Peter G. Peterson is a man of parts: leveraged-buyout billionaire, policy wonk, social lion, and—most recently—the patron of an ambitious new foundation (named, like the Washington think tank he chairs, after himself) that aims to alert Americans to the dangers of mushrooming deficits, exploding entitlements, and gluttonous oil addiction.
    
At 81—rich, privileged, and well-connected beyond his dreams—Pete Peterson is an unlikely Paul Revere. He's the Nebraska-born son of striving Greek immigrants, who studied hard, excelled in business (rising through the ranks of the McCann Erickson advertising agency and then running Bell & Howell), and impressed the likes of philanthropist John D. Rockefeller III and former Treasury secretary Douglas Dillon with his public-spirited bent. They sponsored his induction into the American Establishment, and Peterson ended up serving as Richard Nixon's international economics expert, and then Commerce secretary, before running Lehman Brothers for more than a decade. In 1985, Peterson was nearly 60—and ripe for a rewarding retirement—when he and a young financial whiz named Stephen Schwarzman decided to start a small private equity firm, the Blackstone Group, whose name was an amalgam of theirs (schwarz meaning black in German and petros meaning stone in Greek). Now the senior chairman of the hugely successful firm, Peterson received $1.8 billion as a result of Blackstone's initial public offering and plans to pump as much as a billion dollars of his own money into his new foundation. Three weeks ago, he sat down with Portfolio.com for an exclusive interview.

Lloyd Grove: You have launched this foundation that is hugely ambitious. It's going to tackle everything from the federal deficit to the insolvency of our health-care system to our energy policy or lack thereof, and any number of other issues. Why should we believe that this one will go beyond its good intentions and bright ideas and actually have some impact on public policy and the way we live?

Pete Peterson: I think that is truly the central question. I was presumably educated at the University of Chicago. One of my professors used to say if you have no alternative, you have no problem. And I would agree that taking on some of these challenges that I call undeniable, unsustainable, and yet untouchable politically up to now, is a very daunting task. But I've thought about the alternative. The alternative is to do nothing essentially and to say that this is just the nature of things in America. But I think of what could possibly happen to this wonderful country that's been so good to me. I think we're at a make-or-break point in America, and if we continue to deny these challenges, which I do think are unsustainable, then in not too many years, we'll become a very different country. And since I'm the lucky, lucky recipient of the American dream—the son of poor Greek immigrant parents who came over here without a penny or without a word of English, with very little education. I had a father who emphasized giving back. I've had a big windfall from the Blackstone public offering. I've got more than enough financially, and I think it's worth a very serious try.

L.G.: Are you actually going to pump a billion bucks into this foundation?
 
P.P.: Oh, over the next several years, it'll be that much. My current plan is to also put much of my estate in it, and whatever's left over is going to the foundation, which I emphasize is non-partisan.

L.G.: Hopefully your stock in Blackstone will go up, right? It's taken a little bit of a hit in the past several months.
 
P.P.: But I was fortunate enough to liquefy some of my holdings.
 
L.G.: Yes, I've read $1.9 billion. That's not bad.
 
P.P.: And some of that goes to my kids. I have five children and nine grandchildren.

L.G.: I think they can make do. But we already have think tanks, and everybody has a great idea about some aspect of public policy. When will we see these good ideas actually enacted?
 
P.P.: I can make a big distinction between an ordinary think tank and what I have in mind. The problem with most of these challenges is not so much that there's a lack of proposals—and there's certainly no lack of agreement on how unsustainable these problems are. Just doing something about them, that's the issue. So in a few cases, you might need some new proposals. In several of these areas that we're going to focus on, there are several ideas, any one of which would be a lot better than what we're doing now.
 
L.G.: Right.
 
P.P.: But the problem is to do something.
 
L.G.: Who's going to be the vehicle to carry the ball forward? I mean, you're supporting John McCain, right? You're one of his economic advisers?

P.P.: Well, I don't know the extent to which that's the case. I'm called one of his economic advisers.
 
L.G.: Now "Mr. Straight Talk"—who initially opposed the Bush tax cuts and voted against them—has said that he's for making them permanent. Why should we believe that John McCain is going to take care of this multitrillion-dollar forecasted deficit, when he talks like that?
 
P.P.: I want to remind you of something about John McCain. He wanted to tie the tax cuts to the same thing, frankly, that Bill Clinton, Bob Rubin and Congress did in the 1990s, which is tie them to spending caps, tie them to pay-as-you-go rules, where you'd have to make up the revenue loss by reducing benefits. That's a very different proposition than just tax cuts. And I think he has a track record of being a true fiscal conservative—for example, on the spending side. There were only a few Republican senators who voted against the Medicare prescription—drug benefit, and I talked to John from time to time about how totally unsustainable the current Medicare program was—huge debts, huge taxes that would be implied. You may recall he voted against it on the grounds that the current Medicare program is unsustainable. He said: ‘Why should we make it more unsustainable until we've reformed the basic program?’ So I think to talk about tax cuts in a vacuum, and by that I mean not in a context of spending patterns, is to oversimplify the tax-cut issue.

L.G.: I know that McCain's very serious about cutting costs and stopping pork-barrel spending, but when he initially voted against the tax cuts, he didn't make a big point at the time of saying, We need spending caps, and we should have tax cuts when we reduce spending. He said this was an unfair tax benefit for the wealthy. That was his main objection.
 
P.P.: Oh, Lloyd, I don't frankly recall precisely what he said, but I know what he thinks, because he's talked to me about it, and I think he does think it should be linked, whether formally or informally, to spending restraints. And one of his great criticisms of the current Congress and Administration is that we've had the biggest increase in spending that we've had in decades and decades. Now back to doing something about it—I think where that starts is getting a [foundation] C.E.O. that is as good as we can find. And we've been extraordinarily fortunate. I don't know how well you know David Walker. He's comptroller general of the United States. He's as least as passionate as I am about the unsustainability of these programs. He's leaving one of the best jobs in government, having done a fabulous job and having really led the discussion on how unsustainable these problems are. Him joining this foundation is really one of the most reassuring things I could’ve ever have imagined. And his reasoning is that the problems are really serious; they really are unsustainable. We've got not too many years to fix them or they will truly explode on us. And he can do more in the private sector than he could in the government, where you're obviously restrained about taking positions and so forth. What's going to be different about what we do? I don't want to sound glib or naive about this. This is a very, very tough topic, the political problem. That's why I said it's untouchable politically. In my view, one of the things we have to do is educate and awaken the country. Starting with young people, starting with their parents. You know the old joke about the students in the philosophy class. The professor asked them, "Which is worse, ignorance or apathy?" And some kid from the back says, "I don't know, and I don't care."

L.G.: Right.
 
P.P.: Well, I don't want to characterize all young people that way, but too many of our young have no idea.
 
L.G.: I recall one young man that you told straight out: These tax cuts are unsustainable, and possibly even immoral. Of course, he was president of the United States, and he didn't listen to you—George W. Bush.
 
P.P.: He wouldn't be the first politician not to listen to me. But you see, we can sit around and criticize the politicians. The fact is, this is a democracy. If you're going to take tough steps, particularly in this democracy, you're going to have to have the understanding and the support of the people. At the present time, all the evidence suggests, just to take the young people: They're blissfully unaware of the magnitude of some of these challenges, and what the implications are on their payroll taxes and their economic future. They just don't know. And one of the reasons they don't know is the political leaders don't want to get in the big discussion of these subjects, as you can see from the current campaign.

Because once you explain the magnitude of these problems, the obvious question is, What do you propose to do about it? And when you're asked what to do about it, there aren't any painless alternatives. One of them is to reduce the benefits, or reduce our energy consumption, or depending on which issue we're talking about. Or the other is to pay for it with increased taxes. And we've developed such an aggregated case of short-term-itis, and all gain and no pain, and all benefits and no cost, that in the current climate, if a politician suggests that you may have to increase revenues or you may have to reduce benefits, it's often not only considered politically incorrect, it's considered politically terminal.

L.G.: So my question is, Are you going to put, like, major dollars—you're an old advertising guy—into trying to try to change the public attitude? In other words, drive the discussion with advertising?
 
P.P.: Our objective is not to only change the attitude, but to increase the knowledge first, the understanding of what the problem is. Our foundation president is just starting, so if you think you're going to get me to lay out a specific program, forget it. There are a couple of things we already have in mind. I have been very impressed with what the effect of Al Gore's An Inconvenient Truth was. And part of it, to be sure, was his presence, and part of it was the drama of the film—the polar bears, the ice caps, and so forth. I have authorized Rory Kennedy and her partner, Liz Garbus, to prepare a film proposal for us that takes some of the themes of my book Running on Empty and tries to dramatize them. Your question is right on, on how difficult it is. If all we try to do is put out relentlessly a bunch of statistics, in a cold form, there may be a few policy wonks that say, "Gee, I had no idea," but that's difficult.
 
L.G.: You've probably had enough of wonks.
 
P.P.: Yeah. If having creative people can dramatize these issues and create the video counterpart of the polar bears and ice caps and so forth, it might make a difference. The one thing we're going to do most certainly is explore conventional filming. Then there's a whole new world of Facebook and MySpace, and the whole video internet world.
 
L.G.: Are you on Facebook or MySpace?
 
P.P.: Not yet.
 
L.G.: So I can't friend you on Facebook yet?
 
P.P.: Not at the moment, but I hope you will be able to.
 
L.G.: How often do you go on the internet?
 
P.P.: I don't personally. That's one of the problems.
 
L.G.: So when I get email from you, you've dictated it to someone?
 
P.P.: Yeah. It's through the office. But I'm not so obsolete about the information age that I haven't heard of the internet and Facebook and MySpace. We're going to have a huge drive (we've got some experts already), saying, If you've got plenty of financial resources and you wanted to do something highly innovative on the internet [that] may involve some partnerships—the primary firms in the business—how would you do it? And I would say to them, ‘I don't want you restrained by the fact that it's a startup and it's going to cost $100,000 or something. Just give us some really dynamic ideas.’ The young are going to be a special target. I don't believe that the young are masochists, that they have consciously decided that they don't care about their economic future or the country's future. I just don't believe that.

L.G.: But I've seen you quoted as saying that young people do want what they want, and they want it now.
 
P.P.: I understand—that's part of the problem.
 
L.G.: And that's not your way. You're sort of old school.
 
P.P.: I'm old school in that way, but the fact that they want it now-life is a choice of alternatives. If they think that wanting everything now doesn't have any serious implications on the future, they're mistaken.
 
L.G.: And I think, by the way, in that context you were referring to Steve Schwarzman.
 
P.P.: In what context?
 
L.G.: Well, in the context that Steve had five houses and this and that, and just a lot of things.
 
P.P.: The last thing I'm going to do is be critical of a partner who's done a great job here as far as I'm concerned. Let me see where we were.
 
L.G.: You were just talking about the young people.
 
P.P.: Right. Nor do I think the parents have suddenly become crassly cold and indifferent to their kids' future. I think we have been disinformed, misinformed, denied, etc., all of the knowledge of this. We want to think of some youth leadership summits, for example.
 
L.G.: So obviously part of this component is a major public-education drive.
 
P.P.: Major public education. We've might identify several hundred or a few thousand—I don't know—young leaders from business, from academia, from wherever. And we bring them to New York, or take them to somewhere, and we present where we're headed, and then we can talk about how should they get organized. What should they do? Do we need a youth organization? Lord knows, the elderly are very well represented. How do we organize the young?

L.G.: So do you feel an urgency to get this discussion up and running so it has an impact on the presidential campaign?
 

P.P.: But this is going to be a problem that takes years. I don't think I'm naive about these problems.
 
L.G.: But now that the candidates have been discussing these issues in public forums like the debates...
 
P.P.: I wouldn't agree that they've been discussed.
 
L.G.: Can you force them into the discussion before November?
 
P.P.: The point is, if the public can become aware of the seriousness of the problem—what I call a major breakdown-and they start asking political leaders very informed questions, I think the dialogue can change. But I would say, the lack of serious discussion in this campaign is just another symptom of the magnitude of the educational and communication and motivational challenge we confront. We have something else we're planning --  Dave has been willing to participate over the last year on something called "Fiscal Wake-up Tours," and because he is perhaps the expert, or one of two or three leading experts, we plan to greatly expand that effort. We go out to the major cities in the country, get some of the political leadership, get some of the educational leadership, get the press, and take them through what the magnitude is of these problems.

L.G.: Tell me why John McCain would make a better president than either Hillary Clinton or Barack Obama.
 
P.P.: I watched the most recent debate and was very impressed with the intellectual horsepower of both of these people, both Hillary and Barack Obama.... I have been supportive of very much of President Clinton's fiscal policies. I'm a great fan of Bob Rubin and much of what they did during the '90s. Now, John McCain, more than any other candidate, I consider him a true fiscal conservative.

L.G.: When they left that office, they were forecasting a $5 trillion surplus.
 
P.P.: I know this. Hell, I go back to 1981 or '82, when I got into a lot of trouble in the Reagan administration because I was asked to give the inaugural speech to one of the Women’s Economic Roundtable. And so since I'm a relentless negotiator, this woman who was president had a house out in the Hamptons on Georgica Pond that my wife and I had always been interested in, and she was very ambivalent about selling it. So I said to her, "I'll make a deal with you. I will make this inaugural speech if you will sell me the house at your asking price." And she said, "Well, there's another aspect to the deal, which is that you have to do a thorough review of the Reagan budget." So here I am, I guess you'd call me a moderate Republican, a Rockefeller Republican, whatever. And we just got a Republican president who's just come out with this program. I'm supposed to analytically review the program. I made a deal, and I did it. And the more I looked at these supply-side expectative numbers, the less convinced I was that they made any sense. You know, huge tax cuts, huge increase in defense, the entitlements growing, and by '84, the motivational effects of supply side-productivity would go up dramatically and so forth. I didn't believe it then, and I don't believe it now. As a matter of fact, I say to some of my supply-side friends, "I don't understand how you explain what happened during the Clinton years, they increased marginal rates, but they combined them with very tough spending restraints, and it's one of the best periods we've ever had and we ended up with a big surplus."

L.G.: The religion of Arthur Laffer persists.
 
P.P.: I've known Arthur since he was in the Nixon administration. I didn't believe it then, I don't believe it now. But McCain...

L.G.: Yeah, why is he better than the two smart people?
 
P.P.: He talked about these unsustainable challenges. Take entitlements. The present value in current dollars of the unfunded liabilities—all we talk to American people about is the public (or funded) debt of $9 trillion; we don't tell them about the unfunded debt, which would be unthinkable to a private citizen or a business—is over $40 trillion, being kept at the two major entitlement programs [Social Security and Medicare]. That's over three times the size of the entire economy.

L.G.: Over what period of time is that?
 
P.P.: That's the present value over the next 75 years. But those are the promises we made. If you wanted to do this by payroll taxes, which fall heavily on the middle class, as you well know—and everybody wants tax cuts for the middle class—you'd have to double the level of payroll taxes. And that's just to me, unthinkable economically, politically, and morally, because we're slipping this hidden check to our own kids. In the case of the second challenge, which is the so-called current account deficit that leads to foreign debt: Because we're such lousy savers, we've got a negative savings rate. Because we're such gifted consumers, spending more than we earn, we're confronting these massive current account deficits, led largely by the trade deficits, and we're borrowing unthinkable numbers from the rest of the world. We're currently borrowing about 7 percent of the G.D.P., and the previous record, in the Reagan administration, was less than half of that, about 3.25 percent. The dollar fell, there were all kinds of stock market tribulations, and so forth. We're now at twice that level of current account deficits.

L.G.: Does it bother you that the countries we're borrowing from, like China, are economic competitors, and that they're doing a lot of things around the world that we don't like?

P.P.: Why would a great country ever want to be hostage to another country, particularly a country that isn't an ally or a partner? I don't know whether or not you remember—and you bring up a very good point, that these kinds of foreign debts have political implications-I'm not much of a historian, but at the time of the Suez Canal issue, the Brits were getting very militaristic and aggressive about moving in, and we were very opposed to that policy. We were huge holders of British pound securities, and the U.S. quietly got the word to the top British officials that if they continue with this policy, we would feel under pressure to sell these securities. And all of a sudden, the British policy changed.

L.G.: China could do that to us.
 
P.P.: China could do that to us, and the Middle East too. You know, the petrodollar deficits are hundreds of billions of dollars a year, which is one of the reasons I'm so concerned about the energy gluttony.... I asked the top foreign-debt guy and foreign-trade fellow [at the Washington-based Peter G. Peterson Institute for International Economics think tank] to do a picture for me in the year 2015 and the year 2025-what we would look like as a country. And I must tell you, we would have debt levels that would easily rival or even surpass the developing countries. And somebody has to tell the American people this is dangerous: It's unsustainable, we're saving much too little, we now have a negative savings rate, and we're going to have to save more. But the question is, How do you persuade them to save more, and how and why do they save more? That's the second issue. The third issue on our foundation’s agenda is health-care costs....

Since the year 2000, and I find this hard to believe, Medicare benefits and capital, even before the boomer crop is retiring, are up over 50 percent in that short period. Our health-care costs are over twice per capita the rest of the developed world, and yet there's no particular difference in health outcomes or longevity. So, to me, the metastasis of health-care costs is a huge issue, and how we're going to reduce health-care costs or get them under control. Because David Walker makes me look like an optimist. David believes that the health-care system could bankrupt this country.

L.G.: If you could just simply tell me, Why is John McCain—a man who has said that he doesn't know a great deal about economics, he knows about national security—why is he better than these two smart people running as Democrats? I just want to get the Pete Peterson view on that.
 
P.P.: I think he's the best one to confront some of these issues. People talk voluminously about the Bush tax cuts. Nearly everyone wants to preserve all of those except those going to the upper income groups. Let's assume for a moment that you got rid of all the Bush tax cuts-that amounts to 1 percent of the G.D.P. Do you know what the increase in entitlements is going to be over the next 30 to 40 years? Nine percent of the G.D.P. So if anybody thinks you're going to solve these problems just through tax increases, he doesn't understand the magnitude. Secondly, what would the impact be of that kind of tax increase? [To solve these problems,] I think it's going to take benefit reductions and efforts to increase savings. For example, it's going to take a leader who is credible on shared sacrifice; it's going to take a person who at bottom is a fiscal conservative. John McCain has a track record that impresses me. Just look at the Medicare prescription bill, his position on the tax cuts that he took. I also think he's a very good symbol of someone who sacrificed a lot. But no president can do this alone, until the public understands the problem.
 
L.G.: How long have you known McCain?
 
P.P.: I don't know, probably 20 years.
 
L.G.: Do you have an extra level of bonding with him now that both of you have been attacked by the New York Times? [A February 15 article portrayed Peterson as a finger-wagging plutocrat who preaches fiscal discipline while benefiting from having his investment income taxed at 15 percent.]
 
P.P.: Oh God [laughs], I knew this was going to come up.... I'm allegedly the fat cat that doesn't pay much taxes or some such thing. I made it clear to the New York Times that I pay substantial taxes,but they chose not to print it. Warren Buffett was brought up. He says his assistants pay more taxes than he does. I'm a great supporter of Warren Buffett. As a matter of fact, one of our projects was working with him and Sam Nunn on nuclear proliferation, and Warren and I are going to be fifty-fifty partners. But I went back and looked at what I paid in taxes. I think my taxes last year were 38.7 percent and my two assistants' were 21 percent.

L.G.: Just to put a number on that. You were paid, according to what I read, something like $200 million, so you paid 38 percent, something like $70 million?
 
P.P.: Thirty-eight-point-seven percent, okay? So I pay a lot of taxes. Secondly, with regard to this charge of insensitivity that a lot of us fat cats are supposed to have to the inequalities in income, keep in mind what my background is. I'm the son of poor Greek immigrants, with a father who-
 
L.G.: -worked hard at a diner, I know.

P.P.: You know the story. And the thought that I'm insensitive to the inequality of income belies my entire upbringing. I have taken public positions with regard to the estate-tax elimination on the well-off, and I've joined Warren Buffett and Bill Gates in being against the idea of eliminating the estate tax....I am on record as saying that I think, to the extent that revenues are part of the solution—and they are—that the fairest way to do this, and the least distorting to the economy, is to increase the marginal rates on the well-off. And I'm on record supporting Bill Clinton and Bob Rubin’s economic policies, even though I'm a Republican. So I favor that way of increasing taxes on people. But you know better than I: Somebody gets a theme, and the theme is that fat cats don't want to pay more taxes or don't care about income inequality, and we ignore some of these obvious facts which are verifiable as far as my background is concerned. So, the fact that I paid 38.7 percent was conveniently left out.

L.G.: Well, one of the points the Times was attempting to make was that since you are the senior chairman at Blackstone and have fiduciary responsibilities there, you can't very well go out publicly calling for a rise in the 15 carried interest tax rates [the rate that partners in a limited partnership like private equity are charged on their earnings].
 
P.P.: Well, let's talk about that. First of all, I wish I knew, and I don't know, but there are probably hundreds of thousands, probably millions of partnerships which are indistinguishable from private equity partnerships. I'm talking about real estate partnerships and energy partnerships, family partnerships, etc. The classic form of these partnerships is you have a financial partner and you have an operating partner. And the operating partner gets a certain percentage of the gains, if they occur.
 
L.G.: Right.
 
P.P.: In our case, if we haven’t earned  for investors more than the hurdle rate, which is 8 or 9 percent  on everything, including any fees they have paid we don’t get anything.  Also, we have put our own money in the deals, and over the last 20 years, we put $2.3 billion or something like that, which is the largest item in many of our balance-sheet statements. [When it comes to returns, investors in a private equity fund are entitled to get their investment back - plus an annual rate of return that is typically 8 percent. That is the "hurdle rate."] There's been, I don't know, six or so studies done-by McKinsey and management consultants in Europe and most recently some Harvard professor-that looked at all the private equity deals. Not a tiny sample, but all of them. And I think the conclusion in virtually every one of these studies is that private equity, because it's private, doesn't care about quarterly earnings; and because there's a hurdle rate, the only way to make any money is if we grow the business classically. And I think in the great majority of cases, the investment rate by the private equity firms after they acquire the business is, considerably, higher than it was before on plant, equipment, and R&D. It's not because we're saints or anything. It's because the only way we succeed is if we grow more than 8 or 9 percent a year. Bernanke, I think, has raised serious questions about this—about taxes and carried interest. But I would've thought that in an economy that needs productivity and competitiveness and growth, this is a sector that has shown a lot of growth, including job growth, incidentally. In the case of Blackstone, if someone took a look at our companies, and I think we produced 42,000 more jobs than there were there than when we bought the companies.

L.G.: Forgive me for interrupting, but why do you think so much attention has attached itself, particularly last summer with the I.P.O., to these huge amounts of money, to Steve's 60th birthday party—about which some unkind things were written? Blackstone is this company that you built from scratch, and indeed is one of the leading financial institutions in the world, and now so much attention is attached to this idea of Blackstone being an avatar of wretched excess?

P.P.: Well, let's explore that. I think partly because of my background, I have a lot of empathy for those who are less fortunate, and I've been unbelievably fortunate, and I admit that. The real incomes of the average person have gone up very little, there's a lot of job insecurity with globalization, health-care costs are zooming out of control, and our energy costs are zooming out of control. And I can understand why so many tens of millions of Americans are feeling very insecure. So the seeds of populism—they're rooted in reality. There are a lot of concerns, so when these people see people in our businesses and other financial businesses making a great deal of money, it's a very attractive target. And hell, I've been around enough, I understand that, and if I were in the middle class, I might very well be responsive to that argument.
 
L.G.: You personally don't do a lot of things that attract a lot of attention.
 
P.P.: Look, part of it is because I'm a Depression baby, and I had parents who emphasized economical living to excess. We had to turn off the lights in every room in the house at all times—turned off the heat in the winter in the living room—and my father kept his last car, I think, 15 years or some damn thing, and he gave away a lot of money to his family back in Greece, plus the local community. So I'm not being critical of the current boomers, because if I were a boomer, I might feel that way. I am a Depression baby. Giving back was part of my upbringing. So when I put a billion dollars in this foundation, it's perhaps some measure of my passion and sincerity that this wonderful country is to a certain extent in peril. And I am willing to pay more taxes. I would love to see it as part of a major spending reduction package. And I told you that I've been supportive of increasing marginal rates, and I'm also a fiscal conservative. I know enough about the numbers to know that it's not going to solve the problem, as attractive as it may sound politically, to tax the rich. I'm quite willing to be taxed more. I would just raise the question, If you're going to increase taxes, how are we going to have the least distorted effect on the economy, and shouldn't it be fair? In other words, what is the argument for just picking on private equity partnerships from this maze of partnerships in the country? If people believe that carried interest shouldn't be taxed at the capital gains rate, well, then, why not tax all the partnerships? What is the fairness of the tax policy?
 
L.G.: So would you advise your colleagues to kind of keep their light under a bushel for a while? Don't be such an attractive target?
 
P.P.: I don't tell other people how to live their lives. I believe this is a free country. They can live their lives however they like. I just know I've been unbelievably lucky, and I love this country, and I'm sincerely concerned. Everybody talks about giving back, but I think there ought to be something more, at least in my case than some costless rhetoric.

L.G.: Now you guys didn't get into the subprime stuff. You avoided that, but yet you, like everybody else, have been feeling the effects of it. Tell me a little bit about that.
 
P.P.: Well, credit has been severely curtailed, and because we borrow money, obviously in this business because this is a leveraged-buyout business, if you don't have credit, then it's very difficult to do deals. In the real estate field, we've been very lucky. I think we have the best team on Wall Street, the best management team on Wall Street, but Jon Gray and his colleagues in real estate have just done a spectacular job, but, no, we've not been in the subprime market as well.

L.G.: You've been in commercial real estate. But it's obviously hurting everybody.
 
P.P.: It affects the business. On the other hand, we have more diversity in business than some other people. We're in several advisory businesses and management businesses, and that gives us something of a cushion that some of the others might not have.
 
L.G.: And Blackstone has never done a hostile takeover?
 
P.P.: That was one of our first principles. I was presumably educated at the University of Chicago, and Adam Smith was our patron saint. I'm getting old, but I didn't know him personally. But it has its comparative advantage and division of labor and so forth, and when Steve and I set up this business, we were getting a tremendous amount of advice. Quite a bit of it was free, and that was I think about what it was worth. In some cases, but they wanted us to do hostile deals the way Drexel Burnham did, and some others, and all that sort of thing. And our reasoning was essentially, What is our comparative advantage? And just speaking about myself at the moment, I've been lucky to be a C.E.O. of a pretty good-sized company, and have been in public service. Been in the budget field, done books, all this sort of thing. It would be incredible if I didn't know C.E.O.'s on a friendly basis. I've organized bipartisan budget appeals with 300 or 400 C.E.O.s joining me in this effort on the budget. It seemed to me, to turn around and do hostile deals on these people was not to our comparative advantage at all. So, no, we've never done them, and, I don't know, we might be alone on that.

L.G.: Do you think there's any economic utility to them though? I mean somebody like Carl Icahn would say....
 
P.P.: Carl Icahn—if that's the way you want to make money, he's done very, very well at it.

L.G.: I mean, is there an argument?
 
P.P.: I'm sure he would make the argument that he takes companies that are underperforming and undervalued and increases the performance and the value. I've never seen an objective study of that, but he's sure made a lot of money doing it. So you know, that's what makes markets. That's not us, that's not the way we do business. I have a bit of a time problem.
 
L.G.: I know you have to go, but David Stockman is a friend of yours.
 
P.P.: Yep.
 
L.G.: He's in a big spot of bother now. [Stockman, Reagan's budget director and a former Blackstone partner, was indicted last year on federal charges of conspiracy, securities fraud, and obstruction of justice.] What do you make of all that? He's apparently going to trial.
 
P.P.: He's a personal friend of mine. I just don't know the facts. I look at him and his wife, Jennifer, and he's got a lovely family, and he's a friend from the Reagan years. I just feel very badly about him and do not know any of the facts. I don't even know about the politics of this thing. I know virtually nothing about the facts. I have a lot of empathy for him.

L.G.: Are you worried about the coming recession?

P.P.: Well, I heard Paul Volcker the other day-

L.G.: -an Obama supporter, by the way.
 
P.P.: I heard Paul Volcker say something like the following: I've been around a long time, but I've never seen this many difficult and intractable economic circumstances, and challenges, and I think this is an immensely challenging period that we're going into.