Acquired
00:48:35 · Ben Gilbert, David Rosenthal
[00:48:35] S0: of that was redemptions where investors are taking their money and going elsewhere. But doesn't matter to the management company. For for them, AUM is AUM. [00:48:41] S1: And this is somebody made this point to me in research. Management companies of investment firms have phenomenal operating leverage, as we talked about earlier. As you are growing your funds under management, you don't have to scale your headcount or your operations or your costs in the same way, and so you can get this, you know, amazing operating leverage and profits. [00:49:02] S0: Much like a software business. [00:49:04] S1: Much like a software business. Unfortunately, that works in both directions. So Right. If your assets under management ever start to shrink, that goes away very quickly. [00:49:15] S0: You still have almost all the exact same operational responsibility that you did when you had lots of assets when you have a smaller number of assets.
00:49:15 · Ben Gilbert, David Rosenthal
[00:49:15] S0: You still have almost all the exact same operational responsibility that you did when you had lots of assets when you have a smaller number of assets. [00:49:22] S1: Yep. And thanks to the merger, there are now four new partners around the table with mouths to feed who own 40% of the management company. So then in the midst of all this, to complicate things even further, Jack starts to develop a crisis of conscience. As all these losses are piling up at Wellington and clients are withdrawing and they're shutting down the IVEST fund, he starts wondering, you know, first to himself and then allowed to his partners, Guys, what are we doing here? Like, we're still taking fees from our fund clients. Yes. Our assets under management are shrinking, so our fee stream is shrinking. But for the clients who are sticking with us, we're not lowering our costs. We're still getting paid pretty well, and we're just incinerating their capital. Something feels wrong [00:50:21] S0: here. I've heard this referred to as his Jerry Maguire moment in the book, the Bogle Effect, where, you know, that famous scene in in Jerry Maguire where he loses confidence in the entire industry of being a sports agent and writes a letter and says, guys, we're gonna do this right. Yep. We should change everything and and blow up our whole business. And as usual, you know how that is received.
00:50:21 · Ben Gilbert, David Rosenthal
[00:50:21] S0: here. I've heard this referred to as his Jerry Maguire moment in the book, the Bogle Effect, where, you know, that famous scene in in Jerry Maguire where he loses confidence in the entire industry of being a sports agent and writes a letter and says, guys, we're gonna do this right. Yep. We should change everything and and blow up our whole business. And as usual, you know how that is received. [00:50:43] S1: Well, so Jack's Jerry Maguire moment here is he gives a speech to the whole firm where he throws out this idea that, hey. Maybe we should actually mutualize the firm's funds, dissolve the management company or have the fund itself acquire the management company, and eliminate all of the excess profits that we are making and just solely serve our fund holders, operate at cost, and at least reduce or get as close to eliminate as possible the fees that they are paying for this, frankly, not very good service that we are providing them. [00:51:21] S0: A mutually owned group of mutual funds or, mutual mutual as Jack loved to say. [00:51:27] S1: Mhmm. Yes. Indeed. Now buy it out. Why would they have to do that if Jack and potentially his partners out of the goodness of their hearts were were gonna give it to the fund holders. Well, before mister Morgan retired, he had taken the management company public, like floated it on the stock exchange. So there were public shareholders there in the management company in Wellington management company along with Jack and along with the four IVAS partners.
00:51:27 · David Rosenthal, Ben Gilbert
[00:51:27] S1: Mhmm. Yes. Indeed. Now buy it out. Why would they have to do that if Jack and potentially his partners out of the goodness of their hearts were were gonna give it to the fund holders. Well, before mister Morgan retired, he had taken the management company public, like floated it on the stock exchange. So there were public shareholders there in the management company in Wellington management company along with Jack and along with the four IVAS partners. [00:51:55] S0: So you not only have to get, you know, your camp, the Philadelphia camp to agree, but you need the Boston guys to get on board too that are a big voting block at 40% and all these public shareholders. And why would anyone do this? Because it's not rational or economic. It's charity. Let's take this business that generates a bunch of cash and has enterprise value. Let's stop generating the cash, and let's take its enterprise value and effectively call it zero now and give it to the funds itself.
00:51:55 · Ben Gilbert, David Rosenthal
[00:51:55] S0: So you not only have to get, you know, your camp, the Philadelphia camp to agree, but you need the Boston guys to get on board too that are a big voting block at 40% and all these public shareholders. And why would anyone do this? Because it's not rational or economic. It's charity. Let's take this business that generates a bunch of cash and has enterprise value. Let's stop generating the cash, and let's take its enterprise value and effectively call it zero now and give it to the funds itself. [00:52:24] S1: Commit suicide with the company, effectively. Yeah. And just to really highlight this again, it's kinda easy in retrospect to look at this and be like, oh, Jack. He was, like, so morally upstanding, and he stood up against Wall Street and, like, all of the, you know, crooks and fees out there. That's not the case. This was how the industry operated. Nobody was asking for this. No other firm changed how they operated. No other firm reduced their fees or mutualized. No clients got mad about it. The government was fine with it. There were not protest groups outside of headquarters. Yeah. There's no Occupy Wall Street in the nineteen seventies. [00:53:03] S0: Purely him saying nobody's asking, but I think we should do
00:53:03 · Ben Gilbert, David Rosenthal
[00:53:03] S0: Purely him saying nobody's asking, but I think we should do [00:53:07] S1: this. I think this is the right thing to do. Like, it is really lunatic fringe. To the extent there is a moral conflict, it exists solely in Jack's kinda head and in his heart. Yep. So, Ben, as you said, as you can imagine, this goes over like a lead balloon within the partnership, which is already quite stressed with all of the problems going on. So after Jack proposes this on 01/23/1974 at the Wellington Management Company board meeting, the four IVAS partners band together, rally enough votes from the public shareholders, and they fire Jack as CEO of Wellington Management Company. [00:53:50] S0: And this is a few years after his original proposal for mutualization, for making the the fund self owning. There is this multiyear drawn out sort of struggle between them where they just don't see eye to eye on anything. They have completely different philosophies, and it gets so contentious. You know, they they ask Jack to quit. He says, I refuse. You know, he he even writes a many, many, many page memo speech, gives it to the whole board of directors, espousing how much he refuses, and then they formally actually do fire him. [00:54:20] S1: Yeah. Yeah. This is an extreme event. Yes. An extreme event. [00:54:25] S0: And from Jack's perspective, he partnered with these guys. They came in. It was a fox in the henhouse, and they forced him out of his own company. Yep. And that is sort of how he is viewing it. [00:54:33] S1: Yep. And from their perspective, this guy lost his marbles.