#425 The Merchant Bankers

This episode discusses Joseph Wechsberg’s 1966 book, The Merchant Bankers. Rather than recounting the histories of families like the Rothschilds, Barings, Hambros, Warburgs, and Lehman Brothers, I wanted to extract the principles they shared. Merchant banking is fascinating. It's a very distinctive form of entrepreneurship. There is an old-school way of doing business that appeals to me. The merchant bankers’ profiled in this book have a combination of: personal honor speed of action clear thinking independent judgment seamless webs of deserved trust discretion and willingness to make unconventional decisions. The founder of every merchant banking dynasty was a merchant before he was merchant banker. Once they discovered financing transactions was more profitable than physically trading goods, their real products became credit, judgment, information, advice, access, and—above all—trust. Their greatest asset was not money. Their greatest asset was their reputation. Made possible by: Ramp: ⁠⁠https://ramp.com⁠⁠ Applovin: ⁠⁠https://www.applovin.com Vanta: ⁠⁠https://vanta.com/founders Add your email here and I will send you my top 10 quotes from every episode.

• 0:00Speaker 00

  In every merchant banking dynasty, there is one pioneer who began with nothing and died rich. The Rothschilds started out as coin changers in the ghetto. The Barings and Textiles, the Hambros and Foodstuffs, the Warburgs and Silver, and the Wesburgs began in grains. Grandfather arrived in town in style, sitting on top of a haycart loaded high with corn. So the author's grandfather was a merchant banker. He said people in town used to call him Albert the Benevolent because he would lend them money at 5%. I had no idea what that meant. Later, I heard that when Albert the Benevolent liked a man, he would lend him money without any collateral, taking a chance on the man's promise to pay him back. Later, grandfather switched from corn to credit in the manner of all merchant bankers,

• 0:44Speaker 00

  and opened a coin changing office. Grandfather then extended the firm into the banking house, A Wesberg and Company. The company in the name of the firm were exactly, as in the case of most merchant bankers, grandfather's sons who became his partners. One of them was my father. The bank was doing very well. When grandfather died with his perfect sense of timing in 1913, one year before the outbreak of the First World War, he was 86, and he was the richest man in town and very much loved. He owned land, mills, factories, houses, distilleries, stocks and bonds. Occasionally, a merchant banker puts his money on the wrong debtor, as you will read in this book.

• 1:27Speaker 00

  I was six, and I thought it would be nice to have such a funeral. He was not ashamed of his humble beginnings. When I asked him how he'd become a millionaire, he tapped his right temple, pointed his forefinger at me, and said, "I used my head. Don't you ever forget that, my child." I didn't. That is an excerpt from the book that I'm going to talk to you about today, which is The Merchant Bankers. It was written by Joseph Wechsberg. It was actually published in 1966. This is the second or third time I read the book. Never made an episode on it before, and I've just been fascinated by merchant bankers. And I'll explain why, as we go through the book, why I actually think there's a couple of the most interesting entrepreneurs that I've met today that I would classify as almost like a one-man merchant bank.

• 2:09Speaker 00

  But what I wanted to do this time is I bought a bunch of copies of this book. I've given them away to friends. And I was like, you know what? If I've read this book multiple times, I've given away the paperback version of this as gifts, I should do an episode on it. And the reason I didn't do an episode on it is because essentially, the book is, I don't know, seven or eight different chapters. Each chapter focuses on one of the great merchant banking families throughout history. So like the Rothschilds, the Barings, Lehman Brothers, Hambros, Warburgs. And what I realized, I spent the last two days going through all my notes and highlights, I was like, you know what? It's really confusing because there's like 50 different names in the book. What I'm actually most interested in is not the names and the years that some of these things happened, it's how they think and run their business.

• 2:52Speaker 00

  So I stripped away everything about the individual merchant banks, other than how they think and what they have in common. So I'm just going to run through the book, now deleting most of my notes and highlights, and just give you an insight into the mysterious nature of merchant banking, which I think is interesting. And I think they just, what fascinates me and what attracts me to this is they have a very old-school, gentlemanly way of conducting business that I greatly admire. So I'm just going to jump into a lot of the themes that reappear throughout, in some cases, these banking dynasties. They have 200 years of history. So it goes through multiple centuries and multiple different families and merchant bankers.

• 3:35Speaker 00

  So I want to start with the fact that merchant banks are the most interesting and least known. Merchant banks are among the most mysterious phenomena. The names of some of them are almost household words, synonymous with great wealth. But what they actually do and how they make their money is a sealed book to most people outside the merchant bank and many people inside of it. The legend of the merchant bankers immediately makes one think of international intrigue, world power, kings and dictators in need of loans, empire building or empire toppling. Every loan seats a nation or upsets a throne. Merchant banking is a very private business that cannot and perhaps should not be defined. The truth is, is that merchant bankers don't mind being the mystery men. They love it.

• 4:20Speaker 00

  They call themselves merchants, or bankers, or merchant bankers, or merchants and bankers, or they call themselves nothing. Nearly all of them started as a family business. Some did it all in one generation. Almost all merchant bankers were merchants before they came bankers. They traded with certain commodities in certain parts of the world, and later found it more profitable to leave the actual trading to others and to deal in credit instead of goods. First, they attended to their own affairs. Later, they financed the transactions of friends and clients. This is really one of the insights that they all arrived at separately, because again, they did start as merchants before they turned into merchant bankers. It is easier to sell one's signature than a bale of silk, and it was also more profitable.

• 5:03Speaker 00

  As they grew in stature, they discovered they could borrow more cheaply than could other merchants. They would guarantee a transaction by accepting the bill of exchange for which they collected a small commission. This is the very beginning of merchant banking. If things went wrong, and they did occasionally, they had to pay for the bill themselves. Such a business demanded boldness and instinct, judgment and knowledge. They dealt in goods as well as in money and news. They knew the best-kept secrets. Again, every single thing that I'm reading to will reappear through every single one of these families. Even the families, in many cases, they wind up knowing each other multiple generations, would do business together. But even before they knew each other, they all arrived at the same conclusions on how to run their business. So again, one of the most fascinating things about this book, it covers several years

• 5:46Speaker 00

  of history and several different dynasties. And I just love the idea of these traits are going to be found in every single example of the book. Of all their assets, integrity and common sense were the most important. You could define merchant banking as "a sense of commercial honor, an absolute fairness in all dealings, willingness to suffer loss if need be, rather than tarnish by one unworthy act the good name of the firm." Character was prized more than wealth. And so what I would say about that is, even if they had the opportunity to screw over one of their customers or partners, so they avoid a loss, what I admire about the way they built, all these people built their businesses, is like, they just took the longest view in the room.

• 6:27Speaker 00

  It's like, okay, I'd rather lose $100,000 on this one transaction from my mistake than messing over this person that I've known for 15 years, that I'm doing business with today, and that most likely my descendants will be doing business with the descendants of their family. It's just a very long-term view that I think, again, is exceedingly rare, not only in today's age, but in human nature in general. Confidence, absolute confidence, at first between father and son, later between brothers, and later still between partners in different countries. That line, "absolute confidence," is really important, because a lot of the businesses that they're doing, there's no paper. They actually don't like keeping records. And a lot of this is because there's like a, merchant banking, they repeat it again over and over again, that it's more of an art than a science, and they don't want to

• 7:11Speaker 00

  let people in on, they call it like the magic. I actually read this quote that appears over and over in the books, that says, "We must not let in daylight upon magic." That is still the motto. Bankers are laconic people who only say 10% of what they think. Much of what merchant bankers do is inevitably never made public. And I just love these two sentences that kind of demonstrate the previous point. The Rothschilds never let any outsider go through their archives. The Barings don't even bother to put their name on their letterhead. Before we get back into this, I want to tell you about the presenting sponsor of this podcast, Ramp. I have been reading a lot about SpaceX lately. SpaceX is one of the most valuable businesses in the world, and one of the main themes in the history of SpaceX is constantly attacking and questioning your cost.

• 7:53Speaker 00

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• 8:36Speaker 00

  I run my business on Ramp, and you should, too. Go to ramp.com today to learn how they can help your business save time, save money, and grow revenue. That is ramp.com. And so here's a story that actually gives you insight into some of what merchant bankers do. It was Friday afternoon, suddenly the phone rang. It was an urgent personal call from Norway. A prominent ship owner was on the line. He needed help at once. To be exact, he needed £200,000 within the next half hour. Most of these merchant bankers are European. He told the manager that one of his ships had undergone repairs at a big Amsterdam shipyard. A few minutes ago, he'd got a call from his captain. The Amsterdam shipyard would not release the ship unless a cash payment was made of £200,000.

• 9:18Speaker 00

  Otherwise, the ship would be tied up for the weekend, and the owner would lose at least £20,000, the cost of two days of charter and expenses for the crew, not to mention the loss of the profit. So now the merchant banker is on the phone. Says he looked at the clock and said, it's getting late, but I'll see whether I can catch anyone at a bank in Amsterdam. Stay on the phone. So he literally has the phone to his ear. Okay. Picks up a second phone. On the second phone, he dictated to his secretary in the bank, a message to the Amsterdam bank. Please pay $200,000 on behalf of this shipyard, or to the shipyard, rather, on understanding that the name of this ship will be released at once. So that's the message he's saying to his banker in Amsterdam. That the money's coming from him. Okay. This done, he put down the second receiver

• 10:03Speaker 00

  and told the Norwegian on the long distance phone to have a little patience. Within three minutes, the second phone rang. Somebody in the bank in Amsterdam confirmed that they had already telephoned to the shipyard that 200,000 pounds was at their disposal. Remember, this is happening late on a Friday afternoon, in three minutes with no paper, no contract. This is so important. So then the merchant banker says, thanks, puts down the receiver and told the Norwegian on the other phone that the payment of 200,000 dollars had been arranged in Amsterdam and that the yard would release his ship in any minute. And he wraps up the call. He's like, don't worry, glad to help you. No bother at all. Now, while he's doing this, there is a young, regular banker from Germany sitting in his office observing this, right?

• 10:46Speaker 00

  He's not familiar with merchant banking or what they were doing. And so when he hangs up the phone, the transaction is done just a few minutes, right? So now this young German bank manager is like, what the hell is going on? He said he had listened first with interest, then with wonderment, and finally with dismay. Now he seemed absolutely petrified. And he says, I could give you a half a dozen reasons why I would be immediately dismissed from my bank if I'd done what you just did. How can you be sure that you really talked to the ship owner in Norway? It's easy to imitate a voice over the phone. This is hilarious that they're saying this. Remember, these words are written in 1966. Imagine what it would be like today. How do you know he's good for the 200,000 pounds? And worst of all, you didn't even check with your superiors. And then the response, I think, gives you an insight into how merchant bankers operate, how they think,

• 11:30Speaker 00

  and again, how they're differentiated from other areas of finance. If I had waited half an hour longer, it would have been too late to arrange the credit in Amsterdam. Our client would have lost 20,000 pounds over the weekend, and we might have lost a good client. He comes to us because we can give him fast, personal service. I couldn't tell him, I'll call you back. That's exactly what the big banks would have done. It would have taken them a week. It would have processed the requests through all these channels and committee meetings. If we acted like that, we would be out of business in a couple of years. This is the most important part of the book. And what I am most interested in is the fact that the entire business runs on trust. Trust and reputation. You should see my notes in this book. One of the most interesting things Charlie Munger ever said.

• 12:14Speaker 00

  He's just like, you just never even think of it like this. It's like jarred into my memory. I remember like being shocked when I finally understood what he was saying. He said that trust is one of the greatest economic forces on earth. This is a great example of that. Merchant banker speaks to the German banker. I've known the Norwegian ship owner for years. I trust him. We have no large bureaucracy inside our bank, but a vast network outside. We know a lot about a lot of people, and we rely on the prestige of our name. People trust us. Again, the most valuable asset and one that they will never sacrifice. Go back to, remember that hearing? I think it was in front of Congress, where Buffett was testifying on behalf of Solomon Brothers when they had that huge scandal

• 12:58Speaker 00

  that's covered in like every Life Story of Buffett. And you would tell people in the firm, it's like, you can lose a little money. You cannot lose a shred of our reputation. It's the most valuable thing that we own. Buffett and Munger have this like old school way of thinking that is very much in line with, again, going back hundreds of this book that I'm holding in my hand. I'm actually pulling Kindle. Covers hundreds of years of finance. It's a very interesting, reoccurring way to think about business. I think it's very, very valuable. Now, this is also the key is like, okay, well, why is this guy sitting inside the middle of this transaction and getting paid to do this? Right? The bank that he called in Amsterdam might not trust the ship owner, the ship owner that was on the phone. The ship owner that's on the phone might not even be able to get access to the bank. Right?

• 13:43Speaker 00

  And so the difference is like, they might not trust the ship owner, but they trust us. That is the basic function of the merchant bank. And so if you think about the importance of trust and reputation, another thing that I would add to this is discretion. They keep secrets. They have access. You have no information edge, therefore you can't make money. So they have to be able to acquire secrets and then you keep them. And so it says, one has to keep a lot of useful information in one's head. And one way they do this is they spend a lot of time with the people that they work with and that they might be lending money to, never actually talking about the business of lending money or doing deals. So they give this insight into what it would be like if you go to lunch at one of the merchant banks. Some people never learn the elusive technique

• 14:26Speaker 00

  of conversation during lunch in an old merchant bank. One talks about everything except the matters one would really like to talk about, such as getting a million pounds of credit. The conversation is about farming, roses, horses, politics, families. The chairman grows roses and the deputy chairman breeds racehorses. The guest unfamiliar with these strange customs doesn't know that at all this time, he's being carefully scrutinized. The general impression that he leaves will eventually decide whether or not he's going to be backed by a million pounds and whether any other security will be demanded for the loan. This is the merchant banker's assessment, a mixture of experience and flair, analysis and instinct inherited from generations of shrewdly assessing ancestors. Merchant bankers say over and over again

• 15:08Speaker 00

  that merchant banking is not a concrete science, but an abstract art. And one thing that they repeat is that mistakes are inevitable. People have been fired for incompetence, but never for making an occasional mistake. And the reason is, they have to move fast. Again, they know that they are completely differentiated. They're not a big bank. They're not a giant corporation. We are always encouraged to make fast decisions, though it may be the wrong decision once in a while. This is a competitive, aggressive business. It is very exciting. There is no routine. Every day is different and you learn as you go along. A few pages later, they pick up on the exact same idea. There is no set pattern. We are consciously unorthodox. And then they just talk about, well, what is your business? Anything that concerns money, we attempt to cater for. Merchant banking is not taught at school and cannot be taught at school.

• 15:53Speaker 00

  Merchant banks can be no better than the people working in them. The big banks live on their deposits. We merchant bankers on our wits. And one of the most important ideas that you'll learn if you read this book is the fact that relationships run the world. So they may have a set way of doing things. Like, for example, at this point, one of the merchant banks is like, hey, we really don't want deposits less than like 10,000 pounds. But friends and their friends are always welcome. So again, there are really no, the reason the maximum relationships run the world is so interesting is because you realize that like, anything that you need to do, like there is a person that can actually make that decision where they may have policy or procedures or rules for other people that just don't apply. That's just not how humans are. Like, they bend and they'll massage and things are way more malleable than you can possibly think

• 16:38Speaker 00

  if you have a relationship with the person. It's like, okay, well, I can't get into Hambro's banking, for example, because, you know, I don't meet the minimum requirement. But that minimum requirement isn't set in stone. It's like, well, yeah, but you're friends with a guy that they've been working with for three decades. And that guy just asked the people at Hambro's a favor. Guess what? You get in there. The merchant bank offers above all, trust. A lot of the business is done with very little paperwork. However tired you get hearing that their word is their bond, the custom of verbal contracts is one of the planks of the banking system. The merchant banker's business is based on this anatomy of trust. Merchant bankers are basically trustful optimists. And again, I think this is one of the most interesting ideas that go back to the Charlie Munger thing, that trust is one of the greatest economic factors in the world.

• 17:23Speaker 00

  Also, it's simple, trust simplifies things. And they had a great way, one of the merchant bankers that's interviewed in the book has a great way to think about this. He goes, lawyers like to complicate matters. We like to simplify them. I love that line. Lawyers like to complicate matters. We like to simplify them. In fact, let me, I'm going to pull something up right now because that reminded me of something. When I had dinner with Charlie Munger, I have this like pinned note on my phone that I go back and like reread, like all the stuff that I learned that night. And one of the things, I didn't even put this together since now. It was me and two other entrepreneurs that were having dinner with Charlie. And he gave us advice. He says, don't let lawyers kill deals. So he said that him and Warren bought like this pipeline or something from Enron. And they got a call on Friday.

• 18:06Speaker 00

  They needed to send the money first thing Monday morning, right? Over the weekend. And they sent, he said that Warren wired the money without even an email. And the lawyers, if they went and consulted the lawyers, they're like, oh, you know, you could be responsible. What if this thing explodes? Or there's all these like, you know, all the liability you could be, that, you know, you could be on the hook for. And because Warren trusted the person that was bringing him the deal. He sent the money without an email and then between like bites of his food, I think like, I think he had a mouthful of food when he said this, he's like, yeah, we made a few hundred million on that deal, you know, one phone call based on this network of trust, sending a wire and a few hundred million in profit. So lawyers like to complicate matters, we like to simplify them.

• 18:51Speaker 00

  I love that. The merchant bank's most important assets, the experience of the experts inside the bank and its outside contacts don't show up on the balance sheet. What do they mean about outside contacts? They're constantly collecting information about the people around them, the people that they may be doing business with. That's why reputation is so goddamn important. We have ways of finding out more about him than the big banks. We've looked at his business, his customers, his special transactions, the monthly statements. We keep track of him. The big banks won't do this. They don't have the accumulated experience. They will turn down tempting offers that don't seem to belong to them. If somebody comes in with a promising scheme for Brazil, we tell them to go elsewhere. We don't know enough about Brazil. And then

• 19:31Speaker 00

  they consciously keep headcount and the size of the bank limited. If one, this is why, if one gets too big, one loses flexibility. There's a great line where merchant bankers describing another company that they could be doing business with, which really to me is not about that company, it's about the merchant bank. So it says, often the company is sound, but doesn't project its image effectively. Merchant bankers control and protect their image. There's a great line about this in Ben Franklin's autobiography, actually. He says, "I took care not only to be in reality industrious and frugal, but to avoid all appearances to the contrary." This mysteriousness, this secrecy, this not writing anything down, they are very, every single one of these families and every single one of these merchant banks control their image.

• 20:17Speaker 00

  They want to be very deliberate how they are perceived by other people outside of their company. The bank's special situations department likes to nurse promise. Oh, this is very interesting too, because when they said, you know, what is, what is really the business? It's like, well, anything that involves money and where we think we have an edge, where we can use our trust and reputation or discretion or contacts, then they will do. And so it's like, if you see my notes, like I just say the same notes over and over again, money and advice and trust and relationships. They'll also incubate companies, but we'll get to that in a minute. So it says, "The bank's special situations department likes to nurse promising ideas from birth to a moderate success as a private company and finally to a big success as a public company. In the past, this was done exclusively with money. Now it's done with money and advice and the advice is often more valuable than the money." And they described

• 21:01Speaker 00

  this with this metaphor, "We became marriage brokers. We arrange alchemies. This is a process of economic cross fertilization." Also interesting, they don't want control. "We take minority interests. We believe that management should be left to the managers. We try anything that generates the making of money and in the process, we sometimes lose money." Again, so if we go back to, hey, we try anything that generates the making of money. Buffett and Munger said, "We are individual opportunity driven." Merchant bankers love to reminisce about the colorful coups of their ancestors. Almost every house has a supply of fascinating stories. So I'm not a fancy person. I kind of find that repulsive. I just like to be the one doing the work, kind of keep my life as simple as possible, just like sit in a room, make podcasts. And if I do that for, you know, multiple decades, I'll get, the squirrel will take care of itself. I'll

• 21:46Speaker 00

  get everything I want out of life and it's what I happen to be obsessed with and addicted to doing. And so this is what I do. And I don't like this pomp and circumstance and all this like fancy shit. And what's fascinating is what they're saying, oh, we love to reminisce about our ancestors. So they have like all this kind of like different ways to move through society, this manners, it's like you don't, you should do X, Y, and Z, you don't do A, B, Z. And what's hilarious is, you know, that's like the third, fourth, fifth, sixth generation of these merchant bankers. The person that built the merchant bank is in many cases like doing illegal shit, but they're cutthroats. And so it goes back to this idea that they're all merchants before they were bankers. And so what my favorite description is, is like, I'm obsessed with Game of Thrones. It's, you know, if you go back and listen to all these

• 22:29Speaker 00

  episodes of Founders, you'll see me constantly reference it. Actually, it plays a huge role in my life. I've read all the books, read through the encyclopedias, the family histories. Like I kind of got obsessed with it like I do with anything that I'm interested in. This is the way I think about what they're talking about here, which is so fascinating. It's like, okay, you're the fourth, fifth generation, but who made the money? Who made your family rich? Right? How did the book start? Somebody started out with nothing and they fucking died rich. And there's, one of my favorite scenes comes towards the end of Game of Thrones. And you have, it's this conversation between Jamie Lannister and his brother, Tyrion, who come from, you know, one of the wealthiest families in Westeros. You're talking now probably, I

• 23:12Speaker 00

  don't know, eighth generation, 10th generation, I forgot, but like their family's been rich for two centuries or whatever the case is. And then if you want to go back, if you're interested in Game of Thrones and you want to know like who I think is the most entrepreneurial character, like if you could say, if they were going to write a book about a person and that person was going to be on Founders, you know, who would it be? It's this guy named Bronn. He's relatively minor character, born in, you know, Fleabottom with nothing. And if you just watch him, just watch him from the first time he appears in the early show and where he winds up eight seasons later, and you see the climb, same climb that's in all these books that's in front of me, all these books that are behind me, right? And this is what's so fascinating. It's like, you guys, you know, like, oh, we like to reminisce about them, but like we're so, you're so different from them. It's just like, yeah, but why, like,

• 23:57Speaker 00

  why was your house built? And I think the, I'll just read you the note I left on my phone. And so Jamie Lannister, basically Bronn is holding them up and he's like, hey, we're going to do a deal and I want you to give me Highgarden, which is like one of the most valuable assets in their world, right? And Jamie, who comes from a rich family, is looking at this poor upstart and he's just like, Highgarden will never belong to a cutthroat. You know, it's kind of like the way that these third, fourth, fifth, sixth generation merchant bankers are from these family dynasties may look at other people, but not realizing what their ancestors were, right? And Bronn's response was perfect. He goes, no, who were your ancestors? The ones who made your family rich? Fancy lads in silk? They were fucking

• 24:41Speaker 00

  cutthroats. That's how all the great houses started. So I'm not going to read you these stories, but in, it's in this book where, again, it's like, well, had the Rothschilds, the bearings, in many cases, they're like smuggling gold or illegally transferring materials through like blockades during wars. There's all kinds, they were cutthroats. That's how all the great houses were built is a very fascinating part of this book, I think is important to remember. Going back to this, ideas are merchant bankers' lifeblood. It goes back to the fact that they collect information, they collect trust. Again, if you think about how you collect, why is trust and reputation so important, right? If somebody

• 25:24Speaker 00

  trusts you and they, first of all, they have, you have a good reputation, then you build a relationship with them, you start to, they start to trust you. They're going to provide you information. And part of that is ideas for different opportunities, different deals you could do, different people, in their case, financing the trade of entrepreneurs. It's excessively important. They talk about the new ideas being lifeblood, the fact that they really have no assets other than the people that are in the bank, the skillset, the brains, the reputation of those people. And I also like how they structure their business. Here's a description, "The merchant banks are this ideal combination of efficient and unbureaucratic." Think back to that story. You called me up on a Friday afternoon, you need 200,000 pounds. I pick up the other phone, I write, arrange this transaction for you in three minutes. I hang up, I go about my day. That is efficient and unbureaucratic. And then

• 26:09Speaker 00

  again, we're deep into the book now and you see the same thing repeating over and again. No one outside the family knows how the truly important decisions are made. And this, this other family says the same thing as that, the family at the very beginning. Why would you let daylight upon the magic? To me, this is a very civilized way of doing business. In one merchant bank, all letters are open in the morning and shown to all partners. There are very few papers and no files. We carry most information in our heads. Risks are assessed, opinions exchanged, solutions found in quiet conversation, not after long speeches and committee meetings. There is no chain of command. No matters are cleared through channels. This is a very civilized way of doing business. If I want to talk to one of my partners, I don't have my secretary call up his secretary before we talk on the phone, like the directors do in those super bureaucracies. They just, everything is handled

• 26:54Speaker 00

  in a quiet conversation directly between the two people that can actually make the decision. Goes back to the relationships around the world. If a man has been an old customer and a friend, we'll do anything for him. Even when money is tight, we don't take advantage of him. We are very, very jealous of our name. It's the name of the merchant banker that builds a magic bridge between buyer and seller. They may not trust one another, but they trust us. And before we get back into this, I want to tell you about AppLovin. One of my all time favorite quotes is from the book Zero to One. In that book, Peter Thiel writes, he says, "The single most powerful pattern I have noticed is that successful people find value in unexpected places and they do this by thinking about business from first principles instead of formulas." And that is exactly what AppLovin has done with their advertising

• 27:39Speaker 00

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• 28:19Speaker 00

  are on AppLovin and you can do that by going to applovin.com. That's applovin.com. And then I want to tell you about Vanta. Vanta, Vanta, Vanta. Vanta helps your company prove you're secure so more customers will use your product or service. Vanta is an AI-powered security expert that scales with you. The more your business grows, the more complex your security needs get and that complexity turns into chaos. Vanta tames that chaos for you. Vanta automates compliance, continuously monitors your controls and gives you a single source of truth for compliance and risk. So whether you're a fast-growing startup or an enterprise company, Vanta fits easily into your existing workflows. Many companies won't sign contracts unless you're certified and this is causing you to lose out on sales.

• 29:01Speaker 00

  That is why the average Vanta customer reports a 526% return on investment after becoming a Vanta customer. Automate your compliance, security and trust with Vanta. Vanta will help you win trust, close deals and stay secure faster and with less effort. Go to vanta.com/founders and you'll get a thousand dollars off. That is vanta.com/founders. This is a one sentence description about the proper way to be a merchant banker. Nothing is more like itself, nothing less like anything else. The secret of the successful merchant banker is to find out a little more a little earlier than the next man. And again, the people that start these companies, the what, the actual founders of them are all centric and, you know, many of them are cutthroats. There's one great story I have to tell you about. It goes on for quite a while, but I'll give you like the synopsis of it. It's called

• 29:47Speaker 00

  The Greatest Financial Adventure of All. So it says, "The most fantastic transaction in the whole history of merchant banking was a transfer of the Spanish Mexican silver treasure. It is one of the great financial adventure stories and surely the most unusual." And it came up by this guy, they call him a formidable friend. I gotta find a book on this guy. Keeps getting put in jail and quite an interesting character, but they call him a formidable Frenchman. His name is Gabriel Julien Orvard. There's no way I'm pronouncing his last name correctly. So he had this idea. So the first they describe him that he was a financial genius and perhaps the most controversial entrepreneur of his time. He provisioned Napoleon's armies, negotiated enormous credits, thought up incredible deals and carried out bizarre transactions. His contemporaries could not agree on him.

• 30:31Speaker 00

  They would call him, "My closest advisor are a cheat." Several times he was arrested and one time he spent five years in jail. He went bankrupt, made another fortune, lost it again. He had more ideas than principles. And all these different European conquerors and dictators, it says, "He worked for them all, all needed his help and money, and he survived them all. A symbol of financial durability, though not of personal integrity. He was a type of international financier that still exists, who is ready to work for anybody who needs his advice and pay well for his service." So the scheme that he comes up with, it says, "The story of the Spanish Mexican silver treasure begins in the early days of the 19th century. When Spain was forced to take sides against England in the Peninsular War.

• 31:10Speaker 00

  Under the Treaty of October 191803, Spain was obligated to pay an annual subsidy of 72 million francs to Napoleon." Why the treaty was ever signed, no one of sound mind could understand. It was common knowledge that Spain would never be able to raise such a sum. So if I'm Spain, I gotta pay Napoleon 72 million francs a year. I don't have that money. What do I do? Well, then in comes Orvard, or however you pronounce his name, came up with this ingenious idea. Obviously, France would never be able to collect the money from Spain, but Spain owned gold and silver mines in its colonies in Mexico and Peru. Large amounts of silver were known to be stored in Veracruz. Orvard pointed out that all one had to do was get the Mexican silver treasure out of Veracruz and bring it to Paris. Okay, that sounds pretty simple. Let's send some boats over there. There's a British blockade. You can't.

• 31:55Speaker 00

  So you have to go through the British blockade in the middle of war. And if you can do that, it's as easy as that. But this again goes back to relationships around the world and that rules are malleable, a lot more malleable than we think. So, okay, I already have this relationship with Spain. I already know I can, they have a need. They gotta pay Napoleon 72 million francs, right? I can get ships. The only thing is, how the hell do I get through this British blockade? Well, who do I know that has a relationship with the British government? So then he goes and he builds and he talks to the bearings, which is another merchant banking family. The major obstacle was now the British blockade, but Orvard was certain that the bearings could probably make a deal with the British government. The bearings agree and then they, what they do is they go to the British government and they appeal to their interest. And the British government agrees. Why?

• 32:40Speaker 00

  The British government agreed, provided that British vessels could be included in the trade with Latin American ports. It was an interesting operation, well thought out and beautifully executed. It lasted three years and by 1808, almost all the silver and gold had been removed from the Mexican treasury. And in a twist, only Orvard, who had thought up the grand scheme, got not a penny out of it. Once again, Napoleon quarrelled with his brilliant banker, confiscated his property and put him into jail. And then a few pages later, there's a great line about, again, the importance of these relationships. Building relationships with the people that are in charge and in places that can actually make the decisions that get these deals done. The merchant bankers had valuable contacts from prime ministers down to the local chiefs of police.

• 33:22Speaker 00

  They always knew the right people and the right places at the right times. And it is through these relationships with the right people, the right places, at the right times, that they're collecting all this very valuable proprietary information. Here's one example, "The bearings had a widespread intelligence network. They knew some of the best kept secrets. Their deals often seemed so audacious that everybody was astonished, until it became apparent much later that they had acted on the basis of sound, advanced information and knew exactly what they were doing." And then there's a great line that describes that this just business runs on understanding humans. It says, "It's difficult to be explicit about this, but the whole question is very much a matter of feel." And so, one thing that is very interesting, I'm actually going to talk about a specific person right now, this guy named S.G. Warburg.

• 34:03Speaker 00

  But I'm using him as an example because how many of the merchant bankers felt that reading, almost all of them like are voracious readers, reading history and philosophy and the classics is way better than reading about business. Because it gives you an understanding of humans and that is what is like, essentially they're constantly decide, can I trust this other human? Can I rely on him? Can, is it good to get into business, engage in business with this person? And so it says, "Even Warburg's banking associates are often puzzled when he admits being prouder of his thorough knowledge of the classics and of English and German literature than of his widely admired skill in banking.

• 34:41Speaker 00

  He considers a working knowledge of Greek and Latin a better preparation for merchant banking than a study of modern finance, management techniques and economics. Classical education is a wonderful thing, Warburg said. It helps you to develop a logical thinking and to perceive quickly and accurately what you read. He emphatically opposes the widespread belief that to think deeply means to think in a complicated way. In fact, the chapter on this guy's life, the very first sentence in the chapter is a great, probably one of my favorite lines in the book. Progress in thinking is progress towards simplicity. Simplicity combined with thoroughness has helped Warburg more than anything else in life. To think deeply means to think lucidly, he says. Warburg has strong opinions on what to read and what to ignore. He reads books on history and philosophy.

• 35:26Speaker 00

  He loves good fiction and good poetry. He avoids business publications and ignores most newspapers. He used to read a lot of newspapers before the war, but came to the conclusion that newspaper reading leads to a gradual loss of memory. Since most people read the paper with the subconscious wish of trying to forget as fast as possible what they read. He spends many pleasant weekends reading and rereading the books he loves. People often ask Warburg how a modern, successful merchant banker can get along without a thorough daily study of contemporary politics, economics and finance, and I love this part. He says, "I keep my ears open. People tell me everything that's important." Warburg is an enthusiastic non-conformist. He wants to be right and doesn't mind being different. In his scheme of things, theory and practice must always mesh.

• 36:11Speaker 00

  Warburg does not like to be surrounded by yes men. This is another thing that reappears throughout the book. Actually, one of my favorite conversations I had recently was with Ed Catmull, the founder of Pixar. If you haven't listened to that conversation I had with him on my other show, you definitely should listen to it. And one of the most fascinating things that Ed Catmull told me about was the fact that in the 10 years when Pixar was public, so goes public. They're a public company for 10 years before they're acquired by Disney. He says that Steve Jobs fired two members of the Pixar board. And the reason that he fired them surprised most people because they never disagreed with Steve. And Steve's point was, if they all, if they agree with me, they're serving no purpose. So therefore they can't be on the board. And again, Warburg says this, a bunch of other merchant bankers, they want differing opinions.

• 36:55Speaker 00

  And another thing that Warburg says is that influence is more important than power. Another thing he says, "Men of talent are often complex and hard to understand." When building his company, he prioritized youth. If you listen to my episode on the founder of Honda last week or two weeks ago, the founder of Honda would repeat this over and over again. He believed that you had to hire young people and you had to give them real authority to change the company. Warburg is, says very similar things, calls this youth and team spirit. Warburg's organization reflects his innermost belief in youth and the team spirit. Youth to Warburg means just that. Men in their late twenties, he collects able young people with the same enthusiasm that other rich men show for old paintings. Warburg calls youth "the greatest strength of our firm."

• 37:38Speaker 00

  Warburg is a born teacher and never stops tutoring. He introduced what he calls "the nursery principle" at his bank. One of the younger men must always be present at all important meetings. Afterwards, he is asked to write a lengthy memo of the meeting. Warburg himself will then correct the wording as carefully as a professor going over his students' homework. He does this because, he says, "The good Lord lives in the detail." Warburg cannot stand incompetence of any kind. He has no patience with people who don't know their job. He never loses a big battle because he's always prepared meticulously for victory. His organization works almost with the precision of a Swiss watch. There is no touch of amateurism. He rarely enjoys the fruit of victory.

• 38:20Speaker 00

  After 24 hours while his associates are still celebrating, he goes back to worrying. And again, we see the same idea over and over again. Warburg calls new ideas "the bloodstream of a merchant bank." He believes in strong praise and strong criticism. A friend once told him that "your strength in business is that you don't change your coat when you leave your home. You are always the same man." He likes to be with stimulating people and loves the forgotten art of conversation. Some of the best advice he ever got is that if you have to choose which way to go, always ask yourself first, which is the harder and choose that one. It will be the right choice. Another favorite piece of advice coming from his mother, "Before you pray, my child, ask yourself what you did wrong today and could have done better. All of us make mistakes every day.

• 39:04Speaker 00

  One must be critical about one's mistakes." Warburg says that happiness is not the fulfillment of desires, but the fulfillment of duties. He says, "Management is made up of people and people are unfathomable." And then I thought this part was interesting in terms of compensation. It says, "Fees are not mentioned until the operation is completed." A great surgeon first saves a multimillionaire's life and then sends him the bill. The merchant banker often saves this multimillionaire's financial life. And so in many cases, when they're arranging these deals or this financing, they usually take something from like, at this time, typical was take it like half of percent all the way up to like 2% of the transaction. And the fees they collect are for accommodation, not only for helping with financing, but the advice that they're offering.

• 39:45Speaker 00

  And so in this case, like you want Warburg on your, in your deals just because of his mind. So they pay attention to what he said because they know he will not utter a single superfluous word. Big people gladly pay a premium for lucidity of thought and economy of expression. Warburg clarifies, never merely simplifies complicated matters. Warburg means literally what he says, which is a phenomenon in this loosely talking age. And so then I came across another character in the book that I have to tell you about, this guy named Rafael Matteoli. They call him the master of paradox. I just want to read through a couple, I think a lot of these highlights, just to give you an insight. Again, the personality types. That go into this very unique and mysterious trade.

• 40:30Speaker 00

  When Mattioli is neither at home nor at his bank, he is apt to be at his publishing house, which is conveniently situated just a few doors away. In fact, all three buildings, his publishing house, his bank and his house are on the same block. So days can go by, which he doesn't even need to cross the street. I gather that his daily routine is as unorthodox as everything else about the man. Again, they're embracing the fact that they're unorthodox. He told me that he rarely gets to the bank in the morning before 11:00 a.m. At 1:00, he walks home for a quiet lunch with his wife, and after that, he takes a siesta. He then returns to his office at around 5:00 in the afternoon and stays until 10:00 or later. Those hour in which the bank is empty, except for the night watchman, are the time to do some really constructive banking, he said enthusiastically.

• 41:11Speaker 00

  He is fond of paradox and leads to the suspicion that he enjoys confusing people. We bankers are fond of pretending that we know everything. I always try to remember the advice of my father, who told me that a man should never be afraid to admit that he doesn't understand something, particularly if he knows all about it. That is a great line. And we see this distaste for yes men. Again, he does not tolerate any yes men around him. And one of his managing directors confided to me that he always thinks twice before saying that he agrees with the boss because the consequences can be very unpleasant. I don't like people who deliberately try to think in my way, Mattioli told me. Besides, why should I pay a man for thinking the way I do? I can do that for myself. It would be a waste of money. Sundays and holidays mean nothing to him.

• 41:56Speaker 00

  He tends to become even more caustic. He tends to become even more caustic than usual when even any of his executives indicate that they would like to take a vacation. Recently, when one man broke a leg on the last day of a long vacation, Mattioli proclaimed the accident an act of poetic justice. He says that money means nothing unless it is being used. And he's another example of one of these merchant bankers that think you should just be reading history and philosophy and stay away from, you know, any of the business publications in the newspapers. I love, there's all these other ways that they're describing their own profession. And I think this is a great way to think about merchant banking. Says, "Wall Street produces money in a much bigger, more impersonal way. It's like the difference between a handmade Rolls Royce and a production line Cadillac."

• 42:40Speaker 00

  So let's go back to this idea that they leverage their relationships and they are individual opportunity driven, so they will also incubate companies as well. So this is a story from Lehman Brothers, way before they collapsed. They were a successful merchant bank. Said Lehman Brothers had the imagination and courage to tackle such ventures. Years ago, it embarked upon a thorough study of the potash industry that lasted for months. So this is this chemical that is used, it improves plant growth and increases crop yields. So they see an opportunity here, they put together the company. And then Lehman Brothers cautiously developed the American Potash and Chemical Corporation, then nursed it along until a very attractive bid was made by the Standard Oil Company of New Jersey. So leveraging the relationships they have and the information they collect, they'll

• 43:24Speaker 00

  also make the bets if they don't see anybody else doing it. There's a great line a few pages later, reflecting on some of the most successful deals in merchant bank history. Says, "The funny thing is that hardest things to raise money for often turn out to be the best." And again, we see this constant hounding on learning from history and reading literature is actually the best preparation for this trade. He considers literature and history excellent approaches to investment banking. I get tired of people who think that banking is accounting. Banking is imagination. And then what's also funny is how they take a long-term view on relationships, but then they make the mistake of not taking a long-term view on some of the assets that they actually owned. And so they're going through all the mistakes they made, because again, they talk over and over again, like you're not, you're going to make mistakes in this business. Like, if you're not comfortable with that, you have to find something else.

• 44:09Speaker 00

  And really, it's true for any business, then if you want to make mistakes, then you can't move, you just have to sit on the couch all day. So they said, "We could own 20% of these giants today and be billionaires. Unfortunately, we did not keep the shares." That made me think of one of my favorite quotes, came from Nick Sleep. He says, "The best investors aren't investors at all. They're entrepreneurs who never sold." Another common theme in some of their greatest deals, "They are doing many things that more conventional bankers ignored." And then back to secrecy and discretion and lack of paperwork, no bureaucracy, there is a widespread aversion to putting anything in writing. Everybody is constantly aware of the uncomfortable commitment of the written word. Don't write a memo that might someday become a source of conflict." And it goes back to having a fundamental understanding of humans and try to keep things simple.

• 44:54Speaker 00

  So Ivor Kruger, so you might know this name. I actually just looked this up. So on episode 348, actually, when I looked this up, the summary of the episode is actually pretty good. So on episode 348, I covered the biography, which is called The Match King, Ivor Kruger, the financial genius behind a century of Wall Street scandals. He was a Swedish engineer who built a global match monopoly, mastered corporate charisma, and then secretly masterminded one of the biggest Ponzi schemes in history. So he comes to Lehman Brothers and he wants money. And the actual patriarch of the bank is the one sitting on the meeting, and they said he had a sixth sense for people. So it says, "One day, Ivor Kruger came in and asked Lehman to be his banker. Kruger talked and talked and talked while Lehman made a few notes on a piece of paper.

• 45:38Speaker 00

  When Kruger had finished, he sat back and looked at the banker. Philip Lehman shook his head and said the answer was no. I have a rule, Mr. Kruger. If I cannot understand something by reading my notes on the subject, I won't buy it. You're too complex for me." Mr. Kruger left and a few months later, shot himself. And that is where I'll leave it. Highly recommend reading the book. That is 425 books down, 1,000 to go, and I'll talk to you again soon.