The Dreamer Who Lost His Dream

Peter Peterson, the former camera maker Bell & Howell CEO, former commerce secretary, former chairman of Lehman Brothers, and founder of private equity giant Blackstone, wrote a book: The Education of An American Dreamer.

I've read several biographies of "successful" people. Have to say, this one is making the reading experience pretty boring. The so-called successful people seem to be a bunch of self-righteous and uncreative individuals – at least the ones I've read. They were never wrong. They were never selfish or greedy – others were. Even if they committed mistake, it's because they were naive and too trusting. How about some true-to-nature biographies like Jean-Jacques Rousseau's Confessions?

Just one example of this book's self-righteousness. When describing the fight between Lew Glucksman and himself, Mr. Peterson described how greedy and adamant Glucksman was in the fight, but never acknowledged that the fight represents a deeper cultural divide between the bankers and the traders at the firm. Traders, despite pulling in the majority of the firm's profit (we learned these profits were illusionary soon enough), were distributed smaller share of the firm's bonuses. Bankers' importance in the form's bottom line has declined significantly, but was not reflected in how bonuses were divided. Mr. Peterson wrote the episode as if it's a fight between the good (himself of course) and the evil.

Another example: when defending himself in Blackstone's IPO in 2007, Mr. Peterson says he didn't see the market's peak at all. You have to wonder, for someone who consistently make the right call on market directions and opportunities, how come he would not do the same this time? We are not asking him to confess that he intentional cashed out his investment at shareholders' expense, but to say that he did not know that them market is frothy and overleveraged is just plainly annoying.

Some more of these kind of biographies will force me to designate this category of books as unreadible. I already seriously doubt whether the kind of success – being CEO of a big company or being "the big shot" – is meaningful. If such success produces hypocrites, maybe it's worthwhile to stay real and be a failure.

Excerpts:

Page 288: Blackstone's $500 million purchase of 51 percent of Transtar, our name for the new spun-off company, was announced in the financial  press on June 21, 1988.

The structure of the Transtar deal bears looking at. It helps explain what is a mystery to many and a reason to criticize for some. The uestion is how private equity firms liks Blackstone make money. Critics say,"you don't make anything. Why shoud you be so highly paid?" But we do make something. We make opportunities for businesses to grow and change, which creates more opportunities all up and down the line. At the same time,, I would certainly admit some investments are far more difficult than others. Transtar was not one of them.

Here's how it worked in the case of Transtar, which turned out to be an extradinary investment, made possible  by the characteristics of Transtar as a company and the benign financial conditions that existed during our period of ownership.

Its cash flows were solid and steady, owing to many long-term contracts. The equipment was relatively new and well maintained so that little new capital would be required, and depreciation was high. All this made it possible to buy Transtar in a highly leveraged deal, meaning much of the purchase price was borrowed, 95 percent, in fact. And because we were willing to be flexible and creative about overseeing and operating the new company, we got it at an excellent price.

The equity put into the deal totaled only $25 million, or 5 percent of the purchase price. Of that, 51 percent was Blackstone's – $13,421,000. The remaining 49 percent investment came from USX. With the solid cash flows, large in relation to the business, we were able to benefit from a virtually assured ad steady flow of divident payments as well as recapitalizations and other realized proceeds while at the same time paying off the loans.

…in 1999, twelve years after the original purchase, when we sold the part of the business that we had retained, we realized proceeds totaling $344,601,000 and our annual return on our investment was a stunning 129.9 percent, or 26 tiimes our original investment. Blackstone's carried interest gains, as they are termed, amounted to something over $60 million.