The David Rubenstein Show: Citadel's Ken Griffin

The legend is that you began trading convertible bonds out of your dorm room. When you make a few thousand dollars as a freshman, you are rich. So by the time you graduated, did you say, 'I'm now gonna do this full time'? 'I became boy genius.' 'Now I knew I was boy lucky.' 'How does somebody invest with Citadel?' 'I'm gonna be the bearer of bad news. We've been closed for a long time.' Even from interviewers, you wouldn't take anything. 'Your parents must be very proud of you.' 'I'm certain Mom's proud of me.' 'Does she ever say, "Well, where do you think the markets are going? Where should I invest?"' 'Mom's all set.'

Would you fix your tie, please?

Well, people wouldn't recognize me if my tie was fixed. Just leave it this way. All right. I don't consider myself a journalist, and nobody else would consider me a journalist. I began to take on the life of being an interviewer, even though I have a day job running a private equity firm. How do you define leadership? What is it that makes somebody tick? So let's start with your beginning. You grew up in Florida, is that right? 'I was born in Daytona Beach.'

My father worked on the space program. So I grew up in Florida, Wisconsin. We went to Texas for a brief period of time, and then back to Florida for middle school and high school.

You applied to many colleges, and you applied to Harvard. Were you surprised to get into Harvard, or did you think you were going to get in?

So, David, I've spent my entire professional career working on probability. 'OK.' Right? So odds: stocks go up versus down. So when I applied to college, I played the same game. In the dark ages of using a typewriter, I typed out about 13 different college applications.

OK. And so your chance of getting in each of them—you applied to 13 colleges? 'Right. And I'll get into one of them, hopefully the best I can get into.' Now, you were the president of the math club in high school. So I guess you were pretty good at math. 'I was pretty good at math, pretty good at math.' Okay, so you got into Harvard, and when you got into Harvard, did you decide to go there right away, or you wanted to see if the other schools were gonna accept you? 'That is a complicated story.'

My father's business partner was a Princeton graduate. And Princeton was my first choice, and my father had a falling out with his business partner just before the time you pick where you're going to college. And my dad said it would break his heart if I went to Princeton.

'And I went to Harvard.' Well, that's broken the heart of the Princeton development people, I assume, now.

Well, one of my partners at Citadel, who I've had the pleasure of working with for almost two decades, actually served on Princeton's investment committee oversight. And I think he's done wonders to help Princeton feel better.

OK. So the legend is that you began trading convertible bonds out of your dorm room. Is that true or not? 'That is true.'

So my freshman year—and I'm at Bloomberg, so I need to say a moment of gratitude to everybody in the press—my freshman year, there was an article in Forbes on how Home Shopping Network was overpriced. And having read this article, I went and bought two put contracts in Home Shopping Network. And lo and behold, the stock cratered like 30% or 40% shortly after I bought these puts. And when you make a few thousand dollars as a freshman, you are rich. This is the moment you have dreamed of. And that was what really started my interest in trading. 'You had never been that involved in it before?' 'I'd never traded a financial asset before then.'

But, you know, your classmates at Harvard, they're presumably doing other things, not worried about convertible bond arbitrage, right? So what did they think of you? I was a bit of an anomaly.

I mean, look, my classmates and I, same experiences we all had. We'd debate politics, like, rabidly. We would have fun playing soccer in the yard at sunset and hoping not to run into a tree. And you'd have your Friday night fun. So it was a college experience, but I spent a lot of time at Baker Library just understanding, trying to understand and trying to learn about finance.

So the story is that you installed a kind of receiver in your room so you could receive data. Is that true or is that a legend? It's true.

So this is the early days of Harvard saying no to any form of business on campus. And the supervisor of the building gave me permission to put a satellite dish on top of the building so that I could have real-time stock quotes.

Because remember, before the days of the internet. Did you have a roommate that said, 'This isn't a good thing to do'? I purposely chose a single, so I would not have a roommate that I would annoy every day. So by the time you graduated, did you say, 'I'm now going to do this full time'? You're going to love this. Timing is so important in one's career.

When I started to engage in convertible bond arbitrage in '87, I literally launched in September of '87. And I was very confident as to how this portfolio would behave in a bull market and very uncertain as to how it would behave in a bear market. The mathematics on the way down are just much more nebulous than on the way up. And so I was short more stock than my back-of-the-envelope math would tell me to be short. And what happened a month later was the crash of '87. And so at that moment, I became boy genius. Now, I knew I was boy lucky because I was short the market intentionally. But outside investors go, 'Look, this person's a genius. He made money in the crash.' So that was a very defining moment in my career—was the crash of '87.

And being net short gave me a track record early on that was attractive to investors.

So you graduate, you say, 'I'm going to set up my own company.' Your family say, 'You're a little young to set up your own company,' or they said this was a good idea? I was incredibly fortunate.

My father was first generation to go to college. He was one of seven. My grandfather worked on the railroads. My parents always placed great importance on education. On my mother's side, my grandfather was an entrepreneur, literally borrowed money from my grandmother's mother to start a small business, and ended up in the fuel distribution business back in the '50s and '60s. So that entrepreneurial bug was part of my mom's entire life. She grew up in a family that was defined by my grandfather, who was a bit of a maverick. And so the idea that I'd go off and try to pursue this dream, to my parents, was... was very much, 'Just go for it.' Who actually made the trading decisions? I was very fortunate to have hired a handful of colleagues who understood the products and who had very good judgment.

What was most important in many respects in my life's journey is we traded 24 hours a day from almost day one. So we traded convertible bonds in the United States, we traded Japanese equity warrants in Tokyo, and then we had traded the convert market in Europe. Now, why was this so important? Because I could only be at work 13, 14, 15 hours a day. I had to learn to delegate. And if I look at our success over the last 30 years, it really comes down to having learned to trust people, to trust their judgment, and to delegate to skilled people.

Which are you: someone to hold on until the market comes to your knowledge and wisdom, or just get out when it's going against you?

All right, so first of all, the market is rarely dead wrong. And the history books are littered with people who are smarter than the market who've lost all their money. So when you're in an investment and it's not working out, you really need to take a step back. What don't I understand in this situation? If you really think you've resolved all the unknowns that you can possibly get your head around, you stay with your position.

Before we went to the Great Recession, how big was your company in terms of employees or assets under management?

So from 1990 to 2008, we grew from effectively three people to right around 1,300, 1,400 people. Assets under management, ballpark $25 billion. OK.

So the Great Recession comes. And how did you survive it? And how close did you come to not surviving it? So survival is the right choice of words.

It was the only moment in the history of Citadel that our actual existence was in question. Did you think you might not survive? I'll make it very clear. I would go home on a Friday. If Morgan Stanley did not open for business on Monday, I would be done by Wednesday. And if you remember Morgan Stanley, the question was would the Japanese follow through on their financing commitment, and their very existence was in question. So you quickly come to terms with the fact that we may not survive, and it may be an exogenous event in some sense that causes us to fail. And I have to accept that reality, and now that I've accepted that reality, what are the best decisions we can make to survive? And that was the playbook we came to work with every day.

We are going to fight to survive, knowing we might fail, but we are not going to give up.

How does somebody invest with Citadel? And is there a minimum? And how long should they hold the money with you?

So I'm going to be the bearer of bad news. We've been closed for a long time. So we're not actively soliciting new investment. Even from interviewers, you wouldn't take any money. Okay.

Now you've built your business up in the hedge fund world to what size level are you now? We're at $30 billion today. We've been there roughly the last three or four years. Do you make the investment decisions, or do you delegate it to your various investment professionals? So we've been here now for about 30, 40 minutes.

And in our hedge fund today, we'll trade about 3% or 4% of the entire US equity turnover. There's no BlackBerry. There's no phone. 99.9% of the decisions that we make, my colleagues are making. I firmly believe I want the individual closest to the information who has good judgment to make the call. There's no way from my seat that I'm going to be able, generally speaking, to make a better decision than my analyst who has covered Xerox for five years or has covered Amgen for a decade.

There's no way I'll make a better call than they will. It is said that you spent a fair amount of time recruiting very good investment professionals. Is that a big part of your job, recruiting others to come to Citadel?

I have interviewed ballpark 10,000 people in my career. So recruiting is, like, I will leave today and I will do two interviews today. I will do two interviews tomorrow. I am always, always looking for talent.

So if somebody is watching this and they say, 'I'm going to be interviewed by Ken Griffin,' what should they do in the interview to make you like them?

So what's interesting is the 'make you like them' is a cognitive bias we have in interviewing people. And you actually want to avoid being caught in that trap. What I'm looking for—I'm looking for two key drivers in a candidate. I'm looking for their passion. Do they actually love what they do? Do they love the problems that they work on? There was a young woman who worked for us 15, 16 years ago, roughly a year or two out of an Ivy League school—I forget which one. And her boss came to my office and he goes, 'She's going to leave. She's incredibly talented, she wants to go to medical school, and you need to convince her to stay.' And I said, 'With all due respect, the minute she walks into my office, I will offer to write her letter of recommendation.'

If she wants to be a doctor, the world needs another great doctor, and I'm going to help her make that happen. So I'm really looking for what's the passion of the individual in this field, because that passion is what drives so much of our success. The second is, I'm looking for clear accomplishment. I'm looking for individuals that have a demonstrated track record of having made good decisions and having accomplished in their life.

How does somebody invest with Citadel? And if they say they want to invest with you, is there a minimum? And is there a certain rate of return that that person should reasonably expect? And how long should they hold the money with you?

So I'm going to be the bearer of bad news. We've been closed for a long time. Oh. So we're not actively soliciting new investment. Even from interviewers, you wouldn't take any money? Okay, you fall into one of my idol categories. So, heroes in my career, I'll figure out how to solve for. And I think that's actually an important statement. Your success or Henry Kravis's success, those are important stories that help to encourage the next generation to pursue a life with vigor, with passion. So leave that aside.

We're closed to new investment. You're closed. Okay. So your wealth has created opportunities for many other things, including philanthropy. How do you decide what your philanthropic gifts are going to be?

So first of all, I'm in Bloomberg's corporate headquarters. And Michael Bloomberg's gift to Johns Hopkins makes what I've done seem pretty immaterial. So congratulations, Michael, for really having completely set a new bar for all of us to focus on. Nothing is more important to American competitiveness than education. There's nothing more important. And it starts preschool and goes through our greatest universities. I've done a lot of work in K-12 education. And the numbers involved are staggering. So if you look at a city like Chicago, we'll spend about $5 billion a year in K-12 education. Here's what's incredibly regrettable. We know how to educate youth in America. We just choose not to do it.

It's heartbreaking. In that arena, I spend much more time on the political front because it's our body politic that is letting our kids down. And it's simply inexcusable. It creates so many of the problems we face today. I mean, I wish Elizabeth Warren had 1 percent the passion to fix K-12 education as she has to attack those of us who have been successful. On the issue of higher education, America leads the world. This is not a given. This is not a given that we have the greatest universities in the world.

But I want to support excellence in American education. You've been very involved in philanthropy to art institutions. So what is the appeal of art collecting to you?

And where do you keep most of your art?

I actually have a painting at home that I did. And it's so profoundly ugly, it's beyond imagination. I have zero artistic skill. So maybe my love for art reflects my admiration for a talent that I'm so dearly lacking in. But it started about two decades ago. I was here in New York, Sotheby's. They were auctioning off a collection. And the Little Dancer, Age 14, by Degas was there. It's an iconic sculpture. And she's so determined. She's not going to be put in her place. She's so determined. And it appealed to me so much. That was the pivotal moment that started my interest in art, was that work. For the record, I was outbid. I was outbid. I tried to buy it. Hammer went down, it wasn't my bid, I wasn't willing to go that far, and I've never been so frustrated in my life.

But you've never probably been outbid again, right? I have been outbid again. There's some level of discipline. But I hung up the phone, and then I called Sotheby's the next day and offered more money to the buyer. So that was my start of a passion in art. And I really do believe art is one of the areas in which we can find a common ground as a society. We can find an appreciation for art that brings us together. My art collection's almost all at the Art Institute of Chicago. It's been there for years.

So you're going to have your own art museum. Some people who have art collections build their own museums. Are you thinking of that?

No. No, I'm not. For me, the fact that 700,000 to a million people a year will have a chance to see some of the greatest works of art of our culture that I'm fortunate enough to own, I have great satisfaction in that.

Can you just state what your view is on political matters and freedom and things related to that?

It's very important that we as a country embrace freedom of speech, freedom of opportunity, freedom of... what our Founding Fathers put their lives on the line for. That's important to me. And so candidates that really support personal rights, personal liberty on all causes are important to me.

So you have bought the most expensive apartment ever in New York City and maybe in the United States. You have also bought a lot of property in Palm Beach and in other places, London, so forth. So you can't live in all these places. So what's behind it?

Well, you and I would probably be in competition for hours spent on a plane. I think I probably spend 800 hours a year on a plane. So I'm actually in New York every single week. We have hundreds of employees here. We pay the New York investment banks roughly a billion dollars a year in revenues. So this is my second home in some sense. This is home away from home. I have three little kids. My ex-wife and I have debated, do we make New York home? And the apartment represents the possibility that this might be home for me, and Citadel might be headquartered in New York one day. I'm a bit frustrated by the political winds in the city over the last few months. Amazon opting out of New York is heartbreaking.

It's heartbreaking because when you bring a firm that is such a great user of technology into your city, it's not just about the success story of Amazon, it's about the fact that you now have a talent magnet that creates an entire ecosystem of success stories around it. They plant the seeds of other success stories.

You're obviously a successful businessman, philanthropist, art collector. Your parents must be very proud of you. So do they call you to tell you how great you are? Do they still give you advice?

Look, I'm certain Mom's proud of me just as I'm proud of my children. We're all proud of our children. And I think my mom—we don't talk about it much. I saw my mom yesterday. I was at a conference at Boca Raton. My mom's down there for the winter. We went out and had a quick drink together. And I got parenting advice, like how to be a better parent. And we talked about raising children because that's near and dear to my heart. I have three little kids, and Mom's going through, you know, 'In high school, here's how I thought about trying to encourage your interest,' and so on and so forth.

Parenting advice. Does she ever say, 'Well, where do you think the markets are going? Where should I invest?' Does she invest with Citadel, or she does her own thing? Mom's all set.

OK.

Mom's all set. Mom doesn't need to worry about it. Let me just ask one or two final questions as we wrap up. You have been somewhat involved in the political world as a donor to Republican causes very often and conservative causes. Can you just state what your view is on political matters and freedom and things related to that? I've supported over the years candidates on both sides of the aisle.

I do live in Illinois, which means that our mayor's race, for example, is—I get to pick who I think as a Democrat will be the most business-friendly, education-friendly candidate that I can find. And you would probably know this, I was an early supporter of President Obama because he came to me to be the education president. 'You want my vote, you want my support, that's the issue. You come to me and you say, "I'm going to fight for education in America," I've got your back.' So that's number one. Number two is freedom. And in our country, a government that can take care of all of our needs also takes care of having left us with no freedom. It's very important that we as a country embrace freedom of speech, freedom of opportunity, freedom of what our Founding Fathers put their lives on the line for.

That's important to me. And so candidates that really support personal rights, personal liberty on all causes are important to me.

Have you ever been a candidate for office yourself?

I don't know. We live in a post-truth reality in politics today. Right. Facts no longer seem to matter. And that's hard for me to understand how I'd be a candidate, because if I were to be a candidate, it would be about the substance of how America will be successful. It would be about the substance of how we have our individual rights protected. And I don't do well in a debate which is untethered to facts.

You've obviously got many years ahead of you, but do you ever think what you'd like your legacy to be as you get older? David, I'm 50, for God's sake. I know, it's very young. But, you know, Bill Gates almost retired, pretty much at 50, from running the company. And some people—John D. Rockefeller retired in the late 40s. So you haven't thought of retiring at a young age, like 50? You know, Rockefeller grew up in a different era.

We will live—knock on wood—we will live much longer, much healthier lives. And I really hope to contribute to society for decades to come. Whether it's in the business realm, whether it's in the philanthropic realm, I want to be relevant to society. I'm very fortunate to know how to build teams, to know how to make things happen. That wasn't a gift given to me. That's a lot of trial and error, a lot of learning. But if you look at Citadel, we are so successful. We are far more than the sum of the parts. We're far more. And when you can put together the right team with the right mission, you can accomplish great things. What I'm most proud of is actually how we've reshaped financial markets around the world with Citadel Securities.

If you look at interest rate swaps, for example, we've helped to create a competitive dynamic that has brought bid-ask spreads down by roughly 80% in the last 10 years. That's money that goes right into the bottom line, pension plans, corporate treasuries, and other parts of society, and not into the Wall Street value chain. So by bringing competition into the securities markets, we have created a huge creation of value for the end users of these products.

Ken, I want to thank you for a very interesting conversation. If you ever open up your fund again, could you let me know? Absolutely. Thank you. Great. Thanks very much. Thanks. Thank you all.