Bill Cohan on Leon Black: From Drexel to Apollo, and Could Athene Trigger the Next Financial Crisis?

[Jonathan Boyar] (0:04 - 1:11)

Important disclosures and disclaimers applied to this episode. Please listen to the end of the episode for the full disclaimer. Bill Cohan is one of my favorite business writers.

He was on the show a few years ago to talk about his book on GE. So when I saw he had a new one on Apollo, I asked him back. Money to Burn covers a lot.

Leon Black, The Big Deals, and of course, Jeffrey Epstein. What grabbed me, though, was the origin story. Apollo was born from the ashes of Drexel Burnham and one of Leon's early wins.

The one that put him and Apollo on the map was buying at a steep discount, bonds Drexel had sold at par. He knew what was in that portfolio better than anyone bidding against him. That edge was the first big step in building one of the largest private equity firms in the world.

We also get into what could go wrong at Apollo and whether it could be at the center of the next financial crisis. Here's my conversation with Bill Cohan. Bill, welcome back to the show.

 

[Bill Cohan] (1:12 - 1:16)

Jonathan, thank you for having me again. Always nice to be here with you.

 

[Jonathan Boyar] (1:16 - 1:53)

I enjoyed the book. Anyone who loves the history of Wall Street, especially the 1980s, 1990s part will really enjoy the book. So I recommend it to all the listeners.

And I just wanted to start how you opened it because you did it in an extremely dramatic fashion where Leon Black's father, Eli, broke a window in the Pan Am building, which was an extremely famous building in Midtown Manhattan on the 44th floor and then jumped out and committed suicide. Why did you start there?

 

[Bill Cohan] (1:54 - 5:43)

Well, I'm a narrative nonfiction writer and I have an eye for the dramatic and want to make sure that people enjoy what they're reading and want to read the book. So part of it was to compel people forward into the story. Part of it was also, could there be anything more dramatic or more important in a young person's life than one of their parents committing suicide in not only a very astounding and unbelievable fashion.

Then it was front page news because Leon's father was an important CEO of a conglomerate company in the 70s. It was called United Brands. Just a little background, Leon comes from 10 generations of Orthodox rabbis, which is incredible enough.

His father was also an Orthodox rabbi and had actually been an Orthodox rabbi in Woodmere in Long Island for three years, actually lived there and practiced there and at some point decided that he didn't want to do that anymore and wanted to be a businessman. So he went to Columbia Business School where I had also gone. So that was a point of interest to me.

Then went from there to Wall Street, as did I. He went to Lehman Brothers, was asked to cover a bunch of accounts at Lehman that basically nobody else wanted to cover. He did that for a while and then went to work for one of his clients, became head of one of his clients portfolio companies.

This company called American Seal-Kap, which made the paper cap on top of milk bottles, which Jonathan, you're too young to remember, but milk used to be delivered to people's door steps and glass bottles, which is an incredible thing to think about. That used to happen, there used to be a guy in the milk man used to come around. That's not a joke.

One of the companies that he bought was some company called United Fruit, which owned Chiquita Bananas, which are the largest importer of bananas to this country. We don't grow bananas here and they're imported from Central and South America. So he had created this big, not like GE or ITT big, but big enough conglomerate was viewed as somebody who, believe it or not, I mean, this guy who goes from being an orthodox rabbi to being viewed as somebody who could be like a raider, corporate raider, did a few hostile deals as well until he got his prey.

With your tough guy? Obviously, I didn't ever meet him. I think he was generally regarded as kind of a very savvy businessman like Leon and like Leon, if he sets his site on something, he's going to get it.

He didn't win everything that he went after, but basically got most of what he went after. And a lot of them were competitive situations like United Fruit was a competitive situation and he also took clever M&A steps to win the day. So he was a pretty well respected businessman.

Then he got caught up in scandal, which obviously he felt we don't have to have a spoiler alert, but it's an amazing story and involves tariffs, believe it or not. And I think felt humiliated and shame through his briefcase, through the double pane or triple pane windows at the Pan Am building and somehow broke the window and jumped out onto Park Avenue. And that was front page news.

And at that time, Leon was in his second year at Harvard Business School. So you can imagine that that would have impact on the family.

 

[Jonathan Boyar] (5:43 - 6:03)

You said that you wanted to have some flair for the dramatic. You certainly achieved that in that way. It certainly hooked us in.

And just to go to Leon, he started his career at a firm called Drexel Burnham. For the younger listeners out there, can you very briefly kind of explain what is Drexel? What was Drexel?

 

[Bill Cohan] (6:04 - 9:03)

Now, I'm getting freaked out that there might be people who don't know what Drexel is, but OK, let's assume that. First of all, he didn't want to be a banker. He didn't want to go to Wall Street.

He was a philosophy major at Dartmouth. And he only went to business school because his father kind of insisted on it in the same way that my father insisted that I go to business school. So I found another parallel there.

But when his father died, his mother was an artist, his sister was a teacher. So he realized that if they were going to maintain any sort of lifestyle like they had been enjoying, like life on Park Avenue and a weekend house in Westchester that was Leon, who was going to have to be the breadwinner. And he decided to do that.

He needed to go to Wall Street, tried to go to Lehman Brothers, couldn't get a job there to his disappointment. What was the reason? What did they tell him?

His father had worked at Lehman. So of course, he knew people there and he wanted to go to Lehman. And he had worked at Goldman between his first and second year at Harvard Business School.

So it wasn't crazy. And his father knew Gus Levy, who was senior partner at Goldman. He got offered a job at Goldman and for some reason turned it down, which I'm not sure I quite understand, but he wanted to go to Lehman.

He had like four rounds of interviews and he thought he was going to get a job there. And then they turned him down and he like insisted on knowing why and first the partner Steve Fenster gave him some sort of BS answer. And then he basically insisted, no, I got to know because I'm now in the fetal position because I didn't get this job that I thought I was going to get and my father worked there.

And he said, well, basically, we don't think you're smart enough and we don't think you have the personality and what it takes to be an investment banker. He was wrong. He was very wrong.

Yes, very, very, very wrong. And instead he went to Drexel, teamed up with Mike Milken, who basically created the junk bond market and put the fear of God into corporations all over the country. Leon became a partner in four years, the fastest that ever happened and rose up to be head of M&A at Drexel.

He had a meteoric career at Drexel and then, of course, Milken got into legal trouble, pled guilty to securities fraud, spent 22 months in prison, left the firm. The firm tried to carry on without him, but like many a Wall Street firm that gets into trouble. It's a confidence game, confidence in Drexel was lost because of the whole Milken scandal.

They financed themselves in the short term financing markets and the financing dried up. And Drexel filed for bankruptcy and was liquidated in 1990, February 1990. And that's when Leon found himself and his colleagues out of a job.

That's when Leon took what he perceived as the best and the brightest from Drexel. That he could corral and they started Apollo.

 

[Jonathan Boyar] (9:04 - 9:18)

And just to take a step back, you were talking about his meteoric rise at Drexel. I mean, he did things like he created the highly confident letter, which sounds like BS. But I don't think it's an exaggeration to say it changed the course of Wall Street.

 

[Bill Cohan] (9:18 - 10:38)

The huge innovation that, of course, Leon piggybacked on with the highly confident letter was Milken and his high yield financing machine. So basically the idea behind the highly confident letter, which was smoke and mirrors, but it was highly effective, was like if some corporate raider like Carl Icahn or whatever, Asher Edelman wanted to buy a company that pretty much they couldn't afford. I mean, they didn't have the capital to buy.

They went after big companies. I mean, this raider era, which sort of is faded into the woodwork at this point. But Leon working with Milken would produce what they called this highly confident letter, which would basically say, okay, Carl, we are highly confident that we can raise the financing for this buyout that you want to do that force the board of directors of the company that was the target to take it seriously because they couldn't say, oh, you don't have the financing for this because Drexel and Milken was like a financing machine at that point. If they said they were going to raise the capital for a company or a raider, they most of the time were able to do it. So even though there were no teeth.

But it wasn't a guarantee. It was no guarantee, but it was a recognition by the market that Drexel had the power and the financing prowess to get it done.

 

[Jonathan Boyar] (10:38 - 10:43)

And people like Carl Icahn and Bennett LeBow, they paid real money for this.

 

[Bill Cohan] (10:44 - 13:02)

They paid real money for those letters. And that was another source of fee income for Drexel. You know, it was very lucrative, even though Drexel really wasn't committing to anything.

Good work. Well, if you can get it. Good work.

If you can get it, again, it's a part of the Wall Street Historical Archives at this point. Nobody really does that anymore. Did Milken sit down with you for the book?

I had incredible cooperation from all the folks at Apollo, including on the record conversations with Leon and Josh Harris and Marc Rowan and others of their colleagues. And pretty much anybody I wanted was very kind to talk to me, except for Mike Milken. Why?

Mike is very selective. I mean, doesn't really talk to many journalists. Everything has to be on his terms, of course.

And he's not particularly generous with his time or availability. I think what he does not like about me is because back when he turned 70, and you know, I'm not sure how old he is now, maybe something like 10 years ago or so, I wrote a cover story for Institutional Investor magazine about him and about sort of his legacy and what he had accomplished, giving him full credit for the genius behind the creation of the high yield market, the junk bond market, but also, you know, having the audacity, Jonathan, to mention that he pled guilty to securities fraud and crimes and spent 22 months in prison. So that put me on his shit list. Fair and balanced, although I hate that because that's Fox kind of thing, but completely accurate, but that put me on his shit list.

He's written sort of a quasi memoir that was useful. I think he's actually working on another one. One thing that I found interesting that I mentioned in the book was trying to find the Milken indictment, which should be available readily of all things on the internet because, you know, such a sort of momentous event in the history of Wall Street when Milken got indicted.

It's like a hundred page document. Anyway, you go to try to find that on the internet and you can't find it, which I thought was fascinating. So I ended up having to pay for the Southern District of New York to go through their archives and pull out the indictment and make a copy of it and send it to me.

 

[Jonathan Boyar] (13:02 - 13:07)

Do you know how he was able to scrub the internet for that? I mean, it's a scene someone can post it on a website.

 

[Bill Cohan] (13:08 - 13:28)

Some people are able to scrub things off the internet. I think if you have enough connections and enough power and enough money, that's one thing you can do. I would not have expected that Mike Milken would have been able to scrub his indictment off the internet.

But maybe your listeners can see if they can find it. I couldn't without going to the Southern District of New York.

 

[Jonathan Boyar] (13:29 - 13:37)

One of the things I was thinking about with the book, what happened if Drexel didn't fail? What would Wall Street look like today?

 

[Bill Cohan] (13:37 - 14:25)

What was already happening? First, originally the Wall Street establishment, the Blue Bloods, didn't take what Drexel was doing seriously. What is this insurgent firm doing?

What are they financing all these companies that have poor credit or less than stellar credit or these emerging industries like, say, cable television, cellular, phones, casinos? Of course, business is now that we can't do without and take for granted. But he was financing all of these businesses, lots and lots and lots of businesses.

He wanted like 100% market share in this activity and he ended up with like 80% market share. So don't forget, he got paid what, $550 million in 1987.

 

[Jonathan Boyar] (14:25 - 14:26)

There's a lot of money then.

 

[Bill Cohan] (14:27 - 16:57)

It's a lot of money for an investment banker to get paid under any circumstances ever, either back then or now. Obviously, for hedge fund managers, standard or private equity mogul. But back then for an investment banker to haul out that kind of money.

And that made sense because that was his arrangement. Even he was probably generating most of the profits, if not all, for Drexel at that point. And he was getting 30% of what he brought in or more now just blew people away.

So it was incredibly lucrative. It was incredibly powerful. They had huge market share.

And then slowly but surely the rest of Wall Street said, huh, I guess we should like, hmm, maybe take this high yield junk bond thing more seriously. And then of course, deconstructed what he was doing and replicated it and started competing with him and taking market share. I think if he hadn't overstepped his bounds, which, you know, I guess he couldn't resist for whatever reason, even though he swore up and down, he hadn't done anything wrong.

But then he ended up pleading guilty. I'm sure he would say, oh, I had no choice. I couldn't go through a trial.

You know, that's too much brain damage and who knows what a jury would have said. So I took the safer bet as many people often do. And he saved his brother from prosecution.

And so Drexel was really a powerhouse. So if he hadn't done that and it somehow survived 2008, which it may not have, because it probably would have been making the mistake of borrowing short and lending long, financing itself in the short term financing markets. So if it had survived 2008, could have been like the Bear Stearns.

Could have been the first one to go or could it have been Goldman Sachs? I mean, the talent that was there, the talent was there. To Goldman's credit, not only had the talent, but I think they also understood the risks of financing in the short term market and avoided that by and large.

The tsunami could have hit them too, because it was coming after everybody. But Drexel probably wouldn't have been financing itself in the long term debt markets. It probably would have thought, oh, we can make more money by borrowing short term.

And it would have made itself vulnerable to quote unquote a run on the bank as Bear Stearns did and Lehman did and Merrill did and Morgan Stanley pretty much almost did. I actually suspect, and this is interesting that Drexel, if it had made it to 2008, would have probably been the first one to go down the tubes instead of Bear.

 

[Jonathan Boyar] (16:57 - 17:14)

Just moving from after Drexel goes down, Leon leaves right before it goes bankrupt. He fights hard to get, I think a $16 million bonus, which he later says he regrets. I kind of doubt that.

And then what did he do next?

 

[Bill Cohan] (17:15 - 19:09)

So then he thought this fascinating opportunity. Again, to his credit, he thought, I'll start my own firm. I'll recruit my favorite people and the most talented M&A people or whatever from Drexel, including his brother-in-law, Tony Ressler, who's gone on to start Ares, which is now a competitor to Apollo.

They moved into a Park Avenue office of Bennett LeBow, who had been one of Leon's clients, who was like a big cigarette mogul, financed by Drexel, and I'm like, okay, what do we do now? They were M&A guys. At that point in February 1990, there was between the failure of the United Airlines management buyout, which was in the fall of 1989, and then the liquidation of Drexel.

Basically, the credit markets had dried up, and there wasn't a whole lot of M&A work. I was at Lazard then. I was doing restructuring work.

So there was a lot of distressed investing. There was a lot of restructuring work, a lot of bankruptcy work. I don't think Leon really knew how to do that from an M&A point of view that specialized talent, but he thought, okay, well, this is a good opportunity, a good moment to be investing in distressed debt and seeing what happens.

But that required other people's capital to do that. I mean, he had some money, obviously, but not enough to dent the distressed debt markets in any meaningful way. It turned out that at the same time that that thought process was going on, he got a call from an executive at Crédit Lyonnais in New York, the French bank, who called Leon like six times, wanting to suggest an idea to him, and Leon didn't call him back until the sixth time, which is I find amusing.

The call was about this group of ex-Drexel M&A guys. Did they want to be the M&A arm of Crédit Lyonnais in North America?

 

[Jonathan Boyar] (19:10 - 19:21)

The guy who made the call ended up having a fascinating history. I can't pronounce his name. You're a Francophile.

You could do that for the audience. But what ended up happening to him?

 

[Bill Cohan] (19:21 - 19:43)

After he basically connected Leon and Apollo to Crédit Lyonnais, which he did do successfully, VillehuchetV.E.E. or whatever, much better than I could do. He got caught up in the whole Madoff scandal. He was like part of a feeder fund to Madoff, and he committed suicide too.

 

[Jonathan Boyar] (19:44 - 19:48)

So he calls Leon six times, he finally decides to return his phone call.

 

[Bill Cohan] (19:49 - 21:43)

And he suggests becoming the M&A arm of Crédit Lyonnais in North America, and Leon says, well, okay, we could do some of that. And they did do that. And I tell an amusing story of Marc Rowan working with Air France to try to buy a small little airplane manufacturer.

But they said, no, really T.E.R.E. The real opportunity here is to invest in distressed debt and see what happens to it. Either it'll go to power or be converted to equity in these various companies. And then however we do it, we can make a lot of money because a lot of these distressed debt securities are of companies that I advised or Milken financed to Drexel.

So we know these credits, we know these companies very well, and we can figure this out, we can map out what to do here, but we need capital, we need funds. And then he, John Hannan, one of his partners, headed over to Paris and basically convinced another guy, Crédit Lyonnais, to do this. And they were successful at doing this, raised 400 million, then another 400, so 800 million, they got a lot of money from Crédit Lyonnais to do this, which is crazy if you can think about it, because what was this like state owned bank of France with like gilded walls out of the gilded age with deep pockets, getting in bed with these investment bankers who had worked at this fail, investment bank, you know, these bunch of Jewish guys from New York who had worked at Drexel before it failed.

So it was like a very unusual marriage, but they basically both one of the same thing, which was to make a lot of money as quickly as possible by seizing this opportunity in the market because of the collapse of the credit markets at that time. And there was a lot of distressed debt that they could pick up at a discount.

 

[Jonathan Boyar] (21:44 - 21:51)

And you said that they had not inside information, but the inside advantage were they knew where the profits could be made compared to most other.

 

[Bill Cohan] (21:51 - 23:11)

They knew the credits because they had basically sold all that debt at par to investors and now was trading at 30 cents or 50 cents or whatever. The perfect example is what they did with Gillett Holdings, which was George Gillett's company, this mini conglomerate that Leon had advised him to put together that among other things that he owned was the Vail ski resort. In the early 1990s, Gillett Holdings fell on difficult times.

The debt traded down. Leon ends up buying the debt at a discount and converting it to equity and taking over the company that he had advised George Gillett to buy when it financed and it advised. So here's his former M&A advisor buying the debt, converting it to equity and taking over his company.

You can imagine that George Gillett was not that happy about it and he wasn't. I couldn't believe that Leon was doing that, but Leon and his partners made a fortune owning Vail, not only buying houses there and skiing there whenever they wanted, but they made a fortune owning Vail, taking it public and it's still a public company today. And they bought more ski areas and do that thing that private equity guys do, rolled up the industry and made a fortune.

And George Gillett is like, hey, what the hell just happened here? That was the same scenario that played out over and over again.

 

[Jonathan Boyar] (23:12 - 23:16)

And his first real big deal there was with a company called Executive Life, I guess.

 

[Bill Cohan] (23:17 - 26:55)

Right. So first, they were taking Crédit Lyonnais's money and where they could buying distressed debt here and there. And then their French colleagues were liking this so much or making so much money here.

This is fabulous. This unit of the bank was probably making more money than almost any other part of the bank. So then Mr. Hénin said, I believe the quotation was, we need more and more of this. So where would more and more more come from? Well, it would come from the portfolio of a distressed buyer of this debt in bulk. And that turned out to be a bunch of insurance companies that had trouble during this time period as well because of what they had invested in.

They had been one of the Executive Life, which was an insurance company in California, had been one of the big buyers of Milken's junk bonds in the 80s. So they had all this portfolio on the asset side of their balance sheet of these junk bonds that were now trading at a big discount because of the market, because of the credit crunch, because of the recession. And so this caused Executive Life to fail.

And it was taken over by the insurance commissioner of California, John Garamendi, who's now in Congress who wouldn't talk to me and executive at Crédit Lyonnais and Leon put together this proposal to buy the junk bond portfolio for 50 cents on the dollars of six billion dollar portfolio. They bought it for three billion dollars using Crédit Lyonnais's money and some of Apollo partner money, and they bought it for 50 cents on the dollar. And that's how they got more and more and together they made another fortune because there were all these credits in there, some of which the debt went from 50 cents to par as the economy improved, some of it just kept paying interest, but didn't really trade up, and some of which went down into bankruptcy, which they converted or restructuring, which they converted the debt to equity and ended up owning the company like they did with Vail. And they got a bunch of companies that way and made a fortune owning and then buying and selling those companies. I made a real fortune.

He was, I think at that time, finally put on the Forbes list, one of the richest Americans. Yeah. He was on his way.

Now, Coda to that Executive Life transaction, which of course most people don't remember, is that Garamendi insisted on selling the remnants of the insurance company along with the junk bond portfolio. Long story short, Crédit Lyonnais wanted to buy the insurance company too because they thought they could make money owning it and was going to be kind of cheap. So like they paid $3 million for the $6 billion bond portfolio and they paid $300 million for the insurance company or the drugs or the insurance company.

But the problem was that a foreign entity is not allowed to own a US insurance company, a California based insurance company. So, Crédit Lyonnais instead of eating that fact put together this sort of smoke and mirrors group of shell companies that were supposedly were the owners of the insurance company. And Garamendi signed off on that because he thought it was not Crédit Lyonnais owning it, but well, you know, a French bank couldn't own a US insurance company.

They thought somebody else was owning it and turned out many years later that it was all a sham. All the people who were involved in that sham were like indicted, including Crédit Lyonnais including the executives of Crédit Lyonnais and some of the very people that Apollo was partnered with and Crédit Lyonnais ended up paying a big fine.

 

[Jonathan Boyar] (26:56 - 27:01)

Well, it was, I think, the largest fine at that time in US history. I mean, this was big news.

 

[Bill Cohan] (27:02 - 28:17)

This was very big news and Crédit Lyonnais basically got forced by the French government to essentially be merged into Crédit Agricole, and disappear. And so now it's Crédit Agricole, so all this happened. It was a huge scandal.

There was another indictment. Again, there was no trial because they all settled because, of course, that's the thing that you do. And another example where, by the way, the indictment was sealed.

Not only it was it not made public, you can't get your hands on it, although I did quote from one institutional investor writer who got a glimpse at it. And so that was sort of interesting. You think Leon knew about this?

So that's the big question. Did Leon know about this? He had to testify before the grand jury.

He never got implicated in any of this. But did he know? He claimed he didn't know about it.

That won't be the last time he claimed he didn't know about something. And it wasn't the first either. No, look, he never got prosecuted.

He cooperated. He told me he advised against. He said to Garamendi or whatever, we can find an American buyer for the insurance company.

Let us do that. And basically Garamendi had all decided to go with the French.

 

[Jonathan Boyar] (28:18 - 28:34)

You're one of the, I guess, at this point, leading experts on Leon Black, you probably spend more time with him than any journalists out there. Yes, that is definitely true. Gut feeling, is he capable of doing this transaction and knowing it, his character?

 

[Bill Cohan] (28:35 - 29:48)

I think in that case, he was focused on what he was buying, which was the junk bond portfolio. And that was going to be a lot to sort through and figure out how to handle and manage and turn into a fortune, which he did. I think he said, okay, look, I tried to solve this for Garamendi by saying it like we would find a buyer for the insurance unit.

But hey, if my partner here over here, Crédit Lyonnais is found these French companies, a consortium to buy it and they're not part of it. They stipulated. They wrote letters to Rodgin Cohen, a Sullivan & Cromwell, who was the attorney, I think, for the insurance to stay saying, hey, look, it's not us.

We've put together this consortium of people who has nothing to do with Crédit Lyonnais. It turned out that was a big lie and that it had a lot to do with Crédit Lyonnais. It was all just a front for Crédit Lyonnais, who would put up all the money for them to buy it.

I don't know. It was all very sketchy. But Leon was not implicated in it.

I think we just have to leave it at that. What can you do?

 

[Jonathan Boyar] (29:48 - 30:25)

Through that, they learned the insurance industry very well and they ended up doing a deal with Sandy Weill, daughter. But fast forward, they started an entity called Athene, which is now, I think, the biggest part of their business. Because it's not a household name, what is Athene and how did it start?

Before we continue, if you're enjoying this conversation, I'd encourage you to subscribe to our substack at BoyerResearch.substack.com. That's where we share some of our research, all of our interviews, and our thoughts on investing. Now back to the conversation.

 

[Bill Cohan] (30:26 - 30:28)

Marc, of course, worked at Drexel.

 

[Jonathan Boyar] (30:28 - 30:29)

We're talking about Marc Rowan.

 

[Bill Cohan] (30:30 - 35:31)

Marc Rowan, yeah. The quote unquote co-founder of Apollo. Quote unquote co-founder of Apollo, but it was really Leon was the founder and Marc at that time was an associate.

But over time, for various reasons that I describe in the book, he was allowed to call himself a co-founder along with Josh Harris and Leon, when they went public, had given them 58 million shares each, made them billionaires many times over. Probably the most generous gift that has ever been made to anybody on Wall Street was the gift of shares that Leon gave to both Josh and Marc, making them both instant billionaires, and they're both worth over $10 billion. Each now, Leon's worth $18 billion still the largest shareholder in Apollo.

So Marc worked for Milken at various points in time, worked on the Executive Life deal, spending all this time in LA doing that, then conceived of hiring Sandy Weill's daughter, Jessica Bibliowicz, to create national financial partners, which was an insurance brokerage business that they made a lot of money on. So he was uniquely steeped in the insurance business. And of course, every hedge fund guy, private equity guy, wants permanent capital, the idea of continuing to go to investors, limited partners and raising new funds like his anathema, they have to do it because that's the way it was done.

But the Holy Grail is to be like Warren Buffett to have your insurance company and have permanent capital, blah, blah. Bill Ackman has endlessly tried to do this and created all these ways to do it. And of course, Apollo wanted to do this too, and it tried various things over the years, some of which worked out, some of which didn't.

After the 2008 financial crisis, when basically the Fed started regulating all the Wall Street banks and decided that they had to really curb their appetite for financing, providing loans, leverage loans, and riskier loans. And because of course, they believed rightly that their portfolio of mortgage-backed securities that they were using is collateral for short-term financing. In many cases, had lost value and caused the run on the bank in 2008.

And since they were depository institutes, by and large, they didn't want these banks to be doing things like that anymore. So they said, any kind of leverage loan you're going to make, you have to like get off your balance sheet. We don't want you to make those loans anymore.

So they became a real sort of hole in the market that Marc was clever enough to exploit, did Apollo, and then others followed his lead, just like when Milken created the junk bond market, others on Wall Street followed his lead. And in 2008, he was approached by a guy named Jim Belardi, who used to work at SunAmerica to create a new annuity company, a company that provided annuities for people's retirement, an insurance company that provided annuities called Athene. He was looking to raise capital on Wall Street and went to these private equity firms.

And a few of them bit like Kelso and Goldman Sachs and Warburg Pincus, I think, but Marc and Apollo won the day. Marc also decided that he didn't want the, Belardi was looking for a paltry sum at that time, $16 million, which is, of course, not paltry, but to private equity guys, it's paltry. And Marc decided that this should be an Apollo investment, not an Apollo fund investment.

And that's significant. That's hugely significant because it wasn't like something that was owned by the limited partners of a fund. It was something that was now owned by Apollo itself.

So Marc saw this as a business that could grow and scale and become big. And he was ready to nurture it and provide more capital to it so it could grow. And so over time, he found ways to provide more capital to Belardi.

They grew the business organically. They grew it through big M&A transactions and created Athene, which became the largest provider of pension annuities in the world, pretty much. Well, they took it public.

They took the proceeds. They made a lot of money from taking it public. Over time, I think Marc had this idea that he wanted to buy it back and wanted to be the permanent capital solution for Apollo.

Finally, when he eventually became the CEO of the company in March of 2021, immediately bought what they didn't already own of Athene back for $11 billion and made it essentially the permanent capital source of permanent capital for Apollo, which then Marc used to essentially create what we now call the private credit industry.

 

[Jonathan Boyar] (35:32 - 35:50)

To just to clarify, generally, an insurance company will farm out money to various money managers to invest their balance sheet. Marc decides, okay, I want to buy the insurance company and then solely invest 100% of whatever is there. Is that basically what he did?

 

[Bill Cohan] (35:51 - 43:23)

Yeah. So this company was in the business of selling people annuities. You give us your life savings, $250,000 a million instead of putting it in a bank, which will pay you like one basis point a year on my checking account at JP Morgan, two basis points on my savings.

That is ridiculous. That's free. That's zero.

That might as well be zero, but they're doing by ours to make it zero, so they make it two basis points. Too many people are doing that. They don't need to do that.

They don't need as much liquidity as they think they need. So why don't you give it to Athene and we'll tie it up for seven years or 10 years. We'll give you 5% or 6% a year on your money.

So then they take that money that they owe these people retirees annuitants or 6% a year on their money and we'll take that and we will invest it in things that yield more than what we owe you. That's what banks do all the time, of course. And so Apollo is no different than that, but they owe these annuitants more than one or two basis points.

They owe them 500 basis points or 600 basis points, 6%. So they have to get more than that or else they're going to be underwater. So this is where Marc said, okay, I can do that by investing primarily in the senior secure debt of these companies.

I can sort of do what Milken kind of did with the high yield market, but own the asset as opposed to selling it to other people. Apollo now has this huge arm of the company that originates credit like a bank with all sorts of companies and competes to do that. And even partners with banks who will generate the asset through their relationship with a company, they'll generate the loan and then they'll sell it or syndicate it to Apollo.

And Apollo doesn't care about the relationship with the company. Apollo only cares about owning the asset, the loan that will generate 10% interest income a year. So they've created this huge portfolio, $850 billion portfolio out of their trillion dollars of assets under management, which is this private credit, most of which Marc says is in senior secure debt.

So it's theoretically the safest part of the capital structure and it generates whatever 9, 10, 11% interest a year. But so were mortgage backed securities. They were the safest part of the capital structure.

That's right, Jonathan. That's why, you know, to some extent, some people, including me to a certain extent, think that this is deja vu all over again. But the difference here there, and there's an important difference here.

When Merrill Lynch or Bear Stearns or Lehman Brothers was creating these mortgage backed securities that were sort of AAA rated, remember that, and they're part of the senior secured part of the capital structure, they were financing against those assets in various short term financing markets to generate the liquidity in the capital they needed to run those firms. And so they were borrowing short and lending long, which is, of course, the recipe for disaster in a fractional banking system, because it's a confidence game if people lose their confidence in an institution as they did in Bear Stearns and in Lehman, they do a run on the bank and the liabilities are short term, but the assets are long term. So you can't liquidate the assets fast enough to meet the run on the liabilities, except to the big discount, which is exactly what happened at Silicon Valley Bank, even though Silicon Valley Bank was invested its assets in treasuries, long dated treasuries, which you thought would have been safe.

So Marc's solution to this is an innovation of sorts, although it's not like brain surgery, but to actually construct the portfolio is not that easy of matching the duration of the assets and the liabilities. So the liabilities are also long term, remember those are those seven to 10 year annuities that basically people's money is tied up for seven to 10 years, they can't just go to the ATM machine and get out their annuity, their principal amount of their annuity if they're freaking out. They can get their money back though with a penalty, but they can get the money back if they want with a penalty for breaking the contract in effect, and there are probably tax consequences too.

So it's kind of a bit of a double whammy, but if you're concerned enough about what's going on, you will do that. So in effect Apollo, on the one hand, they say, well, we've matched the duration on the assets and the liabilities, you're not going to have a run on the bank, you're going to maybe have a walk on the bank or whatever, but it's not unlike a bank in that they owe people this money, just like the bank owes depositors their money back for sure. They sort of constructed like, oh, this is an insurance company and a private equity or an alternative asset management firm, but in effect, it's not that much different than a bank.

There are penalties though for breaking the annuity contract. You'd have to take a discount on your principal amount and probably have tax consequences. But if enough people freak out about whether they think Apollo is going to be able to pay what they owe because there's hiccups in their asset portfolio with an asset portfolio of bonds or loans, you don't have a whole lot of margin for error.

It's not like in a private equity portfolio, like you can invest in 10 companies and if eight of them go belly up, but two of them are home runs. That covers all the problems because you've got equity upside. There's no equity upside on a loan portfolio.

Either you get the 10% coupon that you're contracted for or you don't. What if Marc's wrong? Yeah, if Marc is wrong in any number of these situations, if any part of his construct is wrong, like if he turns out he wasn't that good as an underwriter of these loans, these senior secured credits, if some of these stop making interest payments or need restructuring or going to bankruptcy, he can have a little of that.

So far, it's just been a little of that. If we're in a credit crunch or credit crisis, that could become more widespread. That could become a big problem that they isn't able to generate the current cash to pay the annuitants what they want.

That's one problem that could happen on the liability side of the balance sheet. They could have a problem if people just lose confidence and like say, hey, what did I get myself into here? I don't like that anymore.

I want to go to like JP Morgan Chase because it's fortress balance sheet. So I'll take my money out of this thing and I'll pay the penalties and pay the tax or whatever, but at least I'll have my money out because if everybody freaks out about this, then who knows what could happen and I could just be a general and secured creditor of the bankrupt Apollo. That's not going to be good.

So it's all a confidence game, Jonathan. Nothing has really changed other than so far, it's working and so far, he's meeting his obligations and so far, the confidence remains and so far, we haven't had a credit crunch since 2008. Some people like me live through this enough times and Marc has to begin to suspect that we're kind of overdue for a situation here.

 

[Jonathan Boyar] (43:24 - 43:30)

So is this systemic? If this starts happening, could this be a bear Lehman type of moment?

 

[Bill Cohan] (43:30 - 44:34)

I don't think so, but confidence is contagious or lack of confidence is contagious. So clearly spread, but I mean, these are not depository institutions. They are people who've saved for their lifetimes have entrusted their savings to Athene, but they're not SIFIs, they're not systemically important financial institutions, although they could be at some point here.

They're not, they're not really depository institutions. I think Blackstone, by the way, which is also being in private credit, but as a different model, they don't have an insurance company that provides permanent capital. They just get money from investors like in a private equity fund.

Okay, here's a private credit fund. We'll do the best we can for you and we've had a good history of high returns and we're going to continue to do that for you, but we don't owe you anything. Marc owes, Athene owes these people, these annuitants, this, whatever he's promised, five or six percent a year.

And if there's a hiccup in providing that, then the whole thing is in trouble. And it's a relatively illiquid market. It's illiquid.

 

[Jonathan Boyar] (44:34 - 44:40)

Yeah. With so if prices go down, you don't know what the second and third order effects are.

 

[Bill Cohan] (44:40 - 46:45)

We don't. And other of the competitors in this field have copied Marc's model. So KKR goes with the insurance model.

And so does Brookfield asset management. And then there are other competitors, which may do similar things like Ares and Sixth Street and Golub and Blue Owl. Blue Owl has had trouble.

So how big is it number? The market for private credit of all kinds is Marc uses the number of 40 trillion. That's big.

Leveraged loans and leverage credit is like two trillion. There's all sorts of now these private credit funds that are publicly traded vehicles that have, as we know in the last year, have run into trouble because people get spooked because of some of the credits, whether they're software related or else or other things. And they want their money back from the credit fund, but they didn't read the small print.

Then you can only get 5% of your money a year or a quarter. And they wanted more than that. And Blackstone dealt with it one way, Blue Owl dealt with it another way.

Apollo deals with it a third way. So there's some cracks in that. I think one very instructive canary in the coal mine of all this was the company called Medallia, which was a Thoma Bravo, Toma private equity deal that Bravo, Thoma Bravo, whatever the hell they are, invested 5 billion of equity in and was financed by three of the principal private credit companies, Blackstone, Apollo and KKR.

So no banks, just these private credit guys. The company was turned over to its lenders, Blackstone, Apollo and KKR, a $5 billion equity check was lost. That's a big face plant for them, evidence of the new financing and private credit and how it could sometimes go wrong.

 

[Jonathan Boyar] (46:46 - 47:02)

So just shifting gears, I mean, no interview about Leon Black is complete without talking about Jeffrey Epstein. I don't want to dwell on it too much, but can you just tell me the relationship with Epstein and kind of what it caused to happen to Leon?

 

[Bill Cohan] (47:03 - 48:52)

The quick answer of what it caused was it precipitated his departure from Apollo and Marc's rise as the CEO and Josh Harris's departure from Apollo. Leon, like his father, was caught up in this scandal of Epstein and then of an affair with a woman who was not his wife, which also came to light as part of this Epstein stuff. As I said, he remains the largest shareholder, but in first six months of 2021, he's been gone now five years.

First, he agreed to step down. In March of 2021, on St. Patrick's Day, this woman he had been having an affair with, but they had stopped having an affair who he had agreed to pay $21 million over 15 years in exchange for silence and assigned NDA, decided to break the NDA and go public on Twitter with her complaints about Leon and that caused Leon to resign immediately. So in March, Marc became the CEO.

Leon left the board, then Marc bought Athene back and implemented his strategy around Athene that we were just talking about, but Leon was gone, obviously, suffered humiliation to some degree and scandal and he didn't commit suicide like his father, but he's been in sort of purgatory since then, even though he's fabulously wealthy and I'm sure still has a wonderful life to that extent. His reputation has definitely been tarnished.

 

[Jonathan Boyar] (48:53 - 49:16)

Part of the big scandal with Epstein and Black is he paid Epstein 150, 160 million, whatever it is, for tax advice that he presumably could have gotten from Paul Weiss or whatever white shoe firm out there and that's kind of the credibility. People think that there's something more there.

 

[Bill Cohan] (49:16 - 50:11)

Obviously, Leon and I spent a whole lot of time talking about this, in paying 158 million to Epstein, which is obviously by far the largest amount of money that anyone has paid to Jeffrey Epstein and couldn't have gotten this advice from much cheaper from Paul Weiss or Sullivan & Cromwell or whatever. We spent a lot of time talking about that, his answers to all that are in the book and on the record and can be found in the Dechert report that he got the Special Committee of Apollo, Board of Directors to commission and to do and he's the only one to have asked for a report to be done about his involvement with Jeffrey Epstein. No one else who has involvement with Jeffrey Epstein has asked for that.

Why do you do that, Leon? I did that because I don't think I did anything wrong and I know I didn't do anything wrong. So readers can read that for themselves and decide what they think, but there's still a huge amount of skepticism out there about Leon's explanation.

 

[Jonathan Boyar] (50:12 - 50:14)

Have there any been criminal allegations against him?

 

[Bill Cohan] (50:15 - 51:08)

There were three civil lawsuits brought by women against him, including this woman who he was having a fair with. These civil lawsuits, two of which have been thrown out completely. He won and won.

The third is probably about to be thrown out with him winning. So they're kind of like 0 for 3. I think they came after him because he's worth billions and thought go where the money is.

Go where the money is. What the hell? He's obviously tied up with Epstein.

He's obviously been known to have affairs with people who aren't his wife. So we'll go for it and they were ginned up by this law firm, Wigdor, who's reprehensible in many ways. But nevertheless, that's our system.

They're kind of 0 for 3. So Leon's prevailed.

 

[Jonathan Boyar] (51:08 - 51:30)

I'm not a big believer in coincidences. So you have Drexel. You have the Executive Life controversy.

Leon was front and center. Now you have Epstein. Does this something not add up to you?

You've been a study of human beings and journalists for a long time and naturally curious. Could there be something there?

 

[Bill Cohan] (51:31 - 53:48)

Well, I think everybody thinks there is. But what do you think? I certainly thought that I was quite incredulous of the explanation when the Dechert report came out and I wrote an article in Vanity Fair about that.

I went into speaking with Leon being incredulous about it. I mean, he's given his explanation to me. I've talked to his lawyers.

I've seen various redrafted documents that comport with what he told me happened. It does still seem hard to believe. I've read a bunch of Epstein's emails to Leon.

There's thousands of them now in the files. Leon never replied to any of them. He was smart enough not to do that.

Epstein's dead. If Ghislaine knew about any of this, she's in prison and certainly not talking as we all know. So this is what we're left with.

And I know the New York Times is trying to win a Pulitzer, trying to bring down Leon and show that Leon was involved with Epstein and his all that horrible things he did with young women. There's certainly evidence of Leon having affairs, but not with young women. There's evidence of Leon paying women for all sorts of things.

But as Leon said to me, there's a lot of people who have had affairs with women and paid them for their silence. I mean, it's not a great answer, but a lot of people are doing what I've done. Justification for your behavior is not great.

And we're kind of left with a guy who is a complicated guy. He's got probably the best art collection in private hands in the world. He is charitable, would like to give away more money, but having trouble because people don't want to take his money.

Believe it or not, I guess I can believe that. So he's sort of got in his professional life as exquisite judgment. I mean, it's like an unbelievable moneymaker has become very wealthy.

And in his personal life is kind of like a basket case. I find that frankly, there's a lot of people on Wall Street like that. Leon's got a particularly hard situation, much of which he's responsible for himself and is in this purgatory.

 

[Jonathan Boyar] (53:49 - 54:00)

Leon had obviously a fantastically successful career. And I always think about this with people, you know, what do you think is obituary? The first two paragraphs of it worried.

 

[Bill Cohan] (54:00 - 54:06)

It's got to be scandal, Jeffrey Epstein, scandal and me even make a reference to his father.

 

[Jonathan Boyar] (54:07 - 54:16)

So all of that, all of these accomplished, those first two paragraphs are going to be about his father committing suicide and his association with Epstein.

 

[Bill Cohan] (54:16 - 56:33)

If one were writing a literary obit, like sometimes the times does, I mean, he'll certainly have an obit in the times. If they did a little research, would, of course, draw a line between his father's suicide in a scandal and Leon's own scandals with Jeffrey Epstein and Guzel Ganieva. But of course, would then go on maybe the third paragraph, talk about what he created at Apollo.

You spent a lot of time with him. What would he want his obituary to say? I think part of the reason he spent time with me in being so generous with his time and on the record was to try to get some sort of Milken like resurrection, rehabilitation.

But it's harder for him because first of all, he hasn't pled guilty to any crime or been convicted of any crime. So I mean, Milken pled guilty to a crime and then used his friendship with Trump to get a pardon. Milken has also been able to resurrect his reputation by co-opting 95% of the financial media to go out to his conference every year and schmooze with him and all of his buddies.

And so they write fondly about him. And he's also, of course, been focused on finding cures for cancer, which Leon has been to, but no one realizes it. You know, his wife had melanoma and he's given more than a hundred million dollars to melanoma.

Leon, and he's got good PR people, but he needs Milken's type PR people. I mean, he can't get a pardon from Trump because he hasn't, he would be able to, I'm sure, but he hasn't committed any crime or hasn't been convicted of any crime or pled guilty to any crime. So he can't get that.

So he's like in this purgatory. I think he helps himself by participating in the book, but I also think he's not a sympathetic character, no matter whether he participates or not. And meanwhile, you got the New York Times trying to go after him at every turn and not only the New York Times, but others too, to try to, oh, there must be something there because who would pay him $158 million without it being some conspiracy or his involvement in criminal behavior that's being covered up and he was being blackmailed.

So they're busy trying to write that story and they still are.

 

[Jonathan Boyar] (56:34 - 56:51)

Well, Bill, you've been extremely generous with your time today. I really enjoy hearing about the history of Drexel hearing about how Leon and his quote unquote co-founders built up Apollo and everything in between. Thank you again for coming on to the world according to Boyar.

 

[Bill Cohan] (56:52 - 56:54)

My pleasure, Jonathan. Happy to do it.

[Disclaimer] (56:56 - 57:20)

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