Highlights of CNBC Interview with Blackstone Boss Stephen Schwarzman

Caruso: Are you talking about the economic cycle or the private equity cycle?

Schwarzman: I am talking about the economic cycle. And, the U.S. is about the slowest growing country in the world. I know this may not be the self-image of the United States. But the blow-off of the residential housing business and the fact that Americans use their house value as sort of their savings account, and that when the value of the houses either stops going up or goes in reverse, that usually creates some issues.

In terms of purchasing, you’re seeing cars purchased less, and while we're not in a recession, I don't think we'll go into a recession, but we certainly have growth rates that appear to be somewhere between 1 and 2%. Trying to measure a big economy like the United States, I've always found, is fruitless. We hang on every number as if they're actually true. I tend to think they're more or less just directional.

And the direction has been down. And that's not surprising. What I think is going to keep us going is that everyone around us, that's Europe, Asia, Canada, it almost doesn't matter where you turn, is doing quite well. And asset values have been going up, in large part because the interest rates have stayed down globally. And the world's awash with money. And so, you can put that together and come to a number of different conclusions, the way that people always do. But I think there's close to unprecedented liquidity on a global basis

Caruso: What makes you worried? What could go wrong?

Schwarzman: Well, there are many, many things that could go wrong. And what stops this almost coordinated expansion globally, is typically exogenous events. Bad governmental trade policies, people raising the barriers in their countries. So that capital stops flowing to between countries, to finance certain countries that will throw them into recessions. Accidents in the capital markets, like long-term capital that create uncertainty and put a big risk premium back into the debt markets; terrorist activity that deals some type of very substantial blow to communications or the psyche in certain population centers. There are a lot of things, most of which are not the normal economic cycle things, which you can look back you, can see, and say, ‘Jeez if I'd only thought of that.’ But most things like that are unpredictable.

If you just take an example, in Thailand, where the military just took over, 4-5 months ago, all of a sudden they just closed their capital markets. You couldn't get capital out and there was almost like a quiet before a storm and people said, ‘What do you mean I can't get my money out?’

And the markets started moving and somebody thought about it and said, ‘We can't do that.’ But if you take a large country and something like that happened then it would have different consequences. So we live in a very integrated world now and it's dangerous because it's integrated. It’s also a uniquely advantageous time because it's integrated. And I think that those of us who live in the financial business have to always be looking with one eye over our shoulder to see what might happen and what might go wrong.

Caruso: How long is money going to be cheap?

Schwarzman: I don't know. If you can tell me, I'd be glad to invest with you too.

Caruso: If you can get in front of wherever the Chinese are going you can make a lot of money. Clearly, they're going into private equity. Where else are they going?

Schwarzman: Well, they've been very active in commodities because they're a purchaser of an immense amount of commodities, because they've single-handedly had the largest building boom in history, certainly since World War II. And I think that's been an area that's profited dramatically from their needs.

Caruso: How big are the deals going to get?

Schwarzman: For some reason, people are fixated on that. I don't know why. We did one that was for $39 billion and we didn't give it a lot more care, frankly than we a deal that is like $4 billion. They all have to be well done. They all have to be good. You know, the size of the deals is really a function of the liquidity of the capital markets and how much equity you can marshal for that one transaction. Big is not necessarily good. It's good if the numbers are right. And it's not good if they're not.

Caruso: But a lot of people are using the move up the size curve to justify saying now is the time to get into big caps, because now they're finally going to move along with small and mid caps because of guys like you.

Schwarzman: Right. Well, I think there's been more value in the big cap area for people buying companies, because they haven't performed as well. In terms of what the practical limits are, I leave that to others to define that. I've never been interested in that, because you can get wildly different answers. Because if you bid with a corporate buyer and they decide they want to put up $10 billion in equity to facilitate a transaction then you'll get a dramatically bigger deal than if you're just dealing with private equity people. And so the idea of how big you can go is really definitional.

I'm much more focused on the goodness of deals and the returns you can make rather than just doing something large because you know you can, or you want to push an envelope. I don't think we're in the envelope pushing business. We should be trying to do well for the people who give us money. That’s really the job of fiduciaries.

© 2008 CNBC.com

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