Episode BAM002 – Lane Carrick, Part 1
Bobby Cheeseman: Hello, and welcome to thebrickandmotor.com podcast, where automotive professionals share the story of their journey as they entered, struggled, and succeeded in the automotive world. Be inspired to overcome your adversity as they share how they overcame theirs. Have you subscribed to our email list yet? If you haven’t signed up yet, go to our website right now at thebrickandmotor.com and sign up for your chance to win $50 cash every week. One subscriber will be announced every Tuesday as the winner. Go to thebrickandmotor.com and sign up today.
In his 30 year career, Lane Carrick has started and run three things. He’s operated an investment advisory firm out of Memphis, Tennessee that at its peak managed over $500 million in assets, he’s been featured on CNN, ABC, and Fox as an expert in financial strategies. Lane Carrick is currently the managing partner at High Bank Capital Partners in the American Title Loans franchise group in Mobile, Alabama. I know you’re going to glean a lot of information from this guy, so sit back and enjoy the ride.
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Hello and welcome to thebrickandmotor.com podcast. I’m your host, Bobby Cheeseman, and I’m here with Lane Carrick. Lane, how are you doing today?
Lane Carrick: Bobby, I’m great. It’s good to be with you.
Bobby Cheeseman: Good, good. Good to hear it. Lane, I want to dive right in. Obviously I always send you the questions ahead of time so that you have an idea of what we’re going to talk about, but I kind of want you to expand on a few things as we have the conversation. What is your worst entrepreneurial moment in business?
Lane Carrick: That’s real easy. I can relive that very vividly anytime I choose, which I prefer not to. Nobody wants to revisit their worst moment. I’ve been in the financial advisory business in some capacity since probably 1980. I’m 57 years old. I was born in 1958. In 1970, I was 22 years old and freshly minted college degree and went into the financial services industry with a firm called Dean Witter Reynolds and started advising clients on how to manage their investments. I saw a lot of good and bad market environments from 1980 until 2008. We all know that markets go up and markets go down, and sometimes they go down a lot, and sometimes they go up a lot. Will Rogers, the American humorist, said that bull markets make a lot of geniuses and the opposite is also true. It was always interesting to observe human behavior and realize how smart I was when markets went up and how stupid I was when they went down.
I never experienced anything like what occurred beginning on, I would say, probably highly specifically, September 14th of 2008. Very vivid day in my memory. It was my son’s birthday on that day and I was trying to celebrate his birthday, but it was also the day that Lehman Brothers filed for bankruptcy. In 2007, the housing bubble had started to crack, if you will, or pop. The government was already stepping in and starting to bail out some of the early damaged companies: Bear Stearns, AIG Life Insurance Companies. Banks were in trouble. The government was in the early stages of developing the Troubled Asset Recovery Program, or TARP, where they were infusing capital into the banking system.
To that point, the government had bailed out everybody that was on the verge of collapse, but they didn’t bail out Lehman Brothers, so 100 year old, 125 year old investment banking firm that was holding securities in the billions and billions of dollars for individual and institutional investors, it was a counterparty on a lot of these derivatives that we subsequently learned about where somebody would exchange risk, interest rate risk or any other risk, that parties where there wasn’t an instrument you could easily buy to swap that risk … In fact, they were called swaps. Derivative swaps, where you could hedge things. All of a sudden, that firm is bankrupt and they’re not answering their telephones. It began or continued a decline in the market. I think the market was down 500 points that day. Later in the month, we had a down 700 point day.
What was so unique about that period of time that started on September 14 and extended until probably April of the following year, 2009, I think the market bottomed after losing more than half of its value. Trillions with a T dollars in global wealth wiped out in what would seem like a blink of an eye.
Bobby Cheeseman: I think that’s hard for people to really wrap their minds around, even to today’s standards. Really to think about trillions wiped out and just completely gone.
Lane Carrick: Yeah. I shared with you that I gave a speech today to a group of high school finance teachers. I was telling them that during that period of time, in 2008, that there were a couple of days where investors actually paid the US government to buy Treasury bills. The Treasury bills traded at a negative yield, so you were actually paying the government. Albeit a very small, single digit .006% or something, but nonetheless, the panic was so overwhelming. Money market funds were failing. Money market funds broke the buck. You always knew you could invest in a money market fund and it had a stable net asset value of a dollar. They broke the buck because some of the commercial paper and other items, there was no liquidity in the market. The liquidity just went out, and not just of the stock market, but out of the bond market. Out of the commercial paper market. All of a sudden, the markets just came to an absolute grinding halt.
Bobby Cheeseman: How did that affect your business and what you were doing at the time?
Lane Carrick: It was terrible. First and foremost, I’m watching the assets. My clients’ wealth, I’m watching that wealth decline.
Bobby Cheeseman: You’re becoming dumber by the day, right?
Lane Carrick: I’m becoming significantly less intelligent by the day. I was accustomed to that. That part of the business is always tough. It’s always tough to be a financial advisor when the markets are under distress because you know you’re going to have difficult conversations with clients. You know in some cases clients are going to hold you directly responsible for what’s taking place in the market.
Bobby Cheeseman: Sure, they can’t help it.
Lane Carrick: Even if they don’t, they still want you to be able to explain what’s happening. The distinction between 2008 and 2009 when Lehman Brothers collapses and you don’t know whether or not you actually have a position with Lehman Brothers or not, and so you don’t know whether you have an asset or a liability or what you have, and the stock market’s losing 5, 7% of its value in a day and the economy is shedding millions of jobs per month in the US. What was different about that was … The biggest crash I’d experienced before that was 1987. The stock market crashed, but it ended up being this isolated event, where it was almost like it crashed and then we went on with our business.
Bobby Cheeseman: Yeah. It was like, that was a Tuesday.
Lane Carrick: Right, but a housing bubble pop where the single biggest asset on individuals’ balance sheets coming into the crash and the unwinding of the speculative mortgage-backed bubble was a house. The average individual’s largest financial position was the equity in their home, and that went away. Also, a lot of individuals were financing their lifestyles with home equity loans. Now they didn’t have any home equity. The banks now understand that if they actually mark everything to market, they probably don’t have equity on their balance sheets. The Fed is rallying to put together a bailout package to infuse capital into the banks.
Here’s what was different Bobby, that was challenging for me. A client wants me to look him in the eyes and tell them that everything’s going to be okay. In 2008 and early 2009, I couldn’t look my clients in the eyes and say, “Everything’s going to be okay,” because I didn’t know. What I did was try to find the smartest people I had access to in my professional Rolodex and get an audience with them. Most of those best minds were in New York, the center of capitalism in the US, the center of the financial markets in the US. I had the ability, because of some of the relationships that my firm and I and some of my clients had, I was able to meet with, at that time, the transitional TARP team, the Troubled Asset Relief Program, because you were transitioning from Bush to Obama administration. I was able to meet with them and talk to them about the TARP program.
I was able to meet with people like Tom Lee of Thomas H Lee Capital, a billionaire who directed a lot of private equity funds, had significant exposure in the hedge fund space. I was able to go up and down Wall Street and pick people’s brains and say, “What do you think?” It was just devastating to me to come away from those meetings seeing the fear in the eyes of the people that I thought had the answers that I didn’t have. I’ll never forget, it was December the 11th, and I’d been in New York for a couple of days before that, just literally going to meet with anybody and everybody that was higher up the food chain than I was, that I thought could help me understand and process what was going on so I could go back at the time to Memphis, Tennessee and tell my clients what I thought was going on.
I’m sitting on the plane at LaGuardia to fly back to Memphis, and anybody that’s flown in or out of LaGuardia knows that that in and of itself can be quite an experience. I think we sat on the tarmac for about two hours while we were waiting for clearance to take off. They allowed us to keep our cellphones on back in the day, what you otherwise couldn’t. I got a call from one of my partners in my business who was my chief investment officer. He said, “Hey, you’ve heard the news?” I said, “What news?” He said, “About Madoff.”
I had just finished three or four days of going up and down and talking to everybody I knew and I’m on the plane to go home and I get a call from my partner saying, “Have you heard about Madoff?” I said, “Who’s Madoff?” He said, “Bernie Madoff.” I said, “I don’t know who Bernie Madoff is.” He said, “Thankfully, we don’t have any exposure to him, but he’s one of the largest hedge fund managers in the world and they just locked him up because he’s running a Ponzi scheme.” I thought, wow. Here’s another data point and here’s a data point that says you can’t trust your advisor because Madoff had been, I think, on the board of the NASDAQ. He operated with tremendous credibility in the marketplace, and I’m thinking, how do I communicate to my clients …
Bobby Cheeseman: Right, if you have credibility. He certainly had credibility to a lot deeper net worth people than you had.
Lane Carrick: Absolutely. I’m going to go back to Memphis and I now have another hurdle. The good news is, our clients account for all custody at Charles Schwab & Company. If you’re going to run an effective Ponzi scheme, you control the money. Madoff controlled the money. He had his own broker dealer and he fabricated statements and the statements came from him. In our case, we were an advisor to accounts that were held at Charles Schwab in the name of the individual …
Bobby Cheeseman: You had some oversight.
Lane Carrick: It was easier for me to go to my clients and say, “Pick up the phone and call Charles Schwab. Walk into the branch at Charles Schwab. Go online and look at your Charles Schwab account. I’m sending you statements that give you additional information, but your account is custodied someplace where I have no ability to reach in and touch your assets.” That period from September 14 of 2008 until April of 2009 was a period where, even if you were a good financial advisor and you owned a diversified portfolio of stocks and bonds, and the stock market loses half its value, if you had 60% of your portfolio in stocks and 40% in bonds, you still took a 30% loss. If you were more aggressive, you saw losses of 40, 50, 60%, depending on your exposure to those assets.
It was the worst market decline since the Great Depression in the 1930s. It was actually worse than the Great Depression in real dollars because one of the things happening in the Great Depression was that the dollar was going up in purchasing power. People were holding onto dollars because the dollar was the world’s reserve currency. In 2008 and 2009, the dollar was going down while the stock market was going down and the actual, real loss in the truer sense …
Bobby Cheeseman: It was a perfect storm.
Lane Carrick: Was a perfect storm. The other perfect storm was a lot of the hedging techniques that people had used, using hedge funds that would sell short stocks and actually bet on declines in the mortgage market, those funds became so illiquid because the underlying instruments stopped trading, they were forced to liquidate because people were panicking and they were putting in redemption orders all across Wall Street with all of their managers. Those that didn’t have gates or ability to restrict redemptions were forced to go sell securities that were liquid before the crash, but suddenly had become very illiquid at deeply discounted prices.
Bobby Cheeseman: [crosstalk 00:15:15] shorts were not [thing 00:15:17].
Lane Carrick: Yeah. You’re in the automobile business. It would be like somebody coming to you and saying, “Bobby, you have to sell every car on your lot by 8 a.m. tomorrow morning.
Bobby Cheeseman: Yeah, that’s possible.
Lane Carrick: You could do it, but what would be the value you’d get for those cars?
Bobby Cheeseman: You’d just get creamed.
Lane Carrick: You’d get creamed, and that’s exactly what happened in the financial markets, is people that had really good, viable strategies were overwhelmed with redemption orders. Or let’s say that they weren’t overwhelmed with redemption order, but Lehman Brothers was their prime broker.
Bobby Cheeseman: Even worse. Their doors are closed.
Lane Carrick: They don’t even know what they own. I was the treasurer of my daughter’s collegiate prep school. A school called St. Mary’s Episcopal School in Memphis, Tennessee, during this period of time. St. Mary’s had a bond issue of I think it was somewhere around $15, $18 million. For us, we issued bonds, we borrowed this money so that we could build new buildings and increase our capacity and update the physical facilities of the school. We were concerned about interest rates.
It had a variable rate, and so if interest rates moved, we might find that we were paying a lot more for that debt, and so we entered into an interest rate swap agreement where we swapped the risk. Our risk was interest rates went up and we had to pay a higher rate on the bonds, and so our cost to capital was going up, but we could enter into a swap: a derivative agreement between two parties where we would say, “We want to get rid of the risk of rising interest rates. If interest rates go down, we’ll lose money, but we’ll make it up because we’ll have a lower payout on the bonds. If interest rates go up, we’ll pay out more on the bonds, but we’ll make money on the swap.” Guess who held our swap?
Bobby Cheeseman: Lehman Brothers.
Lane Carrick: Lehman Brothers. I’m the treasurer of the school. I’m calling Lehman Brothers to find out if our 18 million bond issuance has a hedge or not. Don’t know. Can’t get nobody on the phone. Took months. Took months to find out whether we actually had a hedge or not. Didn’t know. It was a profoundly scary time.
Bobby Cheeseman: In that time, and I’m curious about this because some of the people that will be listening to this are dealers and they get involved in floor planning vehicles. The market adjusts all the time. Sometimes you sell, sometimes you don’t sell. You adjust your marketing. Maybe it’s marketing. Maybe it’s the market. Nobody’s really sure. You’re taking shots. You have some predictability, but it’s not always predictable. What did that do to you from a personal, emotional standpoint? How’d you handle that, because obviously you’ve got to have multiple people calling you asking you for answers and you feel somewhat inadequate. You have to, because you don’t have answers. You can’t answer that.
Lane Carrick: That’s exactly right. The challenge is that, prior to that day, I felt comfortable that I could provide an answer that the world wasn’t ending and assets had been repriced and the prices were attractive, and if you held on and didn’t give into your emotions, that you would be rewarded because in the future, prices would rise. In this situation, we’ve got a bailout of the banks. Basically a bailout of the entire financial system led by the government, and they’re selectively deciding who fails and who doesn’t. Lehman Brothers collapses but AIG gets bailed out.
Bobby Cheeseman: The lobbyists are hard at work and the politicians are hard at work to try and determine who’s on the list and who’s not.
Lane Carrick: Which is a scary proposition in and of itself. I think the turning point for me, and you’re right, at the end of the day, the volume of calls I got, I had built a business where I had multiple relationship managers. What I had done over the years as my business grew dramatically was I hired people who would be my surrogates and I would give them a certain number of relationships and they would be the primary manager. My clients knew that I was there and behind the scenes and if there was ever anything that they wanted to talk to me about, they could call me, but ultimately they became accustomed to dealing with the primary relationship manager. We would have a quarterly event or so where we would do a conference call with all of our clients. They felt my presence.
What I learned was, that works really well until it doesn’t. When it doesn’t is when they want you. They’re not interested in what the guy you hired that’s four years out of college has to say. They want you, the guy with gray hair, to tell them what’s going on. Just the volume of inbound calls and outbound calls, because we prided ourself on being very proactive. In our opinion, the way you distinguish yourself as a financial advisor during times of distress was to proactively reach out to your clients and say, even if what you were saying was, “I don’t know.”
Bobby Cheeseman: I think it’s important to say that.
Lane Carrick: Yeah. I’ve always found that it’s somewhat refreshing to say, “I don’t know.” Sometimes you may not know things that are really, really important and you and the client have to come to an understanding of what that means. The worst thing I could do is look a client in the eyes and say, “Everything is going to be fine,” if I wasn’t convinced it was. The turning point was that we started finding opportunities in the marketplace that were so outrageous, because the markets had become so outrageous, so illiquid, and so disconnected from reality, that we were able to find things like bank paper. Banks originate loans.
Let’s say that hypothetically, this is not a real example, but similar, so let’s say that AutoZone has a bank line of credit or a bank loan and it’s secured by their inventory and receivables. You’ve got their auto parts inventory behind it and you’ve got their receivables, their trade receivables, where they’re owed money for things they’ve sold in the marketplace, securing this debt. The bank that originates that will then chop that into pieces and take that $20 million loan and cut it into $1 million pieces and sell out participations. There were investment pools that were publicly traded. They were closed ended funds that owned pieces of all of these senior secured debt obligations. Senior secured is important.
Bobby Cheeseman: Explain what that means.
Lane Carrick: What it means is that, one, you’re first in line. If you’re in an environment like 2008 and you don’t know whether the world’s ending or not, if the world ends and I’m a participant in that loan and I own $1 million and it’s secured by the receivables and inventory from AutoZone, if AutoZone can’t pay that and it’s a senior note, so I’m the first thing that has to get paid. If they default on me, they default on everybody because I’m in the senior most position in the capital structure. I’m first in line to get paid. If they default on it, then I can go to their inventory and their receivables to satisfy my claim. What had happened was that the market was so scared that you could buy these baskets of senior secured bank debt for 40 cents on the dollar.
Bobby Cheeseman: That’s unbelievable. It’s like, for guys in the car business, being able to go and pick out the best inventory and then pay 40 cents on the dollar for what it’s worth.
Lane Carrick: It is. In those moments in time, I suspect you find yourself saying, “This seems too good to be true.”
Bobby Cheeseman: There’s got to be something wrong here.
Lane Carrick: Right. What’s the catch here? We found ourselves, as an investment firm, taking the same approach. Okay, wait a minute. I own stocks and they’re bouncing around like a pinball. I’m not sure what’s going to happen with the economy. It could get a lot worse. Could get a lot better, but it could get a lot worse, and if I own stocks and it gets worse, my stocks are absolutely going to go down in value. Guess what? Stocks are last in line in the capital structure.
Bobby Cheeseman: Most people don’t understand that. They have stocks or they have investments with their Charles Schwab account and they don’t understand how they’re positioned.
Lane Carrick: You’re last in line. All the bondholders are ahead of you. If you’re the senior preferred bond, you’re first in line. We’re looking at this and we’re saying, “Wait a minute. We can buy diversified portfolio of senior secured bank debt and they probably have 150% collateral when they originated the loan.” When they made the first loan, let’s say I own a million dollar piece of it. They had a million and a half dollars of inventory and receivables backing it. I’ve got 150% coverage and I can now buy it at 40 cents on the dollar. I actually probably have about $3.25 of assets for every dollar I’m paying. If the world gets better, then obviously this senior secured bank debt’s going to pay off and I’m going to get 100 cents on the dollar for my 40 cents. I’m going to get two and a half times my money back. If the world gets worse, I’d much rather own senior secured bank debt than equity.
Bobby Cheeseman: Because it transfers to real assets.
Lane Carrick: Exactly. We repositioned our portfolio. We were proactive. We picked up the phone and told our clients, “Look at this. This is what we have found. What we’re recommending is that you take money out of stocks and you put it into the senior secured bank debt, closed ended funds trading at a deep discount for the net asset value, which, oh by the way, is trading at a deep discount to the underlying assets in the debt [traunches 00:25:47].” We’re doubly protected. If we’re right, we’re going to make a lot of money. If we’re wrong, we’re going to be protected versus being in an equity position. If the market recovers and rallies, we’ll probably make less money in the senior debt than we would in equities, but we’re still going to make a lot of money.
Bobby Cheeseman: You’re doing well.
Lane Carrick: What we found was, there were multiple arbitrage situations where the market had become so indiscriminate that the seller said, “I don’t care what the price is. I want cash.” The cost of getting that cash was getting this tremendously reduced value for a wide range of assets. We were able to say, “We don’t know what’s going to happen with the stock market, but if the world ends and AutoZone’s receivables and inventory at 3:1 aren’t going to satisfy our position then the world’s over. It doesn’t matter what we own anymore.” I’m not cheerleading AutoZone.
Bobby Cheeseman: It’s checkmate for everybody.
Lane Carrick: Yeah, checkmate for everybody. That’s the armageddon scenario. We really won’t have a lot to worry about at that point because it’ll all be moot. What we can do for our clients in this moment, instead of just saying, “I don’t know, I don’t know, I don’t know,” which is what we did until we figured out something, but we didn’t want to knee-jerk things. We didn’t want to make recommendations that we didn’t feel like came from a place of strength and understanding. Once we found some places to move capital where we said, “We’re going to put our customers in a really strong position. They’re going to make money if the market recovers. We think they’re going to make money if the market doesn’t recover.” Then I was able to go out in a very confident way and tell clients, “It’s okay.”
Bobby Cheeseman: Even if we’re selling off assets right now to lose money on the front end, it’d be the same thing as if I had 100 units on my lot and the market shifted and nobody’s buying a Chevrolet Malibu anymore, but everybody wants a Honda CRV. I found several pools of Honda CRV vehicles selling for 40 cents on the dollar. Yeah, I’m going to lose $100,000 selling out those 100 cars because I’ve had to take such a deep discount, but I’m going to make it up three times over buying these Honda CRVs when the market recovers. Even if it doesn’t, I’m in a better position because these vehicles have a higher marketability than what those did. Same thing with Saab and those companies going out of business.
It’s interesting you talk about that as an experience and an entrepreneurial moment because it’s been discussed and being discussed more is that the banks and the financial industries are doing this with the car business the same way they were doing it with the housing market. The concern is, because lending is really loose. I had it in my last podcast and I certainly don’t mean to call attention to any one particular company, but the CarMax, the DriveTimes of the world are putting people in vehicles for $500 down, and we’re talking about ’13, ’14, ’15 model vehicles into essentially a buy here, pay here type market. With people, sub-550 credit scores. Average [beacon 00:29:40].
You’re asking for these vehicles to be mistreated for one … Not putting everybody into that group because the numbers work from a bank’s perspective. If they are going to go put money somewhere and they’re only going to make 2%, then that’s terrible, but if they can inject it in the car market and have 80% payers and 20% not paying or having to be repossessed, and their net benefit is an 8% gain, that’s four times better than they could have done before. Why? why does that even matter? Now that debt is being sold off as well into derivative type scenarios. It’s interesting.
Lane Carrick: Same song, second verse.
Bobby Cheeseman: Same song, second verse. When I was talking to Chuck [Banano 00:30:41], he’s really behind the buy here pay here market, and he’s done it for a lot of years. He goes around and speaks now and talks about this stuff. I was at the dealer convention in Chattanooga when I sent you that picture of the barbecued ribs.
Lane Carrick: Ah yes, right. Forget about cars. The barbecue ribs.
Bobby Cheeseman: I was up there talking to him, and that’s one of the things that we talked about, was the reason it’s not as large and it’s looming as the housing market is because the size of the purchase. The size of the purchase is a 15, $20,000 car, not a $200,000 home. How that’s being split up down the line. It’s not as big a pool of money to lose on. It’s just interesting how it’s all coming about and the reasons that banks have essentially gotten into the car selling business, not just the financing business.
Lane Carrick: Interesting. I’m not aware of all the details of what you’re describing. I have been a founding shareholder of three different banks and chairman of the board of one. Certainly the history of banks and large investors in general is they tend to chase trades. They crowd out the trade. If everybody’s chasing the same trade, if they’re all pouring money into the automobile market because they’ve been burned on real estate or burned on this asset class or that asset class, it’s fairly predictable that the end is not going to be pretty.
Bobby Cheeseman: The problem is is the terms to sell the cars to … When you get down to the real bottom line basis of it, the terms that are being offered to consumers and the ease of credit being issued calls into question the same type of things that they were doing with the housing market. Stated income. I’m telling you I make $80,000 a year and I work at McDonald’s. No, you don’t make $80,000 a year, but we will accept that you said you made $80,000 a year. That just doesn’t work. They’re not doing that in the car market, but it’s some of the things that we’ve talked about before. It’s a race to the bottom. Everybody’s competing for the same pool of people. I’m going to cut it a quarter of a percent here, and a quarter of a percent there, and then I have to beat the next guy. Everybody’s driving each other’s profits down and in turn, experiencing much higher losses, to the point that manufacturers have somewhat participated in it, being able to put people in vehicles that they really should not be in. Credit being issued that way.
Lane Carrick: In that 2008, 2009 debacle, one of the interesting phenomenons which may or may not be related to what’s happening today in the context of what you would be describing as a bubble of capital being pushed in …
Bobby Cheeseman: Thanks for listening today. This visit went a little longer than expected, but it was full of great insight, so we felt obligated to make it a two part interview. If you’d like to finish the episode, just click on Lane Carrick Part 2. I hope you’ve enjoyed the information today. If you have, please do to iTunes and give us a rating and review. We would really appreciate it. I’d like to end every show with an old Irish blessing that I first heard from Brian [Betheny 00:34:20]. May the road rise up to meet you. May the wind always be at your back. May the sun shine warm upon your face and the rains fall soft upon your fields. Until we meet again, may God hold you in the palm of his hand.