaps Democrats win the White House to perhaps Democrats win the Senate for 2021. It might
2:23:35 take down the filibuster. But what happens when that changes? And do those rules and laws stay enacted or
2:23:41 do they get repealed? And so that’s why I think all these things that we work on need to be done in a
2:23:46 bipartisan way, including the pharma. We got a bill passed in the Senate Finance Committee, Republicans,
2:23:52 Democrats come together, get this close, and we just can’t get it onto the floor. That’s where we are.
2:24:01 So, John, your kids are, I’m guessing, they probably don’t, even your oldest probably doesn’t remember
2:24:08 you being a traitor. So your kids are going to grow up and they’re going to think of mom and dad’s job is
2:24:17 philanthropy. What’s the impact that that has on them? I mean, I suspect it’s pretty profound. They see how
2:24:21 seriously their parents think about this stuff. Do they come to you with questions about the work
2:24:27 that you have? Do they have their own interests? They’re obviously not that young anymore and they’re
2:24:31 obviously very smart kids. They must be thinking about, hey, mom and dad, why aren’t you guys working
2:24:35 on this problem? Or what do you think about this problem? I mean, how does your curiosity for the
2:24:40 world trickle down to them? And how deliberate a part of that, of raising your kids is that?
2:24:46 They certainly understand kind of high principles about what we do. We’re philanthropists. They know
2:24:50 what that means. They know that we give money, trying to make the world a better place. But we do have
2:24:58 those conversations when we walk past a homeless individual who’s asking for a dollar. And my daughter
2:25:03 says, we need to give him a dollar, right? And having those conversations about, okay, do we give
2:25:10 this dollar here or do we give it to someone trying to be in a more philanthropic or more strategic way
2:25:12 to try to get at the root of the problem, right?
2:25:17 Do we give the dollar here or do we give it to the food bank down the street that hopefully he can
2:25:20 go to and get the same meal that we would want him to get or something like that?
2:25:29 Right. And it ends up being both. I think you need to teach kids about humanity, about the love of the
2:25:37 individual. So we can’t say no every time, but also have to teach him about not going to give all the
2:25:44 money away dollar by dollar to somebody on the street. We’ve thought a lot about what’s the kid’s
2:25:50 role in this going forward. And Laura and I are very much on the same page here. We don’t want their
2:25:58 lives to be defined by their parents. So we don’t want them working at the foundation. We don’t want
2:26:02 them at least when they’re in their twenties and probably in their thirties to be working at the
2:26:08 foundation. If it’s still open then we want them to go have their own life experiences, define their
2:26:14 own, create their own life. And then after they’ve done that, if they want to come join the work here,
2:26:19 that’s great. But it’s really important that they’re not part of the foundation.
2:26:26 at a young age, because there’s a downside and, and it’s whenever you have that checkbook, people
2:26:34 look at you differently and treat you differently. Your jokes are funnier and people have a sense of
2:26:42 their own best behavior around you because there’s always something that they want funded or that
2:26:47 they’re involved in and are going to come with an ask at some point. And we minimize this largely
2:26:52 because of the types of things we fund and we’ve made it very clear about what we do fund.
2:26:59 But if somebody is growing up in their teens and their twenties and is looked at by the rest of the
2:27:05 world as a checkbook first, I think that’s a very damaging way to grow up. It’s not reality. Like the
2:27:11 twenties is the time when you need to be kissing somebody else’s butt. You need to be going to get the
2:27:17 lunches for everybody else, not vice versa. You need to be trying to climb up to the organization,
2:27:21 not be gifted the checkbook on day one.
2:27:29 So what advice would you give to people who were where you were 25 years ago, which is they’re going
2:27:35 to be writing three figure checks or maybe a four figure or five figure check to an organization.
2:27:40 They’re not going to be able to set up their own foundation. They have the same tug that you have,
2:27:46 which is, Hey, whatever stage of my life I’m at, whatever my means are at, I know that giving away
2:27:51 some of my money makes the world a better place. I just want to make sure I do it as intelligently
2:27:51 as possible.
2:27:59 Yeah. In many ways, what we’re doing is not remarkable. So many people in this world or
2:28:05 especially in the United States are very generous with time, with resources relative to what they
2:28:09 have, relative to the time that they have, relative to the money that they have. So it can just be done
2:28:14 at a different scale. But I think there are some people who are much more altruistic than we are.
2:28:18 There’s people who give away 10% of their money when they’re making a hundred thousand dollars or
2:28:24 fifty thousand dollars that changes their quality of life. There’s a sacrifice, a trade-off by doing
2:28:29 that. And they still do it. And there’s a small movement called further pledge where you pledge to
2:28:36 give everything above a relatively small salary, like 30,000, maybe up to 50,000 to charity. And knowing
2:28:43 that that dollar you’re giving is creating more total good than you spending it. And that’s huge.
2:28:50 And I think we, as a society, benefit when our community around us is stronger. And that’s why
2:28:55 people do it. Whenever we have the needs of our family, whenever our family is secure,
2:29:02 then I think it’s natural, it’s human nature to start thinking about your community and however you
2:29:09 define your community, whether it’s your group of friends, your city, your country, might be shared
2:29:15 experiences. But everybody kind of goes through that process of defining his or her own community and then
2:29:21 uses the resources of time and money to try to help that community to the best extent they have.
2:29:27 There’s no right answer in how you define your community. There’s no right answer as to how you
2:29:33 improve your community. But it is remarkable, just this culture of giving and philanthropy that exists in
2:29:37 this nation. I think largely because we are a wealthy nation, right? More people are more secure
2:29:46 here. People have more likely to have the needs of their family set aside or in line of sight. And so
2:29:51 they’re able to do these things. And that’s one of the reasons that make this country so great. I don’t
2:29:52 know if I answered your question.
2:29:57 No, you really did actually. I mean, certainly what I took away from that was you pointed out
2:30:00 something that I think doesn’t get enough appreciation, which is you’re absolutely right
2:30:05 for you to give away $400 million a year is less. I mean, I’m not minimizing that at all,
2:30:11 but you’re right. It’s less of a sacrifice than someone who makes $50,000 a year giving away $5,000.
2:30:16 The incremental $5,000 to someone making $50,000 is staggering if you’re trying to raise a family or do
2:30:22 anything else. And the other thing I took away was this idea of giving locally. I think the way you
2:30:28 define locally is very important. It doesn’t mean necessarily if I live in this city, I only give to
2:30:34 this city. I can broaden my definition of local. Local could mean I’m a veteran and therefore my
2:30:41 giving back to veterans affairs or other vets is what I define my community as. I think that’s an
2:30:43 elegant way to think about it. I think the other thing that comes with that is frankly,
2:30:48 giving to your community means you can probably make a more informed gift. You have a better sense
2:30:51 of potentially what the needs are of your own community. Absolutely.
2:30:56 John, I’m going to be honest with you, man. We’ve been talking here for like over two and a half
2:31:00 hours. I took a bunch of notes before we spoke. We haven’t got through half what I want to talk about,
2:31:06 but I also can’t keep one of the world’s busiest philanthropists wasting any more of his time
2:31:11 talking with me. So I’m going to honor my commitment to you to keep this relatively short,
2:31:16 not make it a seven hour discussion. I’m going to let you go. We might have to do a part two at some
2:31:21 point, but I want to thank you very much for first and foremost, just set aside the time today,
2:31:27 but more importantly, just for the work that you do. I know personally how seriously you take this work
2:31:33 and the world is definitely a better place for having the best natural gas trader of all time,
2:31:34 no longer trading natural gas.
2:31:38 Well, thank you. It’s been a fun experience. Looking forward to part two.
2:32:07 Hey guys, this is Tim again. Just one more thing before you take off. And that is five bullet Friday. Would you enjoy getting a short email from me every Friday that provides a little fun before the weekend? Between one and a half and two million people subscribe to my free newsletter, my super short newsletter called five bullet Friday, easy to sign up, easy to cancel. It is basically a half page that I send out every Friday to share the coolest things I’ve found or discovered.
2:32:37 Or have started exploring over that week. It’s kind of like my diary of cool things. It often includes articles I’m reading, books I’m reading, albums, perhaps gadgets, gizmos, all sorts of tech tricks and so on that get sent to me by my friends, including a lot of podcast guests. And these strange esoteric things end up in my field. And then I test them and then I share them with you. So if that sounds fun, again, it’s very short, a little tiny bite of goodness before you head off for the weekend.
2:32:49 Something to think about. If you’d like to try it out, just go to Tim dot blog slash Friday, type that into your browser, Tim dot blog slash Friday, drop in your email and you’ll get the very next one. Thanks for listening.
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2:34:47 I don’t know about you guys, but I have seen a lot of crazy stuff in the last few weeks. I saw an AI generated video. It looks like a video of an otter on a flight, tapping away on a keyboard, having a stewardess ask him if you would like a drink. And it goes on from there. And this was generated with AI and it looks photorealistic, basically. I mean, it would have cost hundreds of thousands, millions of dollars to do in the past, taken forever. And now it’s boom, snap of the fingers. It’s crazy.
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In this special episode, my friend—and fan-favorite guest—Dr. Peter Attia takes the mic as guest host. Peter sits down with legendary trader John Arnold, widely considered the greatest energy trader of all time. Today, through his foundation Arnold Ventures, John applies the same rigorous thinking to some of America’s toughest social challenges—criminal justice reform, healthcare policy, and K–12 education, to name just a few. This interview originally aired on Peter’s excellent podcast The Drive. You can check it out at PeterAttiaMD.com, or subscribe to The Drive wherever you get your podcasts.
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Timestamps:
[00:00:00] Start.
[00:05:37] Peter Attia’s intro: who is John Arnold?
[00:08:38] John’s background, upbringing, and early entrepreneurial tendencies.
[00:21:16] John’s time and rise at Enron.
[00:33:40] Characteristics that made John an exceptional natural gas trader and how they translate to his philanthropic work.
[00:41:10] The collapse of Enron.
[00:46:46] The success of John’s hedge fund, and his early interest in philanthropy.
[01:02:03] The infamous 2006 trade that brought down Amaranth Advisors.
[01:08:28] John’s analytical prowess and emphasis on fundamentals.
[01:15:13] The decision to become a full-time philanthropist and the founding of Arnold Ventures.
[01:25:03] Education — John’s quest to fundamentally change K-12 education.
[01:30:36] Strategic philanthropy — preventing problems by attacking root causes and creating structural change.
[01:37:50] The criminal justice system — structural changes needed to address mass incarceration, policing practices, and recidivism.
[01:55:07] Re-imagining prisons to reduce recidivism.
[02:02:27] US health care policy — John’s focus on drug prices, and the severe consequences of not making system changes.
[02:20:00] Climate change — the bipartisan role of John’s foundation.
[02:23:52] Advice for young adults interested in philanthropy.
[02:30:52] Parting thoughts.
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