SCHWARZMAN: You can't grow giant-size economies at 10 percent a year without generating inflation. The way you typically deal with inflation is raising interest rates. When you raise interest rates, that's meant to slow economies and that's exactly what's happening. It's almost like out of the textbook. So we were expecting in those kind of high-growth economies for them to be down at least 100 basis points in terms of growth, maybe 150. And I'm always surprised when markets react to something that we think is expected. And apparently not everyone expected it.
BARTIROMO: There is some concern about the lack of rule of law here (Russia). So are you not concerned that if you put money into this country, that you will be able to take it out? I mean, where are you on that in terms of the rule of law here?
SCHWARZMAN: I think we're assessing the way this economy works. Clearly, the two critical fall shorts are, you know, rule of law and also basically bribery. And you know, to the extent that you run into things of that type, it's a no go. There are people, for example, I just met somebody here at the forum said he's put a billion dollars in here, he's never had a problem. He's done great. And then there are other people who have problems historically. What's interesting now is that the government and the reason we're here is the government appears to be making a change. The government is quite forthright about encouraging foreign-direct investment, talking about the problems you just mentioned and some others, and talking about aggressively addressing those and changing them. And it's everybody at the top level of government. And when you see that kind of openness, that kind of focus on these kind of problems, that question really is will they be effective at making change and how much change in what time frame? And so it's pretty clear that their political establishment has decided you can't continue to run the company--country in the same way. And so there's the start of a--of a change. And it's always good for people like us to be on site and looking at that, thinking about it, figuring out whether things are safe or not and then investing if you think they are.
BARTIROMO: Where are the opportunities for you? Blackstone has been a big investor in energy-related securities and businesses over the years. So talk to us about where specific investment opportunities are. Is it gas, is it oil, which commodities?
SCHWARZMAN: This economy is surprising, it's growing 4 1/2 to 5 percent this year. Contrast that with the countries you usually cover in the developed world. Thee growth is coming from almost everywhere. They actually have quite a robust consumer economy in Russia. So one doesn't have to be in resources and minerals to do well. They've got a fast-growing pharmaceutical industry, for example. And so there are many different areas and many different size types investments with many different types of partners that you can invest with. So it presents an interesting analytic challenge to figure out which way you go. But usually when almost everything's going up, you can't make too bad a decision as long as the country continues growing, and the issues that you mentioned are addressed in one way or another.
BARTIROMO: What's your take on what's going on there in Europe, in terms of the debt crisis, this bailout we're talking about in terms of Greece?
SCHWARZMAN: I think that the Europeans, depends which country you're in, are, certainly in the financial area, definitely feeling the uncertainty of not only the problems in Greece and--which is the most visible, whether it's Ireland, Portugal, but they're really feeling regulatory uncertainty in a—in a major way. At the same time, there's almost like a free-floating anger directed at the financial community, which makes decision-making and other things even more difficult, all right. And so there's a certain caution and defensiveness and almost a hiatus on certain types of things. You will get Germany that's a major exception because of their exports to China. But on the whole, there's a real caution and concern with almost everyone in Europe that's involved with European-type activities. To the extent their great companies are going around the world, some of them are doing very well and you meet with the heads of those companies, it's like life is wonderful. So it depends who you're dealing with.
BARTIROMO: Are you staying away from investing in places like Portugal, Spain and Greece because of these issues?
SCHWARZMAN: Actually, we just bought a company for a billion dollars in Spain. One of the things about what we do for a living is when everybody is discouraged and multiples go down, there are usually very good things to buy. We'll probably be announcing another one within a week in another European country and we haven't bought companies in Europe for years. So the financial crisis there and the uncertainty leads certain sellers to say I've had enough. If you're buying high-quality companies at what we hope to be, when we look back, reasonable prices, then we should do very well. So we're actually optimists in this context for our types of businesses.
BARTIROMO: In terms of your types of businesses, are you talking about banking, consumer businesses?
SCHWARZMAN: No, I'm talking about we bought a can company, for example, in Spain. And you know, we're going to buy some other kind of company in one of the other countries. And so we just look at it on a value basis and I have thought for the last six months that Europe's going to start treating us quite well in terms of areas to invest. In real estate, it's hard because the banks haven't been selling the way they did in the United States aggressively because they're waiting to see what happens with Basel III.
BARTIROMO: Which brings me to my next question, the regulatory environment, all of this uncertainty. Where do you see this going? I mean, you know, 10 percent Tier 1 capital is--seems high in terms of the banking sector. Do you agree with that? Do you think that's where it's going? What kind of an impact have you seen as a result of this uncertainty surrounding Basel III and the result of Dodd-Frank?
SCHWARZMAN: I think you'll have slower global growth. And there's a trade-off between safety and growth. If you get it the wrong way, you're going to have a very safe system but you'll have global growth that's reduced to a point that there isn't enough credit extension to grow economies in a typical way. And if that happens, then you end up with large budget problems, you end up with political unrest, you end up with reaction to that unrest. And though you may have made your financial institutions extremely safe, you may have created a whole other series of problems that the people doing the regulatory work don't think about, don't believe it's their jobs. So particularly in Europe, it would be hard to imagine, with the Basel III requirements, and you have two countries, the UK and Switzerland, that have giant-sized financial institutions that say we want to be much tougher than even Basel III. So how exactly credit extension is going to work in those countries to help an economic recovery I think is an open question.
BARTIROMO: Is this part of the reasoning behind your continuing to search for opportunities outside of the Western world? I know you talked about Spain and the acquisition that you made recently, and you're going to do another deal in one of the European nations. But does this play into your desire to look at sort of the BRIC?
SCHWARZMAN: There are a number of different ways to make money. One, you can buy a slow gray--growing company at a very low price. The other is you can pay a higher price and get a lot of growth. And those types of investments are typically outside the developed world, other than in certain pockets like technology and so forth. So we think being positioned in the rapidly growing parts of the world to the extent that we can make reasoned and prudent investments is a good way to go.
BARTIROMO: How are you setting your portfolio up for, for example, some of these catalysts on the horizon? For example, the Federal Reserve stopping the QE2 in just a couple of weeks here. We're all waiting to see what the global market reaction to that will be. How do you want to position the portfolio? Do you think about that, the Fed walking away? Is that a big event?
SCHWARZMAN: The Fed basically told you they were going to do that quite a long time ago. I always find it fascinating that when things start happening, people start reacting as if they were never told it was going to happen. I sort of look at QE2 as something that is more or less in people's expectations, and we're not positioning ourselves for some short-term operation of that type. We're trying to look at longer term growth rates. Our average investments, whether it's in private equity or in real estate or in our credit area, typically, you know, can be five-year investments, seven-year investments, three-year investments. And so we're interested in that time frame, not the impact of something that's relatively short.
BARTIROMO: So look at that time frame. What's the portfolio look like in terms of geographies, in terms of sectors? What's most opportunistic for Blackstone right now?
Mr. SCHWARZMAN: What I would--where we were before was basically holding back. We thought equity prices were high, and we were putting money in creating businesses in the energy area, the power area, other areas where we're creating companies at book value, if you will, rather than paying big premiums. As markets come down in response to slower growth, for example, in the US, I think we'll end up getting more active there because valuations will become more sensible. There's usually pretty good opportunity everywhere. We're quite active now looking at things in Brazil and in India, where these economies continue doing quite well. You know, China's a little harder because the prices in China have been high. And in China there's lots of money internally for investment, whereas in Brazil and India they need capital from the outside. So we constantly monitor all of these areas, along with major European countries, and US and Latin America, and try and figure out where is the right risk-reward for us to get our investors 20 percent plus returns in a world where Treasury obligations are, you know, sort of depending upon what maturity, you know, less than 1; 1, 2, 3 type returns. So we're trying to do something unusual, and we have to search pretty far and wide to do it.
BARTIROMO: I know it's relative, but how sharply is China slowing down right now?
Mr. SCHWARZMAN: I think that's hard to--hard to know. You know, the numbers that just came out, you know, sort of are more concerning. I was there six weeks ago, and everybody I talked to said, you know, we'll certainly be in the 8's. And so I actually haven't figured out yet how much more things are slowing in that regard.
BARTIROMO: What's your take on the presidential election here in Russia? Does that play into where and how you want to invest in this country? Will it be Medvedev, will it be Putin, or someone else?
Mr. SCHWARZMAN: Well, you know, there are people who specialize in looking at these tea leaves.
BARTIROMO: So it doesn't matter to you?
Mr. SCHWARZMAN: I think what I've learned from being here, you know, a few times, is that the path to do certain types of economic reforms, the understanding of the frustration of their own society, over 20 percent of young people said they wanted to leave. This does reach all politicians, that the people who live here and work here tell me in unguarded moments that no matter who wins a contest, if there is a contest between Medvedev and Putin, that the basic thrust of the country will go ahead more or less the same. And those are people who may have a stake in one camp or another. But there is a--the whole thrust of change that everybody buys in. I was at a meeting with Putin about four weeks ago for this new Russian direct investment fund which we're involved with, the government's setting up, to put money side by side without side investors to make investments here. And he couldn't have been more direct about the need to attract capital, to have it be on a completely economic basis, and create jobs and create growth in the society. That's the Putin side. And Medvedev just gave his opening talk here at the forum, and had a--had a large list of reforms and changes that he wants to make. So I think the forward thrust, to an outsider, looks to be change in a way that would be more sympathetic with investment aims of the--of Westerners. The important issue is how much of all these good things are going to happen, in what time frame?
Questions? Comments? Write email@example.com