The Peter Attia Drive - #125 - John Arnold： The most prolific philanthropist you may not have heard of

00:00:00.000 Hey everyone, welcome to the drive podcast. I'm your host, Peter Atiyah. This podcast,

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00:00:41.740 head over to peteratiyahmd.com forward slash subscribe. Now, without further delay, here's

00:00:48.080 today's episode. I guess this week is John Arnold. John is probably the guy that'll go down in history

00:00:56.480 as the most successful natural gas trader of all time. And we spend the first part of this episode

00:01:03.080 explaining that story. And you might think, well, what does that have to do with anything? Well,

00:01:07.900 it's only by understanding how John came to amass a fortune of billions of dollars trading natural

00:01:15.760 gas. Can you understand the second part of this discussion, which is how at the age of about 37 or

00:01:21.820 38, he shut it all down and turned all of his attention to the full-time craft slash business

00:01:29.520 slash art of philanthropy. John's philanthropy is as serious as his natural gas trading. And his

00:01:37.340 foundation, Arnold Ventures, which he is the co-chair of along with his wife, Laura, focuses on

00:01:42.880 really the hardest social problems imaginable. And in this episode, John discusses at great length

00:01:48.760 where philanthropy fits into the broader picture of the nonprofit sector, differentiating it from

00:01:55.160 charity and how that fits into even the broader umbrella of public or government spending and even

00:01:59.880 private spending. And it's only by understanding that lens that you can really understand how someone

00:02:05.100 like John thinks about deploying the types of resources they do, which are legion to be clear.

00:02:11.440 The foundation currently spends about $400 million a year in grants. And John's goal is to

00:02:18.540 basically spend their entire fortune in their lifetime solving very hard problems, problems like

00:02:25.100 criminal justice reform, health policy reform, K through 12 reform, public finance, things like

00:02:31.860 that. We obviously don't go nearly as deep as I would love to go into all of these topics. And yet

00:02:37.660 somehow this podcast managed to be probably two and a half hours, if not slightly more, which certainly

00:02:42.580 leaves ample room for a part two of this at some point in time. I guess one thing I would say about

00:02:47.540 this is, I'm obviously fascinated by this topic and could sit here and talk about natural gas trading

00:02:52.860 forever. If that subject matter, isn't that interesting to you? What I would suggest is

00:02:57.320 paying close attention to the timestamps in your podcast player. You'll probably want to listen to

00:03:01.520 the first part of this because it's, I think John's background and growing up and his card trading

00:03:07.100 business, his baseball card trading business. I think that stuff is really important to kind of

00:03:10.980 understand John's mentality. You may actually want to skip his career where he goes from college to work

00:03:16.780 at Enron and don't worry. He's one of the good guys at Enron. And then you may want to sort of skip to

00:03:21.740 the part where he decides to shut his own hedge fund down and instead focus on philanthropy. Again,

00:03:27.280 I'll leave it up to you, but I guess the point I want to make is I wouldn't be put off by the fact that

00:03:31.020 if you're not interested in natural gas, you won't find this episode interesting. I think this episode

00:03:35.640 is interesting start to finish, but there may be some people who only find one part in string or another.

00:03:39.740 So just pay attention to where that is. So without further delay, please enjoy my conversation with

00:03:45.020 John Arnold. Hey, John. Awesome to sit down with you. I'm bummed we are not able to do this in

00:03:55.060 person because anytime we sit down in person, it is a long and fruitful discussion where I just

00:04:01.280 feel like I'm learning at a geometric rate. But nevertheless, I'm excited that we're finally

00:04:06.700 getting to sit down and talk because there's so many things on my mind. Now, a lot of people

00:04:11.240 listening to this podcast will not really know who you are. And I've struggled to think about the

00:04:16.540 best way to introduce you. So I thought one of the funniest ways to introduce you is to do so

00:04:22.060 through the tweet that you have pinned at the top of your page. So remind me your handle on Twitter

00:04:27.420 is, is it John Arnold Foundation? John Arnold Foundation. Yeah. Okay. And what is it that you have

00:04:33.700 pinned at the very top of that? So it's essentially that I've been called the next Koch brother by

00:04:40.640 the far left, and I've been labeled the next George Soros by the far right. And I think I write that I'm

00:04:47.720 an equal opportunity, special interest pot stirrer. And I think it does label me a couple of ways.

00:04:54.020 First is our actions at the foundation, which has been in its current form for about 10 years,

00:05:01.280 have led to getting into a lot of squabbles with both the left and the right. And at times it's

00:05:07.900 been frustrating. At times it's been liberating, but it has brought a lot of conflict, which one

00:05:14.060 doesn't normally think about when you think about philanthropy and a philanthropist about having

00:05:18.240 conflict and fights and battles with a lot of these issues. And that's generally been a component of

00:05:24.720 our work, not by design, but by necessity. And then I think the second part of it that I like is

00:05:31.680 that we don't approach all problems with the same ideology. I think problems are different.

00:05:37.720 Problems are complex. And the type of solution for each problem is different. So we don't say that the

00:05:44.820 free market is the right answer for everything. Don't say government is the right answer for everything,

00:05:48.920 but it depends on the makeup of the problem, the actors, the market failures, et cetera,

00:05:54.060 as to what the right solution is. And therefore over the years have managed to make mad both the

00:06:00.640 left and the right, and sometimes simultaneously. And by extension, I think there are many times that

00:06:05.340 the right and the left also think you are doing the greatest work on earth. I mean, I think that's

00:06:09.940 the corollary of that, which is there were times when you were in lockstep agreement with both sides as

00:06:14.940 well, correct? Yes. Although whenever... Not simultaneously. They tend to be louder whenever

00:06:20.080 you're in conflict with them than when they're showing appreciation. Yeah. I think part of how

00:06:25.060 we've chosen issues to work on is we're looking for these system problems that have a lot of impact

00:06:32.660 in people's lives, where the two sides, the left and the right, have historically been divided for some

00:06:39.940 reason and that they're starting to come together. Like there's a reason why there can be a solution

00:06:45.820 that's viable today that wasn't viable five years ago or 10 years ago. And that ends up being a

00:06:51.680 component of almost every issue we work on is that the left and the right are coming together. And so

00:06:57.220 we need to be able to work with both sides. And so we've tried to tamp down the politics, both

00:07:03.700 personally and professionally over the years, and try to see in the Venn diagram of things the left

00:07:09.420 will support and the things the right will support, even if it's for different reasons or different

00:07:13.640 motivations. Let's explore those territories and see what can be done. And I think we're going to

00:07:19.300 explore one of those in greater detail, perhaps than others, which will be criminal justice. But

00:07:23.560 currently the foundation I know focuses very heavily on health policy, public finance platforms and

00:07:28.740 criminal justice. And I think at least one of those, and I don't know why I just personally find

00:07:32.900 criminal justice to be such an important one. Maybe we'll come back to it because it is one where I think

00:07:37.600 maybe the left and right have a different ultimate motivation for establishing it, but the solutions

00:07:43.200 can certainly benefit society and both sides. Let's take a step back because to put the magnitude

00:07:48.980 of your philanthropy in scale, the foundation is deploying what type of assets per year? Can you put

00:07:55.520 some numbers to this for people? We give about 400 million a year. The assets in the foundation are a

00:08:00.980 little over 2 billion. Then we have a couple other giving vehicles, specifically a DAF. We contribute

00:08:07.140 money every year as well. So we have a high spend rate, but our philanthropic intent is to give away

00:08:13.980 the vast majority of our money during our lifetimes. Yeah. And you're very young, John. You're in your

00:08:19.580 mid-40s. You and your wife, Laura, have been at this, as you said, since you're in your 30s. And yeah,

00:08:25.240 you're sort of on a mission to spend this enormous sum of money during your lifetime. That's something I

00:08:30.600 want to come back to because it's also not a typical path to philanthropy. Many people are thinking about

00:08:36.040 serious philanthropy at a slightly later stage of their life. Let's start with the first half of

00:08:40.660 the story, which is where did this money come from? You didn't have a trust fund, to my recollection,

00:08:44.260 right? I did not. I did not. So where did you grow up? I grew up in Dallas and a very boring,

00:08:51.160 great, upper middle class lifestyle in Dallas. Went to Dallas public schools, ended up going to

00:08:57.960 Vanderbilt. Well, let's go before Vanderbilt. What was your first business? First business. So

00:09:04.100 probably mowing lawns. I was sitting around one summer and said, I want to make some money. So

00:09:10.440 what can a 12-year-old do to try to make a dollar? Not much. And so went knocking on every neighbor's

00:09:18.660 door and tried to find a lawn to mow and realized that everybody either cut it themselves or had a

00:09:24.200 lawn service already set up. And so that wasn't going to be my path to riches. And then kind of around age

00:09:30.580 14, I ended up getting into the baseball card business pretty actively. So this was right around

00:09:38.920 1988, 89, 90, when the sports card business was taking off. And I had a small collection at the time,

00:09:46.260 but I always thought of it more as an asset rather than a collectible that I wanted to put

00:09:51.880 on my desk and look at every day. And so the first experience was just renting a table at a local

00:09:58.380 trade show for $30 and going and putting a lot of the collection on the table and trying to sell

00:10:05.300 it. And again, the sports card business was booming. And so came home with maybe $100 from

00:10:12.120 the $30 investment. Now, of course, the cost of goods sold didn't really factor that in. Maybe that

00:10:17.440 was a sunk cost at the time. But it started getting me interested in this as a potential business.

00:10:23.280 And I kind of quickly figured out, I didn't want to be spending my weekends sitting at the local

00:10:30.200 trade fair and couldn't. I played highly competitive soccer. So I had things to do on the weekend.

00:10:35.280 But there was a wholesale market that didn't require as much time. And so this is really kind of the,

00:10:42.060 again, during the start of the bulletin boards of ways where people would transact.

00:10:46.720 And there was a small bulletin board of baseball card dealers where they would do the wholesale

00:10:54.260 trading. And the market was so volatile at the time. If a particular player went on a good streak

00:11:00.260 for two weeks, that card would get hot, especially in the region he played. And you'd start seeing,

00:11:07.520 number one, volatility in prices and second, geographic differentiation in prices.

00:11:12.480 So the market for hockey cards was very strong in the Northeast and in Canada, a little in Michigan.

00:11:20.100 They would sell them across the nation. Now, the guys that bought them in Texas,

00:11:24.760 there wasn't much of a local market. So I could go buy the hockey cards there,

00:11:29.700 ship them up to a dealer in New York and make a few dollars. And that few dollars,

00:11:35.120 I would then reinvest and do it more. Then the sports card business was going parabolic at the time.

00:11:41.620 And so kind of one thing led to another, and I ended up spending a couple of summers,

00:11:45.860 just kind of full time on this baseball card, really geographic arbitrage and information arbitrage

00:11:52.560 that I would have a sense of who the best buyer was for every product, wherever they were in the

00:12:00.320 United States or even into Canada. And would go around and try to find any bargains I could in the

00:12:08.340 Texas, Oklahoma, Louisiana, tri-state area, kind of do day trips down to Houston and go to the big

00:12:15.000 fairs down here. I would go canvas all the dealers. And that was really my first business.

00:12:21.000 And how were you able to drive around so young? This was pretty unusual for a kid your age to be

00:12:26.920 able to track that circle of geography, right?

00:12:29.080 It was. I got my driver's license at a young age. I think it was at 14. My father at the time

00:12:37.180 was going through an illness. He had Crohn's disease through his life and kind of a chronic

00:12:43.380 condition that, especially in my teen years, became a bit debilitating for him. And so I was able to get,

00:12:50.960 I forget what the name of that particular license was, but because there was a kind of family

00:12:56.680 hurdle, family handicap that I was able to start driving when I was 14.

00:13:02.900 Did you know what the word arbitrage actually meant when you were conducting it?

00:13:07.800 Great question. And I don't remember.

00:13:10.400 Can you explain to people, I mean, you've effectively explained it in concept because

00:13:14.540 it's such a big part of your ultimate business. Can you explain it more formally and technically to

00:13:18.940 people?

00:13:19.760 I would describe arbitrage as taking advantage of price differences with little to no

00:13:26.660 risk. I think true arbitrage is no risk where you bought it for one and you've sold it at two

00:13:32.280 and you've taken no risk in doing so. In reality, there's always a little bit of risk.

00:13:37.620 And so by knowing that the market in New York valued something at $20 and it was trading in

00:13:44.080 Texas at $15, I could take advantage of what I call geographic arbitrage there, that the market

00:13:50.580 in Texas was different from the market in New York. Now, of course, today with the internet,

00:13:54.980 a lot of those arbitrages and inefficiencies, pricing inefficiencies have gone away or have

00:14:01.060 been, what we call in the trade, arbed out. And so now you see the high-frequency traders trying to

00:14:06.920 make a hundredth of a penny on a share of stock and have huge incentive to do so and do so at

00:14:12.800 massive volume. But it's like buying and selling, same item with little to no risk.

00:14:18.160 Which is a theme we'll obviously come back to at length. So you go to Vanderbilt,

00:14:23.520 you studied, if I recall, economics, yes?

00:14:26.260 Econ and math.

00:14:27.640 Did you have a sense of what you wanted to do when you were finished college?

00:14:31.100 I remember reading Liar's Poker and I think Barbarians at the Gate, both classic books about

00:14:37.600 Wall Street. And although growing up in Dallas with my mom as an accountant, my dad as a corporate

00:14:45.140 lawyer, I didn't have a sense as to what Wall Street was except through these books, except by

00:14:50.600 reading Wall Street Journal every day. And it seemed like that was the biggest game around.

00:14:56.020 I got drawn to that game or the desire to enter that game. And so my goal throughout college was

00:15:03.380 to get the job and the classic post-college analyst job at a big Wall Street bank.

00:15:09.800 So then how did that pan out? And I also recall from our discussions that you

00:15:13.380 blazed through college. I think you got your degree in three years by taking summer classes

00:15:18.020 and just being kind of maniacally focused on your degree. Is that right?

00:15:21.920 Yeah. I'd take 18 hours every semester, did summer school one summer, came in with some credits. And

00:15:27.840 I was the guy that was trying to get out of there and into the game as quickly as possible.

00:15:33.460 Every day I was at college was one less day that I had to be in the game.

00:15:37.800 And I think my grades probably reflected that. I was not academically focused, either in high

00:15:44.500 school or in college. I think academics came relatively easy to me. So it didn't instill

00:15:49.700 a great work ethic at school, but I just wanted to move on. It was a task to complete to get me to

00:15:55.280 the next stage.

00:15:56.540 So do you start interviewing for a bunch of Wall Street firms when you're in your senior

00:15:59.200 year or junior year, I guess?

00:16:00.700 I did. So at the time, Vanderbilt was probably a tier lower than it's considered today as

00:16:07.180 a school. And the investment banks didn't do much recruiting there. So there was maybe

00:16:13.140 one or two and some of the regional banks. And then I was able to talk my way into a couple

00:16:16.960 of interviews, but I didn't get those jobs. So I was a bit crushed. Here's what I want

00:16:22.580 to do. And I got things that were close to that, working at the regional investment bank.

00:16:28.960 And then one of the jobs I got, which I thought was closest to what I wanted to do to being in

00:16:34.280 that game, was at the company Enron. And Enron at the time was in this transformation, trying to

00:16:40.740 become essentially an investment bank to the energy industry and specifically the natural gas and

00:16:46.860 electricity industry.

00:16:48.140 What year was that?

00:16:49.140 So I started at that job in 1995.

00:16:53.240 So at 95, nobody knows Enron. They're a pretty unsexy company, right?

00:16:57.900 Correct.

00:16:58.300 They're basically doing disintermediation, like their market making on energy, and that's

00:17:03.840 about it. They're not this darling of Wall Street that they would become before their

00:17:07.540 fall. Is that, do I have my era right?

00:17:10.040 Right. It was historically a pipeline company. And over the decades, natural gas, which went

00:17:15.720 from a highly regulated business and all the troubles associated with trying to regulate

00:17:20.860 a commodity, right? That you end up having these huge booms and busts, way too much supply

00:17:26.420 or way too little supply, was deregulated. And that deregulation ended in 1992. And that

00:17:34.060 was really the emergence of Enron as it became the late stage company, was that previous to

00:17:40.380 then you had the pipeline was responsible for providing the merchant services to the buyer

00:17:46.540 and seller. So the producer of gas would sell to the pipeline, and then the pipeline would

00:17:51.780 transport the gas and sell it to the customer. It was viewed that this was negative because

00:17:56.660 pipelines are natural monopolies frequently. And so the services and the costs of those

00:18:02.380 services were too high. And so 92, they deregulate, and here's Enron as the gas merchant.

00:18:09.020 Only because they become relevant later in the story. So was Ken Lay the CEO at that time of

00:18:14.880 deregulation? And when you came on board, or was Jeff Skilling there at that point in time?

00:18:18.420 Not that you would have had any interaction with those guys as a lowly first year guy.

00:18:23.960 So Ken Lay was chairman CEO. Shortly after I joined, I joined I think May of 95, there had been

00:18:31.200 two aspects of the company. It had the historical pipeline business, and then it had this new,

00:18:36.460 it's called investment bank side. And there was what I later came to realize was the great decision

00:18:44.760 point for the company was who was going to be the number two at Enron. Was it going to be the head of

00:18:50.380 the pipeline business, or was it going to be Jeff Skilling, who is the head of the energy bank?

00:18:55.620 And so shortly after I joined, Jeff was promoted up, and Rich Kinder ended up leaving and starting

00:19:02.860 Kinder Morgan. And obviously that promotion was based just as much on perhaps who they were as

00:19:07.900 the direction that the company was going to go in. Right. I think this was a trend in corporate

00:19:14.440 America then was go asset light. So get rid of your big assets. Coca-Cola spins off its bottling

00:19:21.060 business. They just become the seller of the syrup because that's lighter on assets, but your return

00:19:27.500 on equity is higher if you have fewer assets. And so that was the direction of corporate America

00:19:32.360 generally and the one that Enron took. So I love that you show up in May of 95,

00:19:36.940 not even taking a month off like any other kid would. And what is your first job at Enron? Where

00:19:42.080 do they stick you? It's very rare for someone at Enron and even someone at an investment bank to

00:19:48.840 be put on the trading floor. There's just mistakes are expensive on the trading floor. And so they don't

00:19:54.860 want the kid that's a few days out of college. That would be the equivalent of we're going to

00:19:59.600 take kids out of medical school and you're going to get to start operating, even simple operations

00:20:04.620 without supervision. That would be catastrophic. Organ transplant's your first thing, right?

00:20:09.260 Right. But I had expressed interest on the trading side when I went through the interview process

00:20:14.100 and they called me in April and said, a couple people recently left our oil trading group. If you can

00:20:21.180 start immediately, you can start in trading. And I said, well, I graduate in 10 days. How about

00:20:27.520 12 days from now? I'll be there. And so I literally graduated, drove from Nashville to Houston that

00:20:34.240 weekend and that Monday show up at work in the oil trading group at Enron. So what did that mean?

00:20:39.980 What did an oil trader do without as much supervision or experience as maybe you would ideally want of a

00:20:46.580 trader? Right. So I certainly was not trading. I was kind of an assistant on the desk, which meant

00:20:52.460 doing a lot of spreadsheets of running analytical studies and correlation studies, building models,

00:20:59.160 getting lunch, doing all the things that first years do, right? Trying to learn the business.

00:21:04.660 And at what point did your bosses there start to realize that this kid that just came out of

00:21:12.420 Vanderbilt a year younger than everybody else has a knack for this game? Or maybe asked another way,

00:21:18.300 when did you first realize you had a knack for it? Quickly. I look back at all the good timings and

00:21:24.580 kind of good decisions that went into my career. And one of them was I found the perfect job for my

00:21:31.620 skillset as my first job. And I think that's pretty rare. And it happened by accident. Could have very

00:21:40.240 easily ended up a merger as an acquisition investment banker at Merrill Lynch. But I ended

00:21:44.840 up trading commodities at a relative upstart of a company. That was just the perfect spot for my

00:21:51.040 skillset. So tell me a little bit more about that. So oil is a very complicated thing. Gas, perhaps less

00:21:58.660 so, at least at the time. Were those two viewed as the same trading desk at Enron? Or did you shuttle

00:22:04.880 back and forth between them and find yourself eventually at gas? Enron, by its nature, was always a gas

00:22:10.020 company. It was gas focused. The oil group was small. It was kind of the redheaded stepchild. It

00:22:17.100 didn't make much money. It was necessary because some customers wanted to transact on oil with the

00:22:22.240 same company that they were doing their gas transactions with. But it was always this small

00:22:26.580 group. So then how did you work up the ranks in natural gas trading? And when did you actually start

00:22:32.200 to go from modeling to actually making some trades and by extension then earning Enron some money?

00:22:39.020 So early 1996, I was supposed to be on a formal rotation, six months on one desk, six months on a

00:22:47.920 different business within Enron and kind of rotate four rotations over the two years and then go back

00:22:53.300 to business school. And after six months, I think the team there liked me and I liked being there and

00:22:58.880 kind of got made to be an exception. So I didn't have to rotate. But kind of shortly thereafter,

00:23:04.700 one of the traders, I was speaking earlier about mistakes are costly in the trading side. And there

00:23:11.300 was an older gentleman who kind of made a mistake, kind of did a trade that ended up going bad and they

00:23:17.600 reorganized the whole group. And the new boss came up and I worked for him for a couple months.

00:23:23.560 And one day he pulls me aside and says, I have to blow up this group. I like you. It's not going

00:23:29.020 to be good for your career to be here. You need to find a different group. And he gave me two options.

00:23:33.420 One was go to London and work in the oil group there or go downstairs and work in the natural gas

00:23:40.620 trading group. And as a 21-year-old getting offered an expat package to go to UK, it was

00:23:47.140 extraordinarily tempting because I'm thinking I'm going back to business school anyway.

00:23:51.280 And it was a hard decision, but I realized the core of this company is natural gas. That's where

00:23:56.620 I need to be that I need to learn that. And so I went downstairs and started natural gas. And that

00:24:01.240 was on its own, just very fortuitous timing. I spoke about in 1992 was when the full deregulation

00:24:07.580 happened. The winter of 96 was the first time that natural gas prices really blew out. It was extremely

00:24:18.280 cold winter and all the historical relationships that gas had just completely changed. And so

00:24:26.360 going down there, I knew nothing about gas, but people who had spent their career in gas wasn't

00:24:33.040 sure if they knew anything about gas either. They knew I had the fundamentals about the physical

00:24:37.920 molecules, but what the historical pricing relationships were, it was a whole new game.

00:24:43.700 So I went down there knowing nothing, but it felt like the whole industry was trying to figure out

00:24:47.700 what does the world of natural gas look like today going forward, given everything's changed.

00:24:53.280 How did you rise through those ranks there? Because that's a pretty interesting situation where

00:24:56.820 it's not necessarily the person with the most historical knowledge that's going to bring the

00:25:00.520 most value. It's probably the person who can learn the quickest, spot patterns the quickest,

00:25:04.300 and basically morph to a new environment.

00:25:06.760 Right. So my first job in the Nat Gas Division was they put me as an assistant trader with a

00:25:14.820 gentleman who had expertise on the physical side of the business. Didn't know anything about trading,

00:25:20.840 but he knew natural gas. And I knew nothing about natural gas, but knew something about trading and

00:25:25.320 was good with numbers. And they essentially put the two of us together and said, you guys go figure this

00:25:31.280 out, work together and run this book. And so that was my first real trading job where, although I was

00:25:37.840 an assistant trader on the book, but where I was involved in the trading. At this time, Enron started to

00:25:44.480 become a darling. And it was certainly within the energy side and within the pipeline business had

00:25:50.700 become this darling. Its stock was higher than all other stocks. So every other company was trying to

00:25:56.080 figure out how do I be more like Enron. So what's the easy way to be more like Enron is go hire Enron

00:26:03.160 people, go hire someone kind of mid-level, give them a promotion and a raise and have them come over

00:26:09.380 to your company. And so that was happening all the time, which was great for the young guy

00:26:15.320 at Enron because the guy above you was leaving to go get a better job. And so it was an environment

00:26:23.080 where if you could prove that you were responsible and that you were smart, you could rise much faster

00:26:32.180 than you could at a mature company or in a mature industry. And so that next four years for me was

00:26:38.620 really the roller coaster where every nine months or so I would get a promotion again, like much faster

00:26:44.860 than I would have gotten had I been at a more mature company. And ended up by the time I was 25,

00:26:52.740 I was the head natural gas trader at the largest natural gas trading company in the industry.

00:27:00.840 It's hard. It's almost hard to believe that that's possible, especially now when I look

00:27:03.980 what I was doing when I was 25.

00:27:06.140 Right, right. It is almost hard to believe. It was a company that was very merit focused. I think

00:27:12.240 by giving out that responsibility, it was fantastic to work at a place like that. I think it ended up

00:27:19.940 being the downfall of the company as well as there just wasn't the controls on people who were given

00:27:25.100 too much responsibility, too much of the company's balance sheet to use without their adequate controls

00:27:32.500 on it.

00:27:33.120 What was the stress like that you felt just in a self-imposed manner? I mean, were you,

00:27:39.100 if you're 25 years old, and just give me a sense of, as a head trader at Enron, we're the largest gas

00:27:44.780 trading company. We're talking in the billions of dollars worth of potential profits and losses

00:27:50.140 here, correct?

00:27:51.140 In a given day, I was trading billions of dollars of notional value of gas. So a lot of it was trying

00:27:58.800 to buy it at $2, trying to sell it at $2.50 for enormous volumes. And so Enron was the largest

00:28:06.560 market maker. It was the largest speculative trader of gas. It had the most customer business

00:28:11.840 coming through it. And so being at the center of that, being the head trader there, it was just

00:28:16.980 from the moment you sat down in the morning until about three, four o'clock, it was just nonstop

00:28:24.240 trading. Someone would bring food and put it in front of me, run to the bathroom and run back.

00:28:29.680 Internet trading was starting to take off then. So there was still the trading in the pit on the

00:28:36.840 trading floor, like trading places style. So there was that. There was trading that was happening on

00:28:42.300 the internet. There was trading that was happening with other people within the company that they had

00:28:46.760 customers or somebody needed to put a hedge on because of another deal that they did. And so it

00:28:51.560 was just nonstop action. And the stress level was intense. I think I'm very good at handling stress.

00:28:58.420 The stress level was intense to a point of not being healthy. And I think this is true of many

00:29:05.600 trading floors, especially back in those days. I think it's why traders generally have short lives,

00:29:11.540 trading lives, trading careers. It's hard for the body to handle that level of stress for decades and

00:29:19.720 decades. Were you seeing this creep out into other areas of your life? Did you have difficulty sleeping?

00:29:25.580 Were you able to exercise in the periods of time? Presumably in the evenings would be your only

00:29:30.200 windowed exercise. Were you eating like crap? I mean, you're a very fit, healthy guy today. Is this

00:29:35.460 what John Arnold looked like when he was the head of trading?

00:29:38.840 No, I didn't realize it. Looking back, probably after I eventually lost the weight that I gained during

00:29:45.260 those years and cut down on some of the drinking, I started exercising a lot more. Looking back at

00:29:51.560 the health of my life was a bit telling, even like going and putting on some of the clothes that I

00:29:57.680 used to wear, seeing how I'm so differently built today than I was back then. You had to find some

00:30:04.620 method to relieve stress.

00:30:06.760 And unfortunately for a lot of traders, that's pretty negative behaviors, right? It's more drinking,

00:30:10.800 more partying, more gambling or whatever.

00:30:12.460 Exactly. Exactly. It is not a healthy lifestyle. As I grew up, I was able, I learned how to handle

00:30:18.680 the stress better. I got tired of the drinking and partying and gambling. And especially kind of

00:30:24.540 as I got into my thirties, as I got married, as I had kids, that all starts changing. But it also

00:30:30.140 can be a reason why people start to get repulsed by that career is the lifestyle that doesn't necessarily

00:30:37.460 go along with it, but oftentimes does. I want to go back to just something before we

00:30:42.380 leave this topic, which is, did you get a sense of an addiction to trading? Because I've spoken with

00:30:47.920 many friends of mine who are, have at some point in their life been in that, in that field. And for

00:30:52.640 some of them, the addiction, the high, the physiologic response that they get to a good trade

00:31:00.120 is easily on par with what the most indebted gambler feels when they're sitting at a blackjack table

00:31:06.640 or with the drive that someone has to drink who is so disproportionately dysregulated by alcohol. I

00:31:14.360 mean, did you personally get that or was it more of an intellectual exercise for you? How much of this

00:31:19.840 was just purely limbic system, dopamine surging versus more of a calculus? So I've definitely seen

00:31:29.260 traders where they had that dopamine aspect to their trading personality. I've gotten the question

00:31:35.560 many times, why were you a good trader? Why were you considered one of the best traders in the

00:31:41.920 market? And it's always been hard for me to answer. I think part of it is I had this emotional detachment

00:31:48.120 from the business. So if I was having one of my best days or having one of my worst days, if you walked

00:31:54.380 by me, you couldn't tell. It was just 100% focus on executing the process. So my views would change,

00:32:03.720 but the process of how you look at the market can easily get swayed by emotions whenever, and there's

00:32:11.640 the phrase fear and greed that drives a lot of price trends in financial assets. You're either greedy

00:32:19.760 or you're fearful, and that's driving your behavior. And to the extent I think that you can eliminate

00:32:25.680 those two emotions from the trading and from the process, you get better. And you know me well

00:32:32.620 enough, you wouldn't describe me as an emotional guy, right? So does that mean it was natural for

00:32:38.120 you, John, that this superpower, because that is probably a trading superpower. Is that something you

00:32:44.340 had to cultivate or spend any energy training in yourself? Was it the product or byproduct of

00:32:50.520 something in your childhood or was it simply as innate to you as your hair color and height?

00:32:56.120 I think it was just innate. I think this is how I was born. I have that detachment from the emotion

00:33:01.220 that doesn't affect my decision-making process. And so I think that's one of the two superpowers

00:33:07.580 that I had. I think I also fell perfectly on the confidence spectrum. And I say that it takes a certain

00:33:16.800 amount of arrogance to be a trader because the market's usually right. And to be a trader, you

00:33:22.120 have to say, I think I'm smarter than the market here. I think the market is wrong. I think I am

00:33:27.680 right. So it takes that arrogance in order to be willing to put on a trade. And I've seen people

00:33:33.460 just get paralyzed where they just say they're so concerned about the downside and of being wrong that

00:33:38.560 they can't do anything. So you have to be arrogant, but you can be too arrogant. And that's been

00:33:45.080 the destroyer of many trading careers is if you stick with it, I am right. The market is wrong,

00:33:52.660 then you're going to blow up. And so it's, how do you have the right level where it's like,

00:33:59.040 I'm confident in my view on this, but I know I might be wrong.

00:34:03.640 That's amazing. When we get to talking about the second half of your career professionally,

00:34:08.120 which is now your full-time work in philanthropy, especially the type of bets that you make and the

00:34:14.120 scope and magnitude of problems that you go after, I think those two traits that made you,

00:34:21.080 I think most people would argue the greatest natural gas trader of all time, probably serve

00:34:25.780 you just as well in your philanthropy. Would you agree? I think you said that well. The notion of

00:34:31.640 going in saying, I think we're right about this, but it might not work, or we might be wrong.

00:34:38.660 Let's kind of write down our theory and test it along the way and see if it's playing out the way

00:34:45.260 it should and not get wedded to this theory that everything we're doing in the foundation is

00:34:51.600 evidence-based, but the evidence is never perfect. So we're taking the best available information and

00:34:58.400 saying, how much risk should society be willing to take to test a different idea?

00:35:03.500 So bringing the Enron chapter of your career to a close, help me understand how you and your

00:35:10.580 colleagues under your direction are making so much money. And yet by 2001, Enron is going bankrupt.

00:35:20.960 How are those things happening simultaneously?

00:35:23.140 I don't have the right answer for that. I knew things in the company and other divisions. I had

00:35:29.260 friends that worked in other divisions. We would go to have a beer after work. I would hear their

00:35:32.780 stories about some crazy deal that their division was doing that they thought was stupid. I would

00:35:39.500 hear stories about this, but our day-to-day in the trading group was just so focused on the one

00:35:46.660 activity that we didn't have firsthand knowledge of any of that. It was always kind of the hearsay,

00:35:52.100 but the trading group was making so much money that there was a thought, I think, that we could

00:36:00.080 actually see this whenever earnings would get released, that the trading group could support

00:36:05.520 the other divisions until they stopped making the dumb mistakes and became profitable on their own.

00:36:11.200 I can't speak exactly about why the trading group was making so much money.

00:36:15.200 There were some really dumb ideas in retrospect. When you look at the documentaries, I mean,

00:36:19.060 I remember reading the book, The Smartest Guys in the Room in 2006 or whenever it came out and being

00:36:23.860 like completely fixated on this thing, but the whole broadband water idea, the Indian power plant

00:36:29.940 that didn't seem to make any sense. I mean, there were a lot of ideas that, and again, I'm not saying

00:36:34.860 this like I would have known at the time these were dumb ideas. I'm sure I wouldn't have. So hindsight,

00:36:39.920 of course, offers that luxury. But I mean, these were really, really half-baked at best, right?

00:36:45.440 It's always easy in retrospect. Yeah. I think the disintermediation, which not only Enron was doing,

00:36:53.020 but was a broad theme in the business world at the time, was real. And the investment community

00:37:00.440 was valuing companies who were disintermediating in the same way that they do today in the tech sector.

00:37:07.280 There's a lot of value to be created if you can disintermediate a business chain.

00:37:13.200 I think Enron, trying to approach it from the commodity side and trying to do it with water,

00:37:19.000 trying to do it with electricity, doing it globally in places where the quality of law

00:37:26.340 and of intellectual protections isn't what it was in America, and then having the culture of

00:37:32.820 never being able to admit failure that existed not only in Enron, but again, in many other companies

00:37:39.880 at the time as well, meant that whenever mistakes were made, there wasn't the admittance to Wall

00:37:46.180 Street that this was a mistake and we're going to change. It was swept under the rug.

00:37:53.260 And Enron, the process of bankruptcy kind of happened so quickly because all these financial

00:37:59.580 businesses, which at the time Enron had morphed into a financial business, is completely contingent

00:38:04.900 upon having the faith of your creditors, having the faith of Wall Street. And once Wall Street

00:38:10.480 loses faith in you and refuses to fund you on a day, the business is toast. And that's what happened.

00:38:17.200 And it happened, as you said, precipitously. I mean, I could certainly sit here for another four

00:38:21.700 hours and talk to you about mark to market and all of that, but I think we'll let the listeners who

00:38:26.780 are really interested in that go back and either read the books, watch the documentaries, or go deeper

00:38:31.140 on that. Let's bring it back to you, which is at what point do you realize your career at Enron is

00:38:36.940 going to be cut short? So despite the fact that you've had your head down, you've been, I think you

00:38:42.140 could make the case, the single most profitable human at that company. If the company goes under,

00:38:48.240 you're out of a job. When was that apparent to you? And then what were your next moves? And how did

00:38:52.780 you consider the decisions you had to make? It happened so quickly that there was a damage control

00:38:59.800 that I could see from my perspective in the company. Again, my perspective was sitting at a desk with

00:39:05.160 two phones in my ear for most of the day. I didn't get much of a sense of what was going on outside of

00:39:10.260 what natural gas prices were ticking up. So it happened so quickly that there wasn't much to be done

00:39:17.840 from the trading side perspective. This was all kind of, all those decisions end up in the finance side,

00:39:23.220 you know, CFO's office of how do we raise money? And so when it finally kind of November of 2001

00:39:31.420 was kind of shortly after 9-11 and that caused some havoc in the financial markets. And then that's when

00:39:38.160 Wall Street was not going to give you a second chance in that environment. And Enron arguably didn't deserve

00:39:44.640 one. And so it all happened so fast that whenever Enron lost credit worthiness in the business, then it just,

00:39:51.180 it was over. Business over. There was some time spent trying to find a credit worthy JV partner to come in

00:39:59.040 and Enron would contribute the intellectual assets and someone would contribute new money and keep the trading

00:40:04.160 operation going because it had been so profitable. If it was just swept away in bankruptcy, it was a loss of a lot

00:40:11.240 of potential value to what was then the estate of Enron, the creditors of Enron. And so there was a lot of focus

00:40:17.800 on trying to cut that deal and a deal was eventually cut with the New York bank. And I looked around and

00:40:22.600 I looked at the deal and kind of for the first time stepped back and started thinking like, what do I

00:40:26.580 want to do with my life? And that's where the decision was. I don't want to go with this entity.

00:40:33.000 I have different views on how this business should proceed in the future. And I want to go try it

00:40:38.120 somewhere else. So you take your bonus check, you take some money from a few other folks and you set

00:40:45.540 up your own hedge fund in early 02, right? Yeah. Mid, mid 2002. Again, you're the perfect guy to do

00:40:52.820 it because you're not too stressed about it. You've got a proven track record. I guess you're somewhat

00:40:58.080 toxic because even though you come from the part of Enron that is fully legitimate, you still have that

00:41:04.080 name on your back. Did that hurt you when you were, I mean, were you trying to raise capital? How did

00:41:08.320 that factor into your hedge fund? So it was an interesting time to say the least. So right after

00:41:14.960 Enron declared kind of the first quarter of 2002, I was getting calls by a lot of people, people I

00:41:22.100 didn't know saying, if you are going to do your own thing, I have interest in investing with you.

00:41:27.700 And my intent was to try to raise $50 million of day one capital and just start there and let it grow

00:41:35.120 organically and increase over time. And I thought I'd be cutting people back. I thought fundraising

00:41:40.900 would be very easy. I was, there was going to be $200 million of interest and I was going to cut

00:41:45.460 everybody. You can invest 25% of what you want to. Second quarter, 2002, dramatic change. This is when

00:41:52.260 a lot of the investigations into Enron start to bear fruit, if you will. And the headlines come out

00:41:58.900 and the headlines are, it'd say every week there's a new scandal that's coming out. And now the people

00:42:06.500 who had called me, one, they don't know if the profits that were posted in the New York Times, whether

00:42:13.580 those are real or not, whether I was going to jail or not, all these questions. And so everybody who

00:42:22.060 was banging on my door to invest pulls back. But meanwhile, I've rented office space. I've hired

00:42:27.180 employees. I've bought computers and telecom systems. And I got to move forward. I have almost

00:42:33.320 no money to do this now. I ended up starting in August of 02 with $8 million of capital, some of

00:42:40.660 which was mine. And I had two outside investors. So talk about pressure. 8 million of assets under

00:42:47.500 management is not exactly what you had in mind. As far as you know, basically the only way

00:42:52.000 you're going to grow your fund at this point is by organic returns. So you're going to have to

00:42:56.000 return your way into more money. You're not going to be out there fundraising.

00:42:59.500 Right. So one of the things after Enron went bankrupt is Wall Street started looking at

00:43:04.160 all the copycat Enrons. So all the other pipeline companies and electric utilities who had started out

00:43:11.220 these merchant businesses or trading businesses. And Wall Street essentially says, we're not funding

00:43:17.200 those businesses anymore. There's too much risk. And so what happened was that there is great need

00:43:23.140 for risk intermediation and for risk warehousing in the business. And half of the largest players

00:43:29.660 are out of that business over the first six months of 2002. And so the market became incredibly

00:43:38.460 inefficient and efficient and was willing to pay for the task of intermediation at a very high rate.

00:43:47.280 And so just by setting up the computer, there was going back to the arbitrage, it was very low risk

00:43:53.780 or arbitrage type trades that shouldn't exist in a normal functioning market that existed for that next

00:44:01.560 year, just because the market players had been so decimated. So the first month, I was up 30,

00:44:08.440 36%. On a percentage basis is high. On an actual dollar basis, I mean, made $3 million.

00:44:14.260 But also to put a point on what you just said a second ago, you were up 36% in a month

00:44:18.980 at a very low risk. So it's not just the value, it's the value at risk here that matters.

00:44:24.700 Exactly. Value at risk, I like the term.

00:44:27.560 Well, I was a McKinsey guy, remember. I was in the risk practice, right? So we think a lot about

00:44:30.920 VAR as well.

00:44:32.060 Yeah. So then second month, I'm up 33%. Third month, I'm up 38%.

00:44:37.100 And I'm sending the notes out, the investor notes out to everybody that was in my Rolodex that

00:44:42.020 expressed interest. And now all of a sudden, three months in, I'm up, what's the compound rate?

00:44:46.340 Probably 150% in three months. And so some of the people will start calling me back and saying,

00:44:52.120 hey, maybe I'll send you some money.

00:44:53.880 And so those first few years, it was doing a lot of the low risk trading to create the base and this

00:45:02.360 upward trend in profitability, and then layering on some speculative trading on top of that.

00:45:09.020 And I was able to play bigger than my asset size because I had this upward trend in profitability.

00:45:15.220 If I was wrong on my market call, I wouldn't be decimated because I was still making money on the

00:45:21.220 market-making arbitrage side of the business.

00:45:24.820 Your spec market initially was actually quite small. You switched those 10 years later.

00:45:29.640 You were basically doing the opposite. But at the beginning, it was an amazing,

00:45:33.980 you described it to me in the past as, I think, the perfect time to be a natural gas.

00:45:38.780 Yes.

00:45:39.340 Based on that inefficiency.

00:45:41.080 Yeah. It was just risk reward. It was, don't even bother about taking risk.

00:45:45.500 Yeah. There's so much free money in the market by providing that service. Just do that.

00:45:50.020 You can think about the business as a bundled product. One was the market-making,

00:45:55.600 providing liquidity, and getting paid for that service, warehousing some risk. And the second was

00:45:59.760 trying to make a call on where natural gas prices were going next. There's some synergy of having

00:46:06.360 those together. There's a lot of synergy in having those together, but that's the two strands of the

00:46:11.040 business. And most people, myself included, when they think about gas trading are only thinking

00:46:17.220 about the speculative business, which is my former countryman, Brian Hunter, very, very famously blew

00:46:23.720 up in fall of 2006. A hedge fund called Amaranth at the time was probably one of the biggest blowups

00:46:28.920 in all of energy. We'll come to that because you were on the other side of that trade, if I recall.

00:46:32.820 But it's those stories that get most people thinking about that's how you make or lose money

00:46:37.900 in natural gas trading. But you were doing something, you know, I always talk about risk to

00:46:41.880 people. I sort of explain it as a two by two. Are you picking up bitcoins? Are you picking up

00:46:46.040 pennies? And are you doing it in front of a bulldozer? Are you doing it in front of a tricycle?

00:46:50.560 You want to think through that two by two very clearly. It might be worth picking up a Bitcoin

00:46:55.040 in front of a bulldozer, but it is not worth picking up a penny in front of a bulldozer or a

00:46:59.760 bullet train or something like that. And so you sort of have to understand that's this idea of risk and

00:47:04.680 return. So at what point, I mean, I just want to kind of go back to John the guy who's on this ride

00:47:11.880 that seems hard to believe. But anybody who's made the type of money you've made in life

00:47:18.040 goes from being, I mean, I guess I'm asking this question in a weird way. Is there a moment at

00:47:23.320 which you realize you're not going to have to worry about money anymore? I don't know what that dollar

00:47:27.400 amount is. And I'm guessing for different people, it's a different amount. I've had people tell me

00:47:30.680 that this is going to sound ridiculous too. But I've had people explain to me that until you have

00:47:36.200 $600 million in your bank, you will never feel totally secure, which I find that ridiculous.

00:47:41.440 And I disagree with that idea, though I will never have $600 million in my bank.

00:47:46.040 But there must be some number at which you realize, oh, my life and the life of my family

00:47:51.140 is going to be very different. Do you remember that occurring for you?

00:47:55.620 Yeah. So that first year was remarkable for many reasons. But one of the things that happened was that

00:48:01.680 the gas market ended up being very tight. That demand was high and supply wasn't keeping up.

00:48:10.160 And so the outright level of inventories was okay. But the trend was that we were drawing inventories

00:48:17.380 or not putting gas in the ground like we should have been doing. And again, had the market been more

00:48:23.340 efficient than I think other traders, other traders did notice this and others put it on. But there

00:48:29.800 were some trades that I thought were very misvalued from a risk-award perspective. And that was that

00:48:36.140 if we were to have a cold winter, that first one, 2002, 2003, if that winter was cold, the gas market

00:48:42.680 could experience some significant shortages and the price spikes that would correspond to those shortages.

00:48:50.520 Now, the weather event was maybe a one out of five probability. But I think the bets were pricing

00:48:57.780 them at that it was one out of 50. And so as I'm making money on market making and providing liquidity,

00:49:05.220 I was putting on some of these trades, just putting a little bit of money into this trade

00:49:09.480 at various points. And that winter ended up being the one in five weather event.

00:49:14.260 And there was a two-day stretch in late February.

00:49:18.120 February of 2003, right?

00:49:19.240 February of 2003, yeah.

00:49:20.360 Yeah, one of the three highest gas prices we've had in the last 20 years, right?

00:49:24.200 I think so. Yeah. It all starts to blur together now. But you had this massive spike in price of

00:49:29.740 gas. I think approximately doubled in if two days. And that was the day the fund also kind of more than

00:49:37.960 doubled in those two days in terms of assets. And that was the day when it was like, I feel rich for

00:49:45.280 the first time. I am set for life today.

00:49:48.780 Did you call anybody?

00:49:50.520 I remember calling my mom, pretty much saying those words that we're set. We have financial

00:49:55.920 security now forever, regardless of what happens.

00:49:59.820 So doing the math, you're in your late 20s at this point. Did you have any sense at that moment

00:50:06.480 that you were going to be out of the game in 10 years and full-time working as a philanthropist? Or

00:50:13.820 was that not a clear part of your vision yet?

00:50:16.320 I always recognized the limited social value of trading. I think there is a need for someone to

00:50:23.960 provide risk warehousing and liquidity to markets. But trying to tell the story about how I was adding

00:50:31.980 value or contributing to society was hard. And that always bothered me. So when I first started

00:50:38.400 getting my first $100,000 bonus back when I was at Enron, I shortly thereafter was at a supermarket

00:50:46.680 and I see a magazine that says top 50 nonprofits in America. And I pick it up and throw it into my

00:50:53.940 grocery basket and take it home and immediately turn to the education section. I think a lot of

00:51:01.440 younger philanthropists, a lot of people from the finance industry get drawn to K-12 education.

00:51:06.300 One of the organizations was based in Houston. It was KIPP, KIPP charter schools. And so I called

00:51:11.860 them up and got scheduled to go do a tour, went, did a tour. They had no idea who I was at the time.

00:51:18.200 I wasn't a rich guy back then, but I came home and wrote them a check, a five-figure check.

00:51:24.720 And I get a call from the founder who I had not met on that original tour a couple of days later.

00:51:30.020 And this was back when kind of five figures was really significant to the organization.

00:51:35.400 And he said, thank you. And who are you? And I need to cultivate this relationship. And that was

00:51:40.540 the start of my very long journey thinking about K-12 education in the country. And so in this time,

00:51:47.800 2002, 2003, I was getting more interested in it and my check size was going up,

00:51:53.300 but it was something I thought about 1% of the time.

00:51:57.940 So as your hedge fund is growing and growing and growing, at what point are you now getting the

00:52:07.060 attention of basically everybody who wants to come in and you're doing the opposite? You're probably

00:52:13.380 starting to force distributions at some point. There was a trading magazine that came up with a

00:52:20.060 list of highest paid traders. And that was specifically from the hedge fund world where

00:52:27.540 most of the highest paid traders existed. And it was not only what was the return on your investment

00:52:33.520 in the fund, but what was your incentive fees and kind of trying to estimate that. And they would

00:52:38.900 create these lists of top 100 for the year. And I don't remember what year it was, but somehow

00:52:44.560 they got ahold of my returns and started doing the math on it and figured out that I was not only

00:52:52.320 one of the top 100, but I think top five that year. And that was the first time in a broadcast to the

00:53:00.240 world that I was making big money, but also was a broadcast to the rest of the industry that

00:53:09.720 something's going on in natural gas and all the other hedge funds should, it was a signal to them,

00:53:16.400 go figure out what's going on over there. How's he making this much money and see if there's

00:53:20.400 something for us to do. So during that time, as will happen in any market, whenever there's kind of

00:53:25.680 above market returns going on in a field, new entrants come in. And that's certainly what happened

00:53:31.400 during that time. I made a very deliberate decision that I was going to keep the focus of

00:53:39.120 the business narrow, which I wanted to be the best in the world at North American natural gas

00:53:46.920 and power trading. That was the business. Didn't want to trade oil. Didn't want to trade natural gas

00:53:52.240 stocks or natural gas bonds. Didn't want to trade agriculture. Stick to our expertise. Don't try to

00:54:00.200 build an empire here. Just do this one thing. And I think by doing so, I think it, by keeping focus

00:54:07.440 and it allowed us to achieve that mission of being the best in the field. I think it also started,

00:54:13.520 it put a natural limit as to the amount of assets that we could manage. So we just couldn't be too

00:54:20.880 big relative to the market. And the amount of money that we were making was significant. And so we

00:54:25.640 started sending back money to investors. What was the greatest you allowed your

00:54:30.180 AUM to swell to, to allow yourself to stay so narrowly focused?

00:54:34.780 At the peak, it got to about $6 billion.

00:54:37.200 That's a staggering sum of money. There are lots of hedge funds that have

00:54:40.900 ballooned to 20 and 30 billion in assets under management. And your point is,

00:54:46.120 yeah, that sounds great. And you're going to collect a lot of fees on that if you're the fund

00:54:49.860 manager, but you may be spreading yourself too thin into areas that you don't have the deepest,

00:54:55.460 deepest domain expertise.

00:54:57.580 Right. From very shortly after I started, I was the largest investor in the fund and I was in it for

00:55:03.760 the return on my money. That's how I managed the fund. And that's how we would pitch it to

00:55:09.260 central investors was, I think this is a great investment opportunity. This is where I want my

00:55:17.440 money. This is the risk where I am on the risk spectrum for my money. And if you want to join

00:55:24.120 on that journey, I'd be happy to have you, but I'm going to run a risky business and you have to be

00:55:32.060 prepared for that going on because I wasn't in it to make the management fees. That's not how

00:55:37.700 I wanted to, that wasn't my business.

00:55:40.820 Right. Right. If you're more than 50% of the AUM, you can't make money on yourself.

00:55:44.660 You can't make fees on your own money.

00:55:46.640 Right. Right. So it was, it was always driven by how do I want my money managed? What do I think

00:55:51.540 is a good investment for me? And then if other people want to put money alongside, that's great.

00:55:57.140 So by the way, I want to go back to one thing. Talk to me about the 06 Amaranth trade. Explain

00:56:02.660 for people that given the historical significance of that was pretty significant and the fallout of that

00:56:06.640 has reverberated for many years as far as the amount of money that was lost and things.

00:56:10.400 Who is Brian Hunter? What did he do so well in 2005? How did that speculation sort of go the

00:56:16.520 other way in 06? 2005, I hope I get all these facts right. My memory gets a little bit cloudy from those

00:56:22.920 days, but 2005 was Hurricane Katrina. It came in and caused significant damage on the offshore natural

00:56:30.600 gas production, as well as the processing, natural gas processing facilities that were onshore Louisiana.

00:56:35.900 And because of that, the price of gas spiked significantly. People were short supplies.

00:56:43.060 I looked this up yesterday, John. That is both unadjusted and adjusted for inflation. The greatest

00:56:48.620 peak in natural gas pricing of the last, I think, 30 years. That's September 05, right after Katrina.

00:56:55.880 Yeah. And after that time, I think two things happened. First was as ocean temperatures were rising,

00:57:02.180 there started to be a belief that number of hurricanes and the intensity of hurricanes and

00:57:07.200 thus the damage from hurricanes to the energy sector and natural gas sector was structurally

00:57:12.580 increasing. And second, that there would be a great fear amongst any trader to be short during that

00:57:20.780 time period, the hurricane season and August and September and peak hurricane season. So he had done

00:57:29.420 very well in 2005. He was- This is Brian Hunter.

00:57:32.860 Brian Hunter. In 2005, he was long during that time and made a lot of money for his fund.

00:57:37.600 And at the time, he worked for a fund, Amaranth Advisors, which was a macro hedge fund, meaning they

00:57:42.560 do everything. They trade stocks, they trade bonds. Brian Hunter was the natural gas trader for them.

00:57:48.060 Now, in 2005, as I understand it, he was by far the most profitable trading desk and trader at

00:57:54.380 large hedge fund. And so he was given a lot more position size or capital to trade with. And I think

00:58:01.880 he had the belief that something similar would happen or at least a big scare would happen next

00:58:08.260 year and would cause the same type of move. The difference was partially in reaction to the spike

00:58:13.500 in prices that we saw in 2005, it sent the signal to every producer to increase supplies. So every producer

00:58:22.100 gets that price signal, every producer puts more money into drilling for gas. You start to see that

00:58:27.000 in 2006, that supplies are ramping up. And I talked about earlier that the supply demand was tight in

00:58:34.180 2002. Supply demand got very loose in 2006. And so the market was just oversupplied. It was a very

00:58:41.160 bearish market. But Brian Hunter kept this trade on, this very bullish trade on, and kept the prices

00:58:48.800 supported, even though the fundamental picture was deteriorating, by buying,

00:58:52.100 continuing to buy more and more and more of this one product. And to put a long story short,

00:58:58.740 he distorted the relative values in that market so much. It gets told now that the trade was

00:59:05.780 me versus him. And that's very not much the case. It was the whole market versus him because he was

00:59:12.180 such a large position in this as it started to get into the first, the very early part of hurricane

00:59:19.160 season and there was no hurricane. And then prices were starting to collapse and he couldn't hold it

00:59:23.980 anymore. So he kind of single-handedly, that position bankrupted this macro hedge fund. And I

00:59:30.620 did well during that trade. I think I may have had on 25% of the opposing position. I was very cognizant

00:59:37.760 that it is possible that a hurricane comes and has a short-term price spike. And I don't want to blow

00:59:44.580 up if and when that happens. So I need to size this appropriately. And I don't think he had sized

00:59:49.600 it appropriately given the alternative scenario. And that's an interesting thing because it wasn't

00:59:54.580 just that you guys were betting against each other in terms of climate or weather, for which I would say

01:00:00.260 three months out, that becomes an unwinnable bet. Nobody can have more or better information on that.

01:00:06.420 It's the second order bet that's interesting to me, which is, okay, he's taking a position on climate

01:00:13.120 or weather, but it's really, you're taking a position on the more important question, which is supply.

01:00:18.860 And you're saying, even if we are hit with a demand shock, I believe the market is better able to bear

01:00:25.480 this now than it was in 2005. And ultimately, that's really what the bet comes down to. It's true, a hurricane

01:00:31.080 didn't hit that year and the price collapsed. But it's also possible that if a more mild hurricane than

01:00:37.240 Katrina had come, we probably wouldn't have seen the price shock we saw in 2005.

01:00:42.260 Right, right. The market was so scared. And so people were hesitant. People were only going to put on

01:00:48.020 that short trade if they thought the market had already priced that in. And I used to think about it as

01:00:54.880 you have this unknown weather event. How cold is the winter going to be? What's the hurricane

01:01:00.340 situation going to be? And you can think about it, you have this probability distribution function

01:01:04.620 of the possible outcomes. And then think about, okay, under each outcome, how would I think about

01:01:11.300 what fair value is of the commodity at that time? And then did your simple math and come to expected

01:01:17.280 value? And that really simplifies the process down much too simplistically. But that was the type of

01:01:24.860 thought process that would go in is, okay, if it's 80th percentile hurricane damage, what is that?

01:01:31.200 If it's 90th percentile, it's 99th percentile. What if it's 10th percentile, right? And think about

01:01:36.480 all these and then how's the market price today? Certainly at that time, there were people who

01:01:41.960 weren't allowed to be short. There were people who were only going to be short if it was way

01:01:46.280 mispriced relative to expected value. And I think that's what got him was that it was already so

01:01:52.980 mispriced to expected value that even had you had this supply shock happen, what's the upside now?

01:02:00.400 We're already priced for that. Yep. When you explain it that way, it's a much sadder story than just

01:02:06.440 two guys betting against weather and one guy's got to be right and one guy's got to be wrong.

01:02:11.200 You realize that it was probably a bit more of an error and hubris as well, which goes back to your

01:02:16.220 point about maybe being a little too confident in your ability to predict what's going to happen.

01:02:21.260 You spent a lot of your time doing research. I mean, again, we've already talked about you

01:02:26.360 having two superpowers, but having known you for a while, I would add to that list, maybe a third

01:02:31.180 superpower, which I believe also has come to serve you very well in your philanthropy, which is you

01:02:38.080 have an insatiable bordering on pathological obsession for knowing everything. And I say that

01:02:44.980 in the kindest way as someone who shares part of that affliction. And I remember once you explaining

01:02:49.540 to me some of the details you would study about natural gas pipelines, it's like, look, if I'm

01:02:54.780 going to be the best trader in this commodity, I have to know everything. I have to know exactly

01:03:00.200 what this pipeline looks like. How does it cross this type of part of the country? What type of bolt

01:03:05.400 are they using in it here? And what happens to it during this type of weather? I mean, how much of

01:03:09.420 your time went into understanding every piece of the minutia of how the system worked that you were

01:03:16.660 basically going to dominate in terms of arbitrage and speculation?

01:03:21.740 So by being a hedge fund structure and not being in the physical business, not dealing with customers

01:03:27.740 and dealing with pipelines, we were at an information disadvantage going in. When we were thinking,

01:03:34.460 think about whenever I trade against a counterparty and they're putting on the opposite trade I am,

01:03:42.100 what are they thinking? What do they know? Can I replicate as best I can the knowledge that they have

01:03:49.320 so that I can make an educated and confident decision? Do I want to be on the other side of this bet?

01:03:56.820 And to do so, we were at an information handicap just in terms of BP had more information that would

01:04:04.120 come through their shop than we did. So we had to make it up by having better analysis and knowing

01:04:11.240 where to get third-party information and how to analyze that information, how to craft better models

01:04:18.540 that described what the past was and thus what the future is going to be, and then try to overlay

01:04:26.100 some good smart trading and structuring of trades on top of that to get the above average returns.

01:04:34.020 But I think we were always fundamentally focused. It was, and this came from the days at Enron,

01:04:38.120 which was the largest physical mover, shipper of gas, was count the molecules. Try to count as

01:04:45.660 many molecules as you can. Where did it come from? Where did it travel? How was it consumed?

01:04:51.120 And so you can build a molecule about, if you know how every molecule behaved yesterday,

01:04:57.140 you can model how those molecules are going to behave tomorrow and how those molecules are going to

01:05:01.300 behave in six months. Now, your confidence level is not as good in the six-month model, but

01:05:05.560 you can start doing that. And then you can start doing the speculative trading on top of it.

01:05:10.740 And so I think we probably had the biggest fundamental research department of any competitor

01:05:16.680 in the space at Centaurus. And that was really what I thought our advantage was, was that we're going to

01:05:23.320 invest in the fundamentals more than anybody else is, and then overlay that with some good trading.

01:05:30.140 You just alluded to something, which I guess I hadn't picked up on before, which,

01:05:33.560 or at least it just occurred to me now when you said that. Earlier, you said natural gas was easier

01:05:38.440 than oil. When you just gave that explanation, you talked about being able to count every molecule

01:05:43.880 of gas. I suspect that that's what allows an island like North America to be easier to trade gas than oil,

01:05:50.740 because we have more insight into where gas is coming from. LNG was not a big part of gas. So gas was

01:05:58.360 being locally produced and consumed. It's not like with oil where, my God, it's coming from everywhere

01:06:04.720 and it's going everywhere, right? Is that a fundamental difference between natural gas and

01:06:08.020 oil trading, at least at that time? I mean, I know natural gas is more complicated now with shale,

01:06:12.620 with liquefied natural gas that can go offshore. But is that part of why you made that statement earlier?

01:06:18.680 Yeah. I think there's three main differences that made natural gas a great product to trade.

01:06:23.340 One was, it was this closed system that you described, that the molecules for the most part

01:06:28.540 were just stayed in North America. There was a little bit of LNG business. It was mostly baseload.

01:06:33.280 So it was easy to predict what those flows were going to be in the future. That wasn't a big variable

01:06:38.320 that was going to cause price moves in the future. And because it was this closed system,

01:06:44.480 you can model it with much better accuracy. Second was that the deregulation that got the pipelines

01:06:51.460 out of the business and the pipelines had to be third parties that couldn't take ownership of

01:06:56.800 the gas. The only service that they could provide was transportation. And by doing so,

01:07:01.880 they didn't have the pipelines, which had the most fundamental information about where the gas came

01:07:07.600 from and where it was going. They had to publish all this information in a way that was publicly

01:07:13.920 accessible and they couldn't trade on it. So there had to be the Chinese wall between the trading group.

01:07:18.860 And when you compare that versus oil, Exxon can own the oil platform in the Gulf of Mexico,

01:07:25.820 stick it in on an Exxon ship, take it to an Exxon owned refinery and put it in Exxon gas stations.

01:07:33.200 And so as an outsider trying to figure out and track those molecules, it's impossible. And that's why

01:07:39.060 the best and most profitable oil traders have to be in the physical business, have to be moving

01:07:44.920 molecules. And the third is that natural gas, because it was a seasonal product, you store it

01:07:51.200 during the summer, getting ready for the peak winter demand, that there was a window of storage

01:07:58.220 that the industry almost required when you go into the winter. And there was a window of what it should

01:08:06.740 be when you exit the winter. And so twice a year, there was a mechanism to get you back

01:08:13.200 close to fair value. And if you compare that to a tech stock today, have all these debates about

01:08:20.000 some stock, there's nothing that necessarily has to get that tech stock back to one's belief of fair

01:08:26.160 value. There's not that forcing mechanism. And if you're talking about gold, there's no forcing

01:08:32.920 mechanism in gold. If you have a surplus of gold, you're going to stick it in a safe someplace.

01:08:38.140 But with limited storage in natural gas, and the need to have a certain amount of storage when you

01:08:43.600 enter the winter, it caused that forcing mechanism, which got you back to fair value. So while price

01:08:50.180 could deviate from fundamental value for parts of the time of the year, twice a year, it kind of had to

01:08:57.720 go back to that, which was great as a fundamental trader. There's a lot of commodities where

01:09:02.320 they don't necessarily have to go back to that fair value.

01:09:06.660 So the country is entering a recession, 2008, 2009. You are still staggeringly profitable.

01:09:15.680 Where at this point in time is your head with respect to philanthropy? So we've established the

01:09:20.740 fact that when you were making $100,000 bonus as an early trader at Enron, even before you became

01:09:26.860 head trader, you're already spending 1% of your energy thinking about how you want to

01:09:30.980 utilize your wealth down the line. But now let's talk 2009, 2010. You're almost a decade into running

01:09:39.740 your own fund, which will probably go down in time as one of the most profitable hedge funds of all

01:09:44.940 time, certainly in this space. Are you, what are you, 10% now thinking about philanthropy? I mean,

01:09:50.240 how are you now thinking about chapter two of your career?

01:09:53.740 Yeah. So I met my wife in early 2006 and she had moved to Houston. She was a mergers and acquisitions

01:10:03.160 lawyer and had moved to Houston to help start an energy company. And I spent, I forget exactly how

01:10:10.040 long, but call it 18 months on that job. She and I had started in the meantime, we'd gotten married

01:10:15.860 and we're starting to think about what should we do with our lives now. We had this momentous event

01:10:22.600 of marriage. What does she want to be doing? What do I want to be doing? We have the financial

01:10:26.620 resources to do what we want with our time. And so she answered that question by saying, I don't want

01:10:33.780 to work at the energy company anymore. I want to focus on our philanthropic activities, which we had

01:10:38.980 both been doing a little bit on the side. At this point, I'll call it 2006, I was spending maybe 3% of

01:10:46.260 my energy on philanthropy and she the same. And by 2008, she had gone full-time with our nascent

01:10:56.020 foundation and we'd started hiring a few people. And I was starting to spend more of my energy,

01:11:02.640 call it 10%, 15% of my energy on the foundation, which became troubling a little bit because

01:11:11.720 it's obviously markets are efficient in the longterm. The markets are smart. The competitors

01:11:18.880 are smart. Competitors entered, had to keep finding new ways to stay above the competition. And one of

01:11:26.180 those was you have to be a hundred percent focused on this job. It's too competitive to not be a hundred

01:11:32.660 percent focused. And when I went 90%, then it got harder. When I, and as the preceding years happened

01:11:39.160 and I started thinking more about giving the money away than making more of it, that was really the

01:11:44.920 signal to me that I want to be spending my time on the other side of the table. And I'm physically

01:11:50.840 and mentally, emotionally exhausted with trading natural gas is the only thing I had done as a

01:11:57.840 professional again, from a few days after graduating college. And here I am 17 years later, I'm still

01:12:03.900 doing pretty much the same thing. And I want to do something else with my life. And so that was 2012.

01:12:10.000 And that's when I decided it's time to shut this down. I'm guessing that, I mean, I've spoken with some

01:12:15.600 of the greatest scientists in the world and not everybody says this, but there are some that do,

01:12:20.360 that they say they can't stop thinking about what it is they're working on. Anytime they get to a

01:12:27.200 stoplight, that's where their mind wanders. When they're in the shower, that's where their mind

01:12:32.460 wanders is to the problem. It's to the questions that they're trying to ask. It's the problem they're

01:12:36.340 trying to solve. Is it safe to say that you probably felt the same way until you hit that inflection

01:12:42.780 point? Absolutely. It was spent more than a decade living, breathing. I would after work go out with

01:12:50.040 other people in the industry and talk about natural gas, dream about natural gas. I would

01:12:55.120 wake up in the morning. First thing you do is check the prices, get in the shower, think about it.

01:12:59.840 What could go wrong? What do I want to do today? What's the plan? And it was just all encompassing

01:13:04.180 in life. I think to be successful in these competitive fields, whether it's in health research

01:13:10.240 or in trading, you have to give it that 100% focus. And if you don't, you're going to see it

01:13:17.140 in the results. It's just too competitive. So was it a hard decision for you then to shut your fund

01:13:23.780 down, return the capital to people and become a full-time philanthropist? Or was it actually quite

01:13:28.620 easy once you accepted, I'm no longer giving a hundred percent of my brain power to this other thing?

01:13:35.940 It was hard. That's who I was as certainly a professional. And who I was largely defined as a

01:13:44.000 person as well was as a natural gas trader, had been the place where I'd had the most success of

01:13:50.780 anything I had tried to do in my life. And so starting in about 2010, I knew this was the decision

01:13:56.540 I needed to make. It was hard. It was a hard decision to make. It got easier because things

01:14:03.020 had changed in the market. So if you look at the graph of natural gas prices, you see them peaking

01:14:10.160 about July of 2008, maybe late June, 2008, and just being on a steady decline. And the volatility

01:14:16.540 starts to change as well. The shale revolution took the market from one that was ever increasing

01:14:23.880 demand and harder and harder to get the next molecule of gas out of the ground. So having to

01:14:29.240 try to balance that through price, which becomes very volatile and leads to booms and busts,

01:14:34.760 to one that was in perpetual oversupply and kind of bouncing around marginal cost to produce.

01:14:39.440 And so the opportunity had changed. And so I'd given back $3 billion back to investors.

01:14:45.540 And I was at the point where by 2012, I need to give back another 50% down to a billion and a half,

01:14:52.080 just the market opportunity is not there. And it's hard when you've been playing in Vegas at the $25

01:14:57.860 table to go back down to the $5 table. It's just not as emotionally interesting.

01:15:03.300 And so that happened. I'd gotten married. We had kids. The regulation in the business,

01:15:10.280 partially, in fact, maybe largely due to the Brian Hunter episodes that had when the price

01:15:15.520 distortions that wasn't good for the market had just become harder. And I had just lost the focus

01:15:21.540 of my interest in the foundation side. And so all these things came together and it still took me two

01:15:25.920 years to really figure out to make that call that it's time. It's time to close us up and go find

01:15:34.040 happiness somewhere else. And I think part of that struggle was I had seen many other people in the

01:15:39.920 industry who had had similar thoughts along the years, that they want to go do something else.

01:15:45.540 And a lot of times those people left and couldn't find what to do or couldn't find satisfaction in

01:15:53.560 their lives doing something else. And so even though that they were unhappy in the trading business,

01:15:59.280 they ended up back in the trading business because they were even more unhappy what the other thing

01:16:04.880 that they had tried to go do. And so that was my fear. It was that a year from when I close up,

01:16:10.780 I'm going to miss it and I'm not going to find satisfaction in this other thing.

01:16:15.540 And then what? What do I do then? Am I really going to go start it up again?

01:16:20.460 That took me those 24 months to really get the confidence to say, I can find happiness here. I

01:16:26.620 can find other things to do and to close it down. So talk me through some of those early days then.

01:16:34.180 Laura has obviously been well up and running. She's been on this full time for several years now.

01:16:40.000 You both have a great number of interests at the time. How do you begin to make that transformation?

01:16:47.660 We've already talked a little bit about what the skills are that you brought to bear. And again,

01:16:51.640 I'd reiterate them as kind of an emotional temperament for it to not let your feelings get

01:16:58.220 in the way of what you're doing. The second one being kind of the right amount of confidence to say,

01:17:03.300 yeah, this is a huge and hard problem, but we should go after it. But maybe not too much confidence to say,

01:17:08.060 we're going to solve this problem no matter what. And then I think the third one being

01:17:12.120 probably one that gets overlooked a bit, but basically an ability to become an expert in

01:17:17.260 something in a relatively short period of time. I mean, I think people who are familiar with Bill

01:17:21.280 Gates just watched the documentary about him and not read much about him. You'll realize

01:17:25.420 he's not just a guy that revolutionized the computer industry, but when you look at the voracious

01:17:31.300 appetite with which he has explored other topics. I mean, I've only met Bill in person once,

01:17:36.460 and I'll share that the subject matter that we were speaking on, which was something in my wheelhouse

01:17:41.400 and not his, it only took me about 10 minutes to realize I was talking to someone who knew as much

01:17:48.600 about this topic as almost anyone I had spoken with. And that's saying something, because this is

01:17:52.940 not something you would assume that a person would know a lot about. I mean, this was at the beginning

01:17:58.180 of the discussion, I'm using terms that I would use with a lay person. And he's like, yep, yep,

01:18:02.340 yep, yep, yep. He's like, no, no, no, you just go straight to shorthand for me. And I was like,

01:18:07.280 but he wasn't doing it from a place that was anything other than totally genuine. You knew

01:18:11.840 that this is a guy who really knew the subject matter. Again, you share that trait, which is,

01:18:18.080 I don't know, that's, that allows people, I think, to have a bigger impact in their philanthropy.

01:18:23.000 Well, I appreciate the comparison, but it's not close. I agree with, I've gotten to know

01:18:28.660 Bill over the years and agree with your assessment of him that his breadth and depth of knowledge is

01:18:36.380 something that I have never seen in somebody else. And it incredibly impressive in that he

01:18:41.900 knows the background and knows the issues of almost anything you can think of in a way that is scary.

01:18:50.440 And I am certainly not that way.

01:18:52.800 Well, I will agree to disagree on that, John. So talk to me about the first problem that you

01:18:59.500 decided to turn your attention to once you became a full-time philanthropist.

01:19:05.460 As I said, I'd gotten my start in giving with K-12 education. And kind of over the years,

01:19:12.940 I've just gotten deeper and deeper into those questions of why does one school have different

01:19:18.920 results from a school down the street serving a very similar population of kids? And what's the

01:19:24.680 theory of change in K-12? It is such a massive system that's broken down at the school level.

01:19:31.440 And how can we as a country try to get results that we're happier with knowing all the hurdles that

01:19:38.760 go into that and all the factors that go into education and behavior? So how does that scale? How does

01:19:46.820 those small gems that you see, how can you scale that? And this is a question I think the education

01:19:55.780 reform movement's been struggling with for decades. And I watched that journey and was on the journey

01:20:03.060 along with many other philanthropists of, is it small schools? Is it better principals? Is it better

01:20:09.480 teachers? Is it the curriculum? Is it technology? All these things kind of bouncing from one idea to the

01:20:15.520 next, trying to find what's the idea that scales and create structural change? And so we're still

01:20:22.580 involved in K-12. I think it's just the most fundamental issue facing long-term health and

01:20:30.600 viability of this country. And when you talk to almost any social service provider, they always refer

01:20:39.380 back to education. And so I think it's one that we've spent a lot of time thinking about and happy

01:20:46.140 to get into that if you want. But it was the first and it continues to be a major effort of the

01:20:50.880 foundation. And I know that you've worked with, as you said, others. I think City Fund has sort of

01:20:57.320 largely, a lot of your efforts have morphed into that, correct?

01:21:00.780 Right. So I guess I'll give you the theory of change that drives our work of late in K-12.

01:21:08.000 And that's that strong and robust systems of any kind have the attributes of biological evolution,

01:21:15.520 right? And so in living organisms, that's the phenotypic variation. Do you have variance amongst

01:21:22.120 the organisms? The differential fitness, is there a different rate of survival and reproduction?

01:21:28.240 And then the heritability of fitness. And I think this is true of any organization. It's true of

01:21:34.700 businesses. It's true of any system. And it's true of the healthcare system, the criminal justice system.

01:21:40.040 And it's true of the school system. So you need to have a strong, robust system that's getting better

01:21:45.800 over time. You need those three traits. And the traditional public school system does not have them.

01:21:51.640 So if you think of a school district that is a monopoly in its area, it doesn't have much variance.

01:21:59.720 It might have a school that's Spanish emerging. It might have a school that's for the talented and

01:22:04.960 gifted. It might have another school that's a magnet of something. But generally, it's the same

01:22:10.840 curriculum, the same process, the same way of hiring, of training, of trying to develop teachers,

01:22:17.340 how your principal development is, right? You don't have that variation. The differential fitness

01:22:21.920 of do things that are working, do they grow or do they go away?

01:22:27.600 Yeah, there's no pressure.

01:22:28.680 The good stuff in public education, there's no natural mechanism for that to grow. And there's no

01:22:34.380 mechanism that really works in the public school system for it to go away, for the things that

01:22:39.380 aren't working to stop. And then the readability of traits, you need the learning organization

01:22:47.620 aspect of it, which I mean, I will tell you as a school system is not good at, and any government

01:22:55.380 monopoly is not good at quality control. It's not good at innovation to provide that variance.

01:23:03.120 And so the theory with CityFund and the theory of our K-12 work is that the school system needs to

01:23:08.480 become a system of schools, that the natural role for government is not to be the service

01:23:13.160 provider. The natural role should be the regulator. And right now, those two functions are bundled

01:23:19.900 together into one, and no system can regulate itself. And too often today, I think those systems

01:23:26.660 are structured to regulate themselves. And so you don't get that innovation, you don't get the

01:23:30.500 quality control. And so the vision is, and what we saw in New Orleans after Katrina, was this

01:23:37.980 change of going from the school system to the system of third-party nonprofit operators that are given

01:23:45.760 the chance to have the resources and responsibility to educate kids, K-12 kids. And the theory, again,

01:23:53.160 if it works well, that the parents, the kids have real choice, get to choose what type of model they

01:23:59.760 want, whether it is a immersion program, whether they want high discipline or regular discipline,

01:24:05.720 whether they want an art school, et cetera. That demand, if you're given real choice to the kids,

01:24:12.220 to the parents, that that's the best quality control that can happen. And then the government

01:24:18.600 as the regulator needs to make sure that all kids are served, because we need to make sure that ideal

01:24:22.960 that every kid is properly served, but is largely out of the business of providing the service of

01:24:28.440 education. So let's put some numbers to this, John, more broadly. So maybe think of it in terms of GDP,

01:24:34.600 how much is private, how much is public slash government, how much is nonprofit? What's the

01:24:40.100 approximate breakdown of the dollars that get allocated in the world, or in the country, I'm

01:24:46.220 sorry, along those three divisions? Of the total economy, the private sector is approximately 60%.

01:24:52.300 Government's approximately 40%. The philanthropic sector is about 2%. Now, when you take out giving to

01:25:00.840 museums, to religious organizations, to the arts in general, and religious organizations, you get down

01:25:06.080 to about 1% of the economy is philanthropy for social services or social goods.

01:25:12.460 Okay. So you're stripping out basically what I used to call maybe erroneously brick and mortar

01:25:16.880 philanthropy. And you're saying sort of 50% of it, the 50% that remains is this type of philanthropy

01:25:23.020 that people like you work on, people like Bill Gates works on. No, it's not just the brick and mortar.

01:25:27.700 No, so I'm including like gifts to food banks, gifts to the hospital system to build a building.

01:25:33.360 Oh, okay. Okay.

01:25:34.580 This is about 1% of the economy, right? So one of the things we've thought about is what's the role

01:25:40.160 of philanthropy? Because the government is giving a benefit to people who give money to nonprofits.

01:25:48.100 There's a tax deduction. And so there is a stake, there is some type of tie that I think exists

01:25:55.440 between the donor and what that money should be going for. And so we've thought about how should

01:26:02.200 that 1% of philanthropic funds, what's the best use of that? And you can think about, or we think

01:26:09.060 about, it can either supplement government services. So by providing more money to the homeless shelter,

01:26:17.900 a service that the government already provides, but you can supplement that with more resources.

01:26:21.720 And that's typically described as charity, trying to solve today's problems. And then there's the,

01:26:28.440 what some would describe as strategic philanthropy of trying to get at the core roots of issues to

01:26:33.120 prevent those problems from developing tomorrow. Both are really important. There's not a priority

01:26:38.660 or hierarchy between those two. We give some charitable dollars. You give money to the food bank.

01:26:45.180 We give money to the homeless shelter in town. You do have to meet those needs, but there is a rule

01:26:50.460 for how does the philanthropic money compliment government services to make them better? What

01:26:56.700 is the market failure as to why government is not working as well as many people believe it should?

01:27:03.500 How can the school system be better? Well, the school system now is so focused on,

01:27:09.580 is already budget constrained. It's so focused on just providing the day-to-day activities. And the

01:27:13.960 same of all these nonprofit social providers is that they're so focused on the day-to-day job that

01:27:22.900 they don't get to experiment like they should. And so there is this rule for strategic philanthropy to

01:27:29.200 come in and say, how can these actors and these systems perform better? And I think that's where

01:27:35.480 we've largely focused on our giving is looking at systems change. It's structural and it's scalable to a

01:27:42.920 way that just providing another dollar for a program largely is not. There's different roles for

01:27:48.860 different types of givers. Anybody can write the check to the food bank. And again, we write the

01:27:53.300 check to the food bank, but the smallest giver can also write the check to the food bank. Looking at the

01:27:57.640 strategic side, which requires a lot of manpower and expertise and hiring experts and getting access to

01:28:06.400 experts and thinking about here are the ideas that have been tried in the past, what's worked, what

01:28:10.720 hasn't, here are the current ideas, what's the theoretical framework for those ideas and why they

01:28:15.720 could work? What are the potential second order effects of those? And making those decisions, it's

01:28:22.080 really, it's hard for the small donor to do that. It's really geared towards the large national

01:28:26.660 foundations. And so that's really where we see our role.

01:28:30.680 Were you humbled by how difficult that is? How difficult it is to, someone could easily listen to this and say,

01:28:36.180 how hard is it to give away $400 million a year? You're just, you're writing big checks. But the way you

01:28:41.340 just described that, actually, it sounds very difficult to give away a lot of money if it's trying to

01:28:45.360 mostly be philanthropic and not charity driven. Because as you said, the philanthropic one is the one

01:28:51.540 that's strategic. It's the one that you're trying to scale and be maximally leveraged in the silo of another

01:28:58.600 agent, for example, in the case of what the government's already doing or what the private sector is

01:29:03.220 already doing. I mean, it just strikes me as very difficult. How long did it take? A, do you agree

01:29:07.680 with that? And then B, how long did it take you to come to that realization that your second career

01:29:11.620 is probably harder than your first? We have about 120 employees at the foundation today. We had no

01:29:18.600 desire or interest to have 120 employees 10 years ago. That was not by design. We thought giving

01:29:27.220 would be easy. I remember very specifically thinking or giving was going to be find the five

01:29:34.800 highest social return projects or organizations and just write those five big checks every year. Make

01:29:42.080 it easy. Make it fairly passive. We started down this route and I started pulling the research. I had

01:29:48.280 econometrics background in college. I was smart enough to read the papers. I could figure out what they were

01:29:53.280 saying. And so start with a topic like preschool. You see three papers that say preschool is amazing.

01:29:59.940 It generates all these outcomes later in life. And then you see one evaluation of the Head Start

01:30:05.200 program that shows it doesn't really have an effect. And then as you dig deeper in, start seeing

01:30:10.720 there's huge battles within this research sector about what the evidence really shows, what it demonstrates,

01:30:20.220 and the quality of the evidence that's going into all these claims about success. And I think in every

01:30:28.140 area that we thought of, look at work training programs. The first scan through, everything works.

01:30:35.220 It's all great. Writing checks there is a great way to invest money. And then you dig deeper and start

01:30:42.640 getting into, okay, the problems with those research that organizations are holding up saying,

01:30:46.880 here's our evidence that we're successful. And it got very frustrating because the more we would study,

01:30:52.260 the less we knew about what worked, what didn't. One of the learnings was very few programs worked or

01:31:01.180 new programs. So the things that work are generally already part of the fabric of society, like K-12

01:31:08.720 education. We know that works, what works. These programs that have clear evidence of success are

01:31:15.880 generally already funded by government, already part of fabric of society. So what's our role?

01:31:20.260 Are we just going to supplement with a few extra dollars on the side? And I didn't want to do that.

01:31:24.780 So where could our dollars go the best? And that really led us down this issue of how do you change

01:31:31.120 and improve the system and the incentives and the rules of a system rather than what's the next

01:31:37.980 program we can fund? Because the frustration of trying to find that program just became immense.

01:31:42.900 So speaking of a system that I think almost anybody who spent any length of time thinking

01:31:48.220 about it will pretty quickly come to the conclusion is broken, is the criminal justice system.

01:31:53.460 When did that system come to your and Laura's radar?

01:31:58.280 Laura really drove us entering this field. She was a lawyer by training, although on the corporate side,

01:32:04.760 I think she was just from having the legal background, you see the world in a different way.

01:32:10.080 And one of the first organizations that we started sending some checks to was the Innocence Project.

01:32:14.920 And we had met the head of the Innocence Project, Barry Schecht, at some event and start hearing the

01:32:19.860 stories that will just tear your heart. Someone who's been wrongfully convicted and was going to die

01:32:28.200 except for the actions of the Innocence Project. And we started funding that just because it was the right

01:32:35.300 thing to do. It was a way to help save a life that was going to be terminated without that.

01:32:43.000 I have great respect for the Innocence Project because as they started building up dozens and

01:32:47.600 into hundreds of examples of people that they got off death row or out of prison for wrongful

01:32:53.720 convictions, they started looking at the policy angle as well. So it wasn't just about the one person

01:32:59.240 or the hundred people that they were saving, although they're massively important. They started

01:33:04.720 thinking more strategically about how do we change the system so that the wrongful convictions don't

01:33:09.940 happen in the first place.

01:33:12.720 Right. Because you have to believe that for the amount of effort it takes to take one person off

01:33:18.980 death row, one wrongly convicted person off death row, having followed a few of these cases,

01:33:24.340 it can take decades. And I mean, it can consume the effort of tens of people, tens of thousands of

01:33:32.820 hours. And you would say, well, it's wonderful that we've saved that life. What if we put an equal

01:33:39.900 amount of resources on the other side of the equation, which is getting few of these people

01:33:44.100 into the system? In other words, you start to think about where's the asymmetry on this one? And it

01:33:51.300 seems a lot of it's on the front end, right? I mean, you could have a hundred innocence projects,

01:33:55.600 you will still never fully be able to rectify the situation, notwithstanding the fact that you can't

01:34:00.580 undo retroactively all the harm that is done by the time the person is set free.

01:34:07.180 Exactly. A couple of examples like that really led us again to like, okay, the systems change,

01:34:12.820 the policy focus is where we want to spend the time that there's higher potential reward. It is harder

01:34:19.740 work. The chance of success is lower, but the impact if successful is so much higher,

01:34:28.660 if you can improve how the system works. And so we started looking at kind of a number of areas of

01:34:35.140 the criminal justice system, right? I guess for first we spent a year and hired someone to lead

01:34:39.920 that work. We spent a year just thinking about all the ways, the inefficiencies in the system that

01:34:45.460 lead to bad outcomes that don't promote public safety, that destroy neighborhoods that aren't

01:34:51.680 fair and equitable for those that are charged or convicted of a crime, et cetera. And where could

01:34:57.800 we as a foundation, where could we be effective? Let's pause on that for a moment. Cause again,

01:35:02.240 I think that's just a very interesting approach that is a bit counterintuitive. You decide this is

01:35:07.760 something you're passionate about, but you don't go right into it, both guns blazing. There's a humility

01:35:13.180 that says, why don't we bring an internal team in that we'll hire that'll spend a year helping us

01:35:19.880 get up to speed on this and identify the specific targets that we can focus on. Do you find that to

01:35:28.540 be a period of impatience for you? Or do you find that to be a period of great enjoyment as you are on

01:35:35.980 the upswing of another learning curve? It's certainly impatience. We have all this money

01:35:42.900 sitting in the account. The goal is to do good with it. And we'd rather figure out how to do the

01:35:49.440 most good today rather than waiting until tomorrow. So there was this natural impatience, but I think

01:35:54.260 we've been smart enough to realize that it's smarter to invest wisely tomorrow than do something

01:36:01.460 that's unlikely to have impact today. And so that's just kind of a necessary function of it is

01:36:07.240 bring in some experts, but really study where is the leverage that a foundation can have on the

01:36:12.900 problem. Well, that's very different from the other actors that are already in the system. It's

01:36:16.700 different from what politicians can do or government policymakers or judges or police or everybody has

01:36:24.200 a role. And the question is, how can a philanthropy or a foundation that is not a natural actor in the

01:36:32.160 system, but has a checkbook, how can that create some leverage to try to steer the system and improve

01:36:38.140 it? Now, in your first version of the foundation, there were two versions, right? There was a C3 and

01:36:44.560 a C4. And I believe currently the entire foundation is a C3. Is that correct?

01:36:48.880 We've always realized that the goal is not to just do research or just do idea generation.

01:36:56.600 The goal is to have real positive policy change and policy change requires some advocacy,

01:37:04.220 political action. It just does. And so we used to have those, the C4, which is the advocacy arm

01:37:10.740 is a separate tax vehicle. And there had to be a Chinese wall between the C3 and C4,

01:37:17.260 with the C3 being the traditional philanthropic vehicle. And what we realized was that having that

01:37:24.200 Chinese wall really was harming our ability to have positive impact. And so we combined the two

01:37:31.480 entities into an LLC so that the same employee who was the expert in fines and fees and the options on

01:37:39.300 how to change fines and fees to make them more equitable and just could also go sit there and talk to a

01:37:44.760 legislature about why the problem existed and what the optimal solutions were.

01:37:52.200 So what were some of the things that you and the team learned when it came to understanding how the

01:37:57.080 criminal justice system could be so broken? And I say that again, not knowing much about it, but

01:38:02.280 knowing a little bit about it, right? Which is there seems to be an enormous racial disparity that

01:38:08.420 exists. There are also certainly by state certainly seems to be great difficulties in appealing, even in

01:38:16.580 the presence of evidence that the first trial may not have been a great trial. The amount of coercion that

01:38:23.200 goes into convictions that turn out to be, I mean, there's so, you could just rattle off, you don't have to

01:38:27.440 know anything as clearly I don't, to still rattle off five or six structural problems. How did you decide which

01:38:35.060 ones were the most important and or which were the ones that you could have the greatest impact in?

01:38:39.440 I think it was important to figure out how we got to the current system. And in this world of real

01:38:46.740 partisanship was a bipartisan response to the growing violent crime that was happening starting post-World

01:38:56.400 War II and then really peaked late eighties, early nineties that got everybody, all politicians

01:39:03.340 concerned and scared. And they felt they were being elected based upon crime rates, based upon the

01:39:11.780 amount of violent crime and trying to get a handle on that. So the violent crime was also destroying

01:39:16.900 communities. And so you had Democrats, Republicans, whites, blacks, Hispanics, all come together and

01:39:24.080 start this tough on crime mantra, which was, we're going to jack up our number of police. We're going

01:39:31.180 to jack up the penalties for any criminal act, have it severely intensify the war on drugs. And then all

01:39:39.620 the second and third order effects that came with it happened. Now, crime ended up peaking in the early

01:39:46.240 nineties. And some of it was because of some of the policies passed, but a lot of it wasn't. So you can see

01:39:52.480 different areas that adopted policies at different times. And it seems like the drop in crime was

01:39:58.660 relatively independent of when communities, both across America, as well as globally adopted some

01:40:06.880 of these policies. So why did crime go down over the past 30 years is still a mystery to some.

01:40:14.640 Some great researchers have looked at this and tried to figure it out. And it's a lot of like,

01:40:17.960 okay, a small piece of it's this, small piece of it's this, et cetera. But the times have changed.

01:40:23.020 So we still had on the books, the reaction from an environment that was very different.

01:40:28.880 And the question is, we've seen what those policies did to neighborhoods. And we've seen the financial

01:40:36.560 cost of those policies and the trade-offs associated with some of those policies. And I think you saw both

01:40:43.540 Republicans and Democrats come together, trying to rethink what's the right way to structure the

01:40:48.200 criminal justice system, all aspects from policing and courts and prisons and re-entry. What's the

01:40:54.820 right way that we should do given the environment that we're in right now?

01:40:59.340 Now, thinking back to those late eighties, early nineties, when everybody came together and said,

01:41:04.960 we just can't handle this amount of violent crime. We're going to get tough on crime.

01:41:08.500 We're going to create more prison beds. We're going to put more police officers on the street,

01:41:11.680 et cetera, et cetera. Was it sort of a combination of things that led to where we are now? Was it

01:41:16.600 basically more police, more arrests, stiffer sentences, less leniency around parole, lower

01:41:22.780 tolerance on parole violations? Like, was there any one thing or even three things that stood out as

01:41:27.360 the most damning factors that led to mass incarceration? What is your assessment of that? And I would be

01:41:35.200 curious to hear your thoughts, because I think your thoughts would be more informed than mine or just

01:41:39.480 the average person on what other factors could have accounted for the reduction in crime, if not the

01:41:46.820 increase in incarceration.

01:41:48.820 Yeah. I'll take the latter question first. The best report I've seen on this is from the Brennan Center

01:41:54.160 that really looked at, spent a significant amount of time trying to piece together what were different

01:42:00.260 responses and how much of it was just kind of demographic trends, how much of it was economic growth and

01:42:07.160 drop in better education, better skilled police tactics, all these different avenues. And I'm doing

01:42:14.040 a short shift on all the things that they've assigned some causation to. I think the summary is it's hard

01:42:21.620 to see any one of them being really causal in the shift in crime. It was most tellingly, you saw this

01:42:30.360 same trends happening globally. Different countries had different reactions to this. And they all had

01:42:37.200 that move up in crime over time into the nineties and then this downward trend. And so people were

01:42:44.960 scratching their head trying to say, well, what caused it? And part of it, I'm not sure we'll ever

01:42:48.960 know.

01:42:49.840 And then to the first question about, which I'll reiterate just in case you forgot, is basically

01:42:53.860 of all the mechanisms or tactics that would lead to an increase in incarceration. Do you have a sense

01:43:01.300 of which of those were perhaps most responsible? I don't want to get too far over my ski tips on this

01:43:08.480 and misrepresent the research. I think part of it has been longer sentences. Part of it has been

01:43:13.720 the conviction rate. So once you're arrested, we can get convicted. What percent of the people are done?

01:43:20.040 So, and it leads into the system is built to demand a plea bargain. We just don't have the court

01:43:28.680 resources, the defense attorneys, the prosecutors, the judges, the court systems to hear a vast majority

01:43:36.120 of cases. And so it ends up being less than 5% of cases actually go in front of a judge. Most of them

01:43:41.660 just get pled out. And for a long time, because those resources don't exist, there's been incentives

01:43:48.540 that have been built into the system that almost coerce people to plead guilty to crimes that they may

01:43:55.140 not have committed. Because just from a risk reward, it is, I didn't commit this crime, but there's a

01:44:02.460 20% chance I get found guilty. I get a 20-year sentence, or I can serve, I can plead down to a lesser charge

01:44:10.280 and get six months, of which I've already been here for three months. So three more months and I'm out,

01:44:14.980 or my life's over. Going back to your days of trading, that's a no-brainer calculation.

01:44:21.640 Yeah. And it's really hard to see how you've solved that problem without a massive infusion

01:44:27.340 of resources into the courts and into prosecutors and defense attorneys, which is not where we want

01:44:33.480 to be spending money. We'd rather spend money on preventing crime on social services to not have

01:44:39.440 that problem to begin with. And so how do you get rid of this culture where the system can't handle

01:44:46.340 everybody going to trial? One of the biggest challenges that nobody has a great answer for.

01:44:52.240 Now, I don't know if this has been a focus at all of your foundation within criminal justice work,

01:44:57.040 but obviously in the last few months, it's quite topical with respect to the relationship between

01:45:03.080 the police and race and the role of systemic racism within law enforcement. How much does that

01:45:09.660 factor into the economics of it beyond the obvious, which is disproportionately arresting,

01:45:18.640 presumably disproportionately convicting, just based on what you just said, the stats you just laid out.

01:45:24.320 I mean, I would have never guessed that 95% of cases would be pled. And if that's the case,

01:45:30.020 then yeah, I just answered my own question, which is if you're going to arrest disproportionately

01:45:33.900 minorities, then you're going to convict, or at least put in prison disproportionately

01:45:38.380 minorities. And certainly the few times I have visited prison, it's disproportionately

01:45:43.660 minorities. Take all of that and try to package it into a question. What is the role for philanthropy,

01:45:49.980 if there is one, to try to address the questions of racism within law enforcement? Does that factor

01:45:56.680 into a tool for criminal justice reform? There's obviously been a lot of debate or discussion

01:46:02.520 this year on that very topic. And there's no doubt the disproportionate nature of the criminal justice

01:46:10.180 system on minorities and particularly on the black community. For so long, the political incentive and

01:46:16.320 so much of the focus has been just on crime rates with no regard for the secondary effects that the

01:46:24.320 criminal justice system causes on these communities and on families. And I think that's one of the

01:46:29.760 things that we as a society are trying to grapple with now, not for the first time, but for the first

01:46:34.720 time, this has gone into a mainstream discussion. Sorry, just to make sure you're saying we all

01:46:42.280 acknowledge and have acknowledged historically that it's disproportionately black men that go to prison,

01:46:48.160 prison. But we're now taking a more broad look at the implication on, for example, children that are

01:46:55.360 now left without a father. Is that what you mean as an example of the impact on the family?

01:46:59.460 Right. And the psychological effects of being a black man in America, especially in a low income

01:47:05.720 neighborhood that has, and especially if it's an aggressive police force there. I think one of the

01:47:11.580 dilemmas has been that minority communities have felt both over-policed and under-policed.

01:47:17.220 At the same time, they feel over-policed with the techniques that the police are using in their

01:47:23.780 neighborhoods. So the random stops, certainly back in the era, stop and frisk, and a presumption of

01:47:30.920 guilt and that people, especially young black men, are likely to be up to something bad. However, there is

01:47:39.660 still a crime problem. Most crime is committed in one's own community. We're in the very

01:47:47.200 near geographic area around the community. And there is a huge cost to society of violent crime. So

01:47:53.640 nobody wants the police to leave entirely. There still has to be that function of deterrence and

01:48:01.340 trying to clear cases that have been committed. So how do you create a policing system that tries to

01:48:10.080 address both of those? That treats people more equitably, more justly, recognizes their constitutional

01:48:18.700 rights while protecting those communities? Because the cost of policing on communities is high. The

01:48:24.820 cost of violent crime on communities is high as well. And that's the struggle with the policing

01:48:29.360 reforms. And there's things that we absolutely should do. A lot of those are getting enacted now,

01:48:34.360 or at least being discussed now. But it's not just, problem doesn't get solved just by passing one new

01:48:40.840 policy. These problems got created over decades, over centuries, over decades of policing techniques, over

01:48:47.840 centuries of disinvestment in these communities. And the question is kind of how do you both provide the

01:48:54.320 public safety while not causing the damage that some policing techniques cause today?

01:48:59.940 So then shifting gears a little bit within the criminal justice system, how much of your effort

01:49:05.180 has focused on the other side, which is recidivism? I mean, one of the things that I was most struck

01:49:11.760 with when I visited prison was the lack of what appeared to be logic around why somebody was in prison.

01:49:21.320 So again, maybe I'm being overly simplistic, but the way I would view it is there are sort of not that

01:49:29.440 many reasons to put someone in prison. One reason to put somebody in prison is to protect the public

01:49:34.960 from them. Another reason to put someone in prison is to punish them for something they have done.

01:49:42.220 And yet a final reason to put somebody into prison that would factor into the first two,

01:49:47.740 should they be released again, is to provide them with a set of skills to reintegrate into society

01:49:54.260 in a better way. So you've got these, call it two pillars and then a foundation.

01:50:00.560 And I was very surprised. Admittedly, I was in a maximum security prison, but nevertheless,

01:50:06.600 at least half the men that were there were going to be out of jail in their lifetime.

01:50:10.400 I was very surprised at how there was virtually no effort into the rehabilitative part. So even if you

01:50:17.860 took a long view on protection and punishment, the lack of rehabilitation almost guaranteed recidivism.

01:50:26.700 Again, going to your point, if 95% of people are pleading out of something, many of which are

01:50:33.160 things they didn't do, what they don't realize in that VAR calculation is, yeah, I'm going to be out of

01:50:39.800 jail in three months, but I'm going to have a very difficult path to getting a job. I've now moved off

01:50:47.000 the track of non-felon to I am a felon, and that's a very different path. So is there an opportunity

01:50:54.360 for strategic philanthropy to play a role in the rehabilitative side of incarceration?

01:51:01.280 Yes. I agree with everything you said. It's very hard to design effective recidivism programs

01:51:09.140 after someone's come out. We've tried this as a society in many different forms and shapes

01:51:16.440 for a long time. And the evidence is very poor that they have. You study it in a diligent way

01:51:24.500 that these programs work. It's a very tough problem. And so there's a theory, which I believe,

01:51:32.040 and kind of going on what you said, that the nature of prisons has to change. That if you wait until

01:51:38.180 the day someone's released, that's way too late. It's like if you wait until someone drops out of

01:51:43.440 school to step in with some more social services, it's too late. And so we have a couple of projects

01:51:52.000 trying to reimagine prisons, think about exactly what you said about what's the role of prisons?

01:52:00.380 What do we want society to do? The struggle is that states and cities, states and counties that fund

01:52:08.460 this are often constrained financially. And so they're trying to figure out how do I meet today's

01:52:15.180 problem, which is I got a lot of people in prison versus how can I make investments to improve

01:52:23.040 outcomes over the longterm and how much of the budget can go to improving outcomes over the longterm

01:52:28.580 while we have to meet today's needs. And anytime that there's a financial shock, you stop investing in

01:52:35.880 the investments because you try to meet today's needs. And so I think so much of the public money

01:52:42.720 has gone to the day-to-day work of it, that not enough is trying to step back and think,

01:52:48.240 how could a system be redesigned? What should people who are stuck behind the bars, what should they be

01:52:55.900 doing with their day? How can we try to maximize the percent chance that they don't come back here when

01:53:01.700 they're released? Because the recidivism rate is incredibly high. And again, we just haven't found

01:53:07.880 ways to lower that through programs that reach people when they are released.

01:53:13.880 So part of the problem with that, I think, is you could certainly make an ROI case that if you invest

01:53:19.500 more now, you'll save much more tomorrow. But so in other words, if you have a hundred people in prison

01:53:25.240 that are going to get out every year and ordinarily 80 of them are going to be back within five years

01:53:31.660 and you can make it 20 of them are going to be back within five years, oh my God, the cost saving,

01:53:37.120 you could almost invest anything you wanted to make that happen and it would pay itself off. The

01:53:41.540 problem is it won't pay itself off for five years. Is that a fair statement?

01:53:45.300 Right. So in the private sector, they would make that investment every day. But in the public sector,

01:53:50.840 it's on a cash accounting. You have to balance the books this year and you have a fixed amount of

01:53:56.320 money. We can raise taxes and raise revenues, but it's hard. Nobody likes to raise taxes. And so you

01:54:03.160 have a fixed amount of money. So how much money goes to the investment, even if it has a strong ROI?

01:54:08.480 And I think that's where the philanthropic sector can be an active player or actor in this system is by

01:54:16.480 providing the funds to experiment with different ideas, different programs in prison, and then

01:54:23.800 funding the high quality evaluation to see what is the ROI. Can we get good data so that we can go to

01:54:31.460 the state and say, look, this program has a very positive ROI. I know it's hard in the short term to

01:54:37.800 deviate money away from just the way we're doing it now. And it's going to be hard to find the funds

01:54:42.240 today to make that investment. But there's great evidence if you can find those funds that five

01:54:48.200 years from now, everybody's going to be better off. The state's going to be better off. Society's

01:54:52.140 going to be better off. The person entering society is going to be better off. And so you got to make

01:54:57.040 that argument, but you have to be able to provide that high quality evidence of effectiveness because

01:55:02.160 everybody shows up saying, my program works. My program works.

01:55:07.200 Is that exactly the type of work you guys are doing in this space, which is basically trying to

01:55:12.120 design the best quote unquote trials or experiments that could at least allow for an evidence-based

01:55:20.260 decision with respect to how to handle these things? That's certainly a line of the work.

01:55:25.660 Some of it is more about values. And it's, should we keep someone detained in jail before they've gone to

01:55:35.760 their court date because they don't have the money to pay bail? I think that's just a value.

01:55:42.580 So the criminal justice has this mix of things that you can talk to ROIs on some things. Other

01:55:50.260 things, it's just, is this how our society should be functioning? Is that a right thing? Is that

01:55:55.980 balance the interests of the system? I think a lot of times when you sit down with people and you're like,

01:56:01.540 is this an American value? Is this an American ideal that the system works this way? They will say,

01:56:08.400 no. Okay. Then how do we fix it more closely represents American values without, while minimizing

01:56:16.640 any potential second order effects, negative second order effects.

01:56:20.880 So let's pivot to another area that is enormous for the foundation, which is health policy.

01:56:25.000 This might be, I don't know, this is easily one of the most complicated systems in this country.

01:56:30.380 How are you thinking about it? And where are you trying to apply yourself? Because it's

01:56:35.840 just too big. This strikes me as sort of the hedge fund problem you alluded to earlier.

01:56:40.840 You could potentially try to spread yourself too thin, try to play in every area of it and get nothing

01:56:48.240 done. So knowing you, though, I don't know where you've chosen to invest your time lately. I'm guessing

01:56:54.040 you have some clarity about the precision with which you want to think about that.

01:56:58.020 Yeah. And you're right. It's just such a big issue, complex, the number of things that one could work

01:57:05.700 on in health policy is immense. And so I did the same thing. We're thinking about where in health policy

01:57:13.460 should we be focused? We started working in this area about eight years ago. And after doing that same

01:57:20.940 type of canvassing that we did in criminal justice work, we realized that our first area should be

01:57:25.760 on drug prices. And I've identified that as an area where kind of very obvious flaws in the existing

01:57:32.180 system, that there were ideas that were, one could conceive of being enacted on how to fix it.

01:57:40.380 And that the political window might open in the future such that there was demand by the public

01:57:47.600 and thus by politicians to actually adopt some of this stuff. And so kind of using those three

01:57:53.700 criteria, we ended up with how do we create a more rational system to price pharmaceuticals that

01:58:01.460 balances interest, balances incentives that are necessary for the private sector to do the

01:58:06.660 innovation that they're doing. It balances the financial interests of the state and the federal

01:58:12.760 government that's largely paying for a lot of this stuff and that maximizes access for the patient.

01:58:19.680 So if I understood you correctly, you're basically saying, look, let's look at what solutions could

01:58:24.600 look like, even though if today the political will to make changes isn't there, this is going to take

01:58:30.340 us a while to figure out what to do. And maybe in 10 years, the water has gotten hot enough that the

01:58:35.880 frog is willing to jump out. We'll at least have something in place. Is that kind of how you went

01:58:39.760 about thinking about it was taking a long-term view? Yes. It was that the political window wasn't

01:58:45.400 open eight years ago when we started the work. You could see cracks in it. You can see cracks in that

01:58:52.160 window. And I think that's one thing that we've been good at at a foundation is trying to identify

01:58:57.440 where's the political window going to open up in the future, whether it's in changing the bill system,

01:59:04.060 whether that's in doing pension reform or in pharmaceutical prices. We've gone to these areas

01:59:09.820 and we were early. And so when the window opened, we had evidence-based ideas that we could present

01:59:18.100 to policymakers and could properly document the problem. There was a whole effort on communications

01:59:24.520 to both individuals, to society about what the abuses in the system are in any of these areas and

01:59:32.380 including in drug pricing, but then also had ideas that you could go to them and say,

01:59:37.860 here are the three things you need to do. Now, the pharmaceutical industry is perhaps the most

01:59:43.960 complex industry of any. And so there aren't the three things that should be done. There's the 20

01:59:50.660 things that should be done because it is just such a broad and complex system with so many loopholes

01:59:56.520 and bad incentives that's driving bad behavior that to get at it is not, here's the one thing,

02:00:02.720 it's here's the 20 things. The downside is you start to lose policymakers when you hit number four

02:00:07.580 because they only want to speak in lists of three.

02:00:11.460 So how optimistic are you? Because this is an area where I know a little bit. I've had Marty

02:00:16.320 Macri on the podcast before. I know you know Marty and we've spoken about this. We have an entire

02:00:20.640 episode on this topic. I've had Catherine Eben on before to talk about a different angle here,

02:00:24.960 which is basically just the difference between the, basically the corruption within the generic

02:00:29.120 drug industry, which is a totally different problem from the one you're addressing. For as

02:00:33.140 much as I know about this, I feel like I still don't understand it, which I think speaks to exactly

02:00:37.880 what you just said. If a problem has 21 bullet points to fix it, it's a complicated problem.

02:00:44.660 What is your level of optimism? I mean, to be blunt, do you feel like you are spinning your wheels

02:00:49.740 for eight years and this is a problem that will only get fixed when we are on the verge of

02:00:54.180 bankruptcy in this country? Because as you said, this is largely a government spend problem.

02:00:59.020 This is my view, by the way, this is my little rant on the United States. So we basically carry

02:01:06.160 two enormous burdens for the world. There are two things we disproportionately pay that our taxes

02:01:12.260 disproportionately go to. On some level, subsidize things in the world. And one is military spend and

02:01:18.500 the other is healthcare spend. And you might say, well, gosh, why would healthcare spend in the

02:01:22.140 United States be a subsidy for the world? But it's effectively that we pay so much more for drugs

02:01:26.920 here than our neighbors do that we, in effect, subsidize the cost of R&D to the point where the

02:01:34.120 incentives are to make the drugs here, to distribute them here and elsewhere, but we disproportionately pay.

02:01:39.780 Do you agree with that assessment or is it overly simplistic?

02:01:41.740 Right. We're 3% of the world's population. United States, 3% of the world's population.

02:01:47.120 We pay 50% of the pharmaceutical revenues of the world. So there's no doubt that the prices that

02:01:57.560 we're paying is helping and creating incentive for more medicines that others then get to benefit from.

02:02:05.380 But one of the talking points I have in this is the NIH spends so much money on the basic science

02:02:13.200 that's required to get these drugs started. And in return, the pharmaceutical companies charge us

02:02:18.900 2X, 3X the prices of other countries. We shouldn't be getting a discount because the United States

02:02:25.760 taxpayer is funding some of the basic science, much of the basic science, but some of the total cost of

02:02:31.780 developing these drugs. But rather than, we don't get the discount, we don't even get the same prices,

02:02:36.860 we get the highest prices in the world by a large measure.

02:02:40.760 So it comes back to this notion of, you'll hear people say things all the time like,

02:02:44.080 this is not sustainable. Our cost of healthcare is not sustainable, blah, blah, blah. And I remember

02:02:47.920 hearing somebody say something once and I don't remember who it was, but I really agreed with the

02:02:51.340 point he made, which was nonsense. It's totally sustainable because we're still doing it.

02:02:56.140 I mean, it's going to be sustainable until it's no longer sustainable,

02:02:59.680 until we default on our debt as the largest sovereign default. This ridiculous system is

02:03:06.840 totally sustainable. So then my question is, what will it take to change this? Given the complexity

02:03:13.400 of it, given all of the bad incentives, given everything that you and I just said, what would

02:03:19.600 it take for us to not be spending 15, 16, 17% of our GDP on healthcare at a clip that's probably

02:03:27.080 increasing at 5% per year in relative growth? Right. We spoke earlier about the downsides of

02:03:34.240 the state having to balance the budget and that's that it can't make the high ROI investments that

02:03:40.160 it should. The upside is that it forces the states to consider trade-offs. They can spend a dollar on

02:03:47.820 healthcare or a dollar on roads or a dollar on education or a dollar on social services.

02:03:52.720 And they have to decide where's the highest value and they look to save money. The federal

02:03:59.440 government without that constraint, at least in today's environment, doesn't have to make that

02:04:05.660 trade-off. So any proposed legislation where somebody gets harmed, unless it's only or concentrated

02:04:14.600 mostly in the other party's constituency, that will not pass because no hard decisions want to get

02:04:22.540 made. And so the ramification of that is enormous budget deficits today and an enormous debt that has

02:04:31.440 had a lot of people sounding alarms for decades. Now, those alarms and those concerns about the debt and

02:04:41.180 what it's going to lead to have not come true today. It doesn't mean they're not going to come

02:04:45.900 true in the future. And I think that's the greatest concern is that the United States is not going to

02:04:52.040 default on the debt. We can just print the money. But what can happen is high inflation. And again,

02:04:57.940 people have been talking about this for years and I don't know if it ever comes true or not,

02:05:01.700 but we in this country now have a fiscal or monetary response to every problem. And the one problem you

02:05:10.100 can't solve from fiscal and monetary tools is inflation. And in fact, you have to go the other

02:05:16.960 way. And that's when things get really bad is when you have to be cutting fiscal spending, when you

02:05:23.720 have to be increasing interest rates to try to combat inflation. And so I don't know if the inflation

02:05:29.100 comes, I don't know if it ever comes, as someone who thought a lot about risk in their career,

02:05:35.520 I'm very concerned about the downside should it come. We just don't have a political environment now

02:05:42.200 where tough decisions can get made. And so what happens if we start seeing high inflation then

02:05:48.460 forces up interest rates that causes all the repercussions, negative repercussions of that,

02:05:53.100 because we have the system now so levered with debt at household level, at the business level,

02:05:58.680 at cities and states, at the federal level. So what would we do, John? Help me understand that.

02:06:03.960 So right now we can get away with printing money because the interest rate that the government

02:06:08.080 pays is very low. If inflation hits and the interest rate goes up, I mean, as it stands now,

02:06:15.240 the United States government's debt service is a staggering number. You probably know it. I certainly

02:06:19.680 don't. I try to block numbers I really, really hate out of my mind, by the way. So I think at one

02:06:24.640 point I knew how much the United States paid per day in debt, and I quickly buried it somewhere in,

02:06:30.160 I don't know, somewhere in my spinal cord. It's not even in my brain anymore. But at some point,

02:06:34.900 as you said, if inflation hits and interest rates rise, that debt service could overwhelm our GDP,

02:06:39.400 yes?

02:06:40.120 Yeah, it could. The debt, people argue we should do more deficit spending today because interest rates

02:06:46.160 are low. We can borrow for 10 years at very low rates. Reality is we borrow generally short term,

02:06:51.960 but even if we put all the borrowing at 10 years or 30 years, we never actually pay off the debt.

02:06:57.060 It's just accumulating. So as long as GDP is growing faster than real inflation, it's okay

02:07:03.620 because on a real basis, it declines. But that's not what happens. Debt's increasing much faster than

02:07:10.740 real GDP. And so the real debt is increasing and we never pay it off. And we're not sure whether the

02:07:16.420 low interest rates are going to be around forever or not. It was 2007 when interest rates were close to

02:07:21.700 5%. Just imagine that now, if interest rates went back to 5%, what it would do to stock prices,

02:07:28.800 to businesses who are so levered, to cities and states, to everybody, to households.

02:07:33.620 If you raise the cost of borrowing-

02:07:35.380 Historically, 5% is not astronomical either.

02:07:38.840 No. And we've certainly seen double digits. I mean, you've got to go back 40 years now,

02:07:42.660 but we've seen double digit interest rates before in this country. And the decimation that would take

02:07:48.380 place if that happened again is immense. And so I always think about, I want to help the world.

02:07:55.900 I want to solve problems. But if the answer is just shovel more money at it, that's not a

02:08:02.660 sustainable answer in my mind. So everything becomes, how do we improve the system without

02:08:08.140 spending more money? Or how do we prove the allocation of resources today? And that gets us

02:08:13.260 back to pharma, is that a dollar spent on pharma, which some portion of that goes to innovation and

02:08:19.380 creates incentive for innovation. Well, innovation's great. In a world of no trade-offs, there's no

02:08:25.420 problem with that. And if you believe that there are no trade-offs with how we spend our resources,

02:08:31.440 then pharma prices are fine. In fact, double them, triple them. There'll be more incentive for

02:08:36.480 innovation in that world. But that's not the world that I believe we live in. I believe there is a

02:08:41.360 trade-off in that a dollar put into pharma innovation is a dollar less for everything else.

02:08:46.560 It could be other healthcare innovation or healthcare services that aren't getting provided

02:08:50.460 today. Or it could be in education. It could be in making our prisons better so that there's less

02:08:55.540 recidivism. All these ways in that somehow the pharma industry has been able to create this island.

02:09:02.140 Every other industry has to fight for the dollars and try to convince the state and federal government,

02:09:07.400 give me an extra dollar. Here's why. And the pharma system has just been able to create this island

02:09:12.300 where they don't have to compete with anybody. They got their own rules. And it's a messed up set

02:09:17.040 of rules that incentivizes the wrong thing. So even within that, we're not getting the drugs that we

02:09:22.680 should be getting. We get a lot of marginal oncology drugs that probably don't provide any real benefit

02:09:28.420 versus the current drugs. And we're not investing in the antibiotics. We're not investing in vaccines

02:09:33.720 because the financial incentive isn't there for lows. So we're spending tons of money as a society

02:09:39.020 and not even getting good returns for it. Sorry, that's my rant.

02:09:43.020 It's very disheartening to see just how low that ROI is. I mean, I think, again, it comes back to this

02:09:49.940 question of where does the crack finally have to occur? I love this expression. I don't know who it's

02:09:56.620 attributed to, and I'm probably paraphrasing it, but it's like change happens very slowly,

02:10:01.640 and then it happens very quickly. It's like the stonemason that is banging, banging, banging away

02:10:08.020 on the stone for hours and hours and hours. And to the outside world, nothing is happening. And then

02:10:13.480 with one more strike, it splits. And I feel like a lot of your philanthropy is like that. It is years

02:10:21.760 of banging away at something that seems unchangeable. And there's a belief, there has to be a belief that

02:10:28.680 at some point that nth strike is going to split that rock. Is this a skill that you, because that

02:10:36.600 seems like the opposite of trading in some ways. Trading was in a relatively short period of time,

02:10:41.360 you're going to find out if you were right or wrong. Again, you always had the advantage of being

02:10:46.400 able to adjust your positions in the presence of new information, but at least you had a feedback

02:10:52.520 loop that was relatively short. Here, your feedback loop is much longer. Does that pose a challenge

02:10:58.200 for you emotionally? Absolutely. And you're right that the trading world has that instantaneous feedback

02:11:05.560 about whether you're right or not. And you used to have the P&L marker up in the corner of the computer

02:11:13.380 screen that would tell you at every moment in time what the market was telling you about your

02:11:20.120 position. And a lot of these efforts that were involved in on policy change, number one, it take

02:11:25.900 a long time. And second, as you described, you don't know if you're making progress often because

02:11:32.940 it feels like you're just have the hammer against the wall, have the hammer against the wall

02:11:36.600 and driving yourself crazy and wasting money. And then all of a sudden it happens. There's a great

02:11:44.040 book I read. It was written by an advocate who was trying to get rid of the don't ask, don't tell policy

02:11:49.020 in the military and allow gays to openly serve. And this turned out to be close to a 20-year

02:11:54.540 campaign for him. The first decade, his wins were so small. His advances in it, it was like he was

02:12:02.960 trying to get invited to give a talk at a class at the military academy, was a step forward. And you

02:12:10.820 could see at any given time, he could have spent five years with very little visible progress

02:12:17.340 and just stopped and said, pushing this rock. I've been hitting the wall. I'm not making any

02:12:22.520 progress. This is a waste of my time. I should be doing something else and gone and done something

02:12:26.440 else and not achieve success. But he stuck with it. And the second decade, he ended up getting the

02:12:32.460 policy reversed and it led the effort. And I think about that story a lot of it's hard to know during

02:12:39.200 that time, like five years in, are we wasting our time and this is never going to pass? Or is the

02:12:45.340 wall going to crack tomorrow? And you just don't have that feedback mechanism in this work that you

02:12:50.840 had in the market and the complete opposite end of the spectrum. And I guess that's why the research

02:12:56.760 that you do, the time that you take, the amount of deliberation that goes into your philanthropy at

02:13:03.100 least gives you a greater foundation of confidence. I interviewed someone by the name of Rick Doblin,

02:13:08.260 who's been singularly focused on the legalization of MDMA since about 1986. Again, it's staggering to me

02:13:14.880 to think 34 years he has worked on the exact same problem. And I just had a call with Rick yesterday

02:13:20.460 and I guess I don't know if I'm going to be careful what I am allowed to say or not say,

02:13:25.100 but I think I can say with some confidence that he is probably closer than ever to achieving that goal

02:13:31.120 through his organization, MAPS, the Multidisciplinary Association for Psychedelic Studies. And again,

02:13:37.360 I just think that people who can do what you can do, who can do what Rick Doblin can do,

02:13:41.500 who can do what a lot of great philanthropists can do. It's not just writing the check. That's

02:13:46.040 amazing. That is unbelievable to be able to write the check. It's equally amazing to be able to stick

02:13:52.220 on a problem. Speaking of problems, there's one problem you and I have never discussed,

02:13:57.240 but it seems so up your alley. I wonder if you have evaluated it and decided it's not worth,

02:14:02.720 you don't have the assets, you don't have sort of the problem solving asset to go after it,

02:14:07.820 or you think enough people are on it. But I'm very curious as to what thought you guys have

02:14:11.340 given to climate change. Again, given your understanding of energy, which is at least

02:14:16.480 a third of the problem, tell me how that's come across your radar.

02:14:20.460 Yeah, we do a little bit on climate change. I think as a trader and again, someone who

02:14:27.540 thinks about risk, it's a problem where the downside possibilities are so enormous

02:14:33.300 that it makes sense as a society for us to make the investments today to try to decrease the

02:14:40.200 probability of those downside scenarios. I don't know what probability it is of those downside

02:14:47.720 scenarios that are truly catastrophic from an economic standpoint, from a life standpoint that

02:14:53.740 change how humans really live, but it's greater than zero. It's less than a hundred percent. It's

02:14:59.920 somewhere in there, but the downside is so great that society needs to make that investment.

02:15:04.720 So we typically get drawn to the areas where I'd call them orphan areas, where there's not much

02:15:10.880 focus, especially philanthropic focus. Things like public pension reform or changing how elections are

02:15:18.300 conducted or the pharmaceutical pricing or surprise billing. Things where the day we enter it,

02:15:24.140 we probably have committed the most money of any other philanthropic actor in the system

02:15:30.560 already. What strikes me about the climate field is that there are remarkable people,

02:15:37.340 there's brilliant people who are working on this today, there are very thoughtful philanthropists

02:15:43.820 who are working on this today, who oftentimes either make this their single issue or one of two

02:15:52.140 or three issues that they'll be working on. So I always think about what's our additionality

02:15:58.300 into the problem. And one of them is that I think because we work with both the left and the right,

02:16:04.940 and we're not a political organization, and many of those who are both the researchers, the advocates,

02:16:11.040 the funders in the climate space do come from the left, that I think we can try to support those efforts,

02:16:17.340 those organizations and politicians that are on the right, who want to start taking the steps.

02:16:23.500 Because this has to be a bipartisan effort to solve. It's hard to imagine today how that happens.

02:16:33.740 But Republican Party is moving slowly, very slowly. But you start to see some people with real

02:16:40.520 credibility within the Republican Party, and there are thought highly of, start to think about,

02:16:45.100 there's an acknowledgement that there's a problem. There is dispute about what level of investment is

02:16:51.760 merited to deal with it. And I think that Democrats don't help Republicans get there.

02:16:58.780 When you put the whole Democratic platform into a climate change bill, I don't think it helps

02:17:04.920 Republicans talk about the issue and be a productive partner. And I think it's going to have to be,

02:17:12.320 again, it has to be bipartisan for it to be sustainable. Perhaps Democrats win the White

02:17:18.600 House to perhaps Democrats win the Senate for 2021. They might take down the filibuster. But what

02:17:24.480 happens when that changes? And do those rules and laws stay enacted or do they get repealed? And so

02:17:30.480 that's why I think all these things that we work on need to be done in a bipartisan way, including the

02:17:36.040 pharma. We got a bill passed in the, through Senate Finance Committee, Republicans, Democrats come

02:17:41.680 together, get this close, and we just can't get it onto the floor. That's where we are.

02:17:46.320 So John, your kids are, I'm guessing, they probably don't, even your oldest probably doesn't remember

02:17:54.660 you being a traitor. So your kids are going to grow up and they're going to think of mom and dad's job

02:18:01.300 is philanthropy. What's the impact that that has on them? I mean, I suspect it's pretty profound.

02:18:09.240 They see how seriously their parents think about this stuff. Do they come to you with questions

02:18:14.280 about the work that you have? Do they have their own interests? They're obviously not that young

02:18:19.440 anymore and they're obviously very smart kids. They must be thinking about, hey, mom and dad,

02:18:24.340 why aren't you guys working on this problem? Or what do you think about this problem? I mean,

02:18:27.040 how does your curiosity for the world trickle down to them? And how deliberate a part of that,

02:18:32.780 of raising your kids is that?

02:18:34.060 They certainly understand high principles about what we do. We're philanthropists. They know what

02:18:40.240 that means. They know that we give money, trying to make the world a better place. But we do have

02:18:43.900 those conversations when we walk past a homeless individual who's asking for a dollar. And my daughter

02:18:51.440 says, we need to give them a dollar. And having those conversations about, okay, do we give this dollar

02:18:57.620 here? Or do we give it to someone trying to do in a more philanthropic or more strategic way to try to

02:19:05.060 get at the root of the problem, right?

02:19:06.700 Do we give the dollar here? Or do we give it to the food bank down the street that hopefully he can

02:19:10.640 go to and get the same meal that we would want him to get or something like that?

02:19:13.960 Right. Right. And it ends up being both. I think you need to teach kids about humanity,

02:19:20.340 about the love of the individual. So we can't say no every time, but also have to teach them about

02:19:28.820 not going to give all the money away dollar by dollar to somebody on the street. We've thought

02:19:35.900 a lot about what's the kid's role in this going forward. And Laura and I are very much on the same

02:19:41.380 page here. We don't want their lives to be defined by their parents. So we don't want them

02:19:49.100 working at the foundation. We don't want them, at least when they're in their 20s and probably in

02:19:54.200 their 30s, to be working at the foundation if it's still open then. We want them to go

02:19:59.140 have their own life experiences, define their own, create their own life. And then after they've done

02:20:04.860 that, if they want to come join the work here, that's great. But it's really important that they're

02:20:10.940 not part of the foundation at a young age because there's a downside. And it's whenever you have that

02:20:18.720 checkbook, people look at you differently and treat you differently. Your jokes are funnier and people

02:20:24.780 have a sense of their own best behavior around you because there's always something that they want

02:20:34.480 funded or that they're involved in and are going to come with an ask at some point. And we minimize

02:20:40.320 this largely because of the types of things we fund and we've made it very clear about what we do fund.

02:20:46.100 But if somebody is growing up in their teens and their 20s and is looked at by the rest of the

02:20:52.740 world as a checkbook first, I think that's a very damaging way to grow up. It's not reality. The 20s is

02:20:59.400 the time when you need to be kissing somebody else's butt. You need to be going to get the lunches for

02:21:05.660 everybody else, not vice versa. You need to be trying to climb up to the organization, not be gifted the

02:21:13.220 checkbook on day one. So what advice would you give to people who were where you were 25 years ago,

02:21:21.140 which is they're going to be writing three-figure checks or maybe a four-figure or five-figure check

02:21:27.740 to an organization. They're not going to be able to set up their own foundation. They have the same tug

02:21:33.220 that you have, which is, hey, whatever stage of my life I'm at, whatever my means are at, I know that

02:21:39.360 giving away some of my money makes the world a better place. I just want to make sure I do it

02:21:43.700 as intelligently as possible. Yeah. In many ways, what we're doing is not remarkable. So many people

02:21:51.040 in this world, or especially in the United States, are very generous with time, with resources relative

02:21:58.020 to what they have, relative to the time that they have, relative to the money that they have.

02:22:02.140 So it can just be done at a different scale. But I think there are some people who are much more

02:22:06.120 altruistic than we are. There's people who give away 10% of their money when they're making $100,000

02:22:11.300 or $50,000. That changes their quality of life. There's a sacrifice, a trade-off by doing that,

02:22:17.840 and they still do it. And there's a small movement called Further Pledge, where you pledge to give

02:22:23.100 everything above a relatively small salary, like $30,000, maybe up to $50,000 to charity. And knowing

02:22:30.280 that that dollar you're giving is creating more total good than you spending it. And that's huge.

02:22:37.460 And I think we as a society benefit when our community around us is stronger. And that's why

02:22:43.320 people do it. Whenever we have the needs of our family, whenever our family is secure,

02:22:49.100 then I think it's natural, it's human nature to start thinking about your community. And however you

02:22:56.140 define your community, whether it's your group of friends, your city, your country, might be shared

02:23:02.560 experiences. But everybody kind of goes through that process of defining his or her own community,

02:23:07.760 and then uses the resources of time and money to try to help that community to the best extent they

02:23:14.760 have. There's no right answer in how you define your community. There's no right answer as to

02:23:19.160 how you improve your community. But it is remarkable, just this culture of giving and philanthropy that

02:23:25.760 exists in this nation. I think largely because we are a wealthy nation, right? More people are more

02:23:30.840 secure here. People are more likely to have the needs of their family set aside or in line of sight.

02:23:39.560 And so they're able to do these things. And that's one of the reasons that make this country so great.

02:23:44.760 I don't know if I answered your question.

02:23:46.260 No, you really did, actually. I mean, certainly what I took away from that was you pointed out something

02:23:50.580 that I think doesn't get enough appreciation, which is you're absolutely right for you to give away

02:23:54.620 $400 million a year is less. I mean, I'm not minimizing that at all, but you're right. It's

02:23:59.860 less of a sacrifice than someone who makes $50,000 a year giving away $5,000. The incremental $5,000

02:24:05.780 is when making $50,000 is staggering if you're trying to raise a family or do anything else.

02:24:11.060 And the other thing I took away was this idea of giving locally. I think the way you define

02:24:15.780 locally is very important. It doesn't mean necessarily if I live in this city, I only give to

02:24:21.760 this city. I can broaden my definition of local. Local could mean I'm a veteran and therefore my

02:24:27.360 giving back to veterans affairs or other vets is what I define my community as. I think that's an

02:24:34.340 elegant way to think about it. I think the other thing that comes with that is frankly,

02:24:37.460 giving to your community means you can probably make a more informed gift. You have a better sense

02:24:42.100 of potentially what the needs are of your own community. Absolutely.

02:24:46.060 John, I'm going to be honest with you, man. We've been talking here for like over two and a half hours.

02:24:49.760 I took a bunch of notes before we spoke. We haven't got through half what I want to talk about,

02:24:54.400 but I also can't keep one of the world's busiest philanthropists wasting any more of his time

02:24:59.820 talking with me. So I'm going to honor my commitment to you to keep this relatively short,

02:25:05.320 not make it a seven hour discussion. I'm going to let you go. We might have to do a part two at some

02:25:09.440 point, but I want to thank you very much for first and foremost, just set aside the time today,

02:25:14.400 but more importantly, just for the work that you do. I know personally how seriously

02:25:19.020 you take this work and the world is definitely a better place for having the best natural gas

02:25:25.780 trader of all time, no longer trading natural gas. Well, thank you. It's been a fun experience.

02:25:31.040 Looking forward to part two. All right. Thanks, John.

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The Peter Attia Drive - August 24, 2020

#125 - John Arnold： The most prolific philanthropist you may not have heard of

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