Archive for June 21st, 2009

NEW YORK: After three months of rallying, the stock market seems to have hit the wall. Bets that the recession is waning have turned to concerns that growth remains elusive, leaving stocks in wait-and-see-mode. But the week ahead brings a bevy of reports that could help get the market moving again.Reports are due on housing, consumer spending, the labor market and durable goods orders. A Federal Reserve policy meeting is also on tap, although the bankers are not expected to change their target for short-term interest rates.”The big rally since March correctly anticipated the change in the economic data from free fall to stabilization, but now it feels like the stock market is in a bit of a lull,” said Bob Baur, chief global economist at Principal Global Investors. He said that investors are pondering whether the consumer is going to be willing to step back in forcefully at a time when mortgage rates are starting to rise, gas and oil prices are advancing and unemployment is at a 26-year high of 9.4%.”Investors are considering now whether consumers feel they need to keep raising their savings,” Baur said. “If consumers sit out, that could delay any recovery.”Consumer spending fuels two-thirds of economic activity. Last week all three major gauges ended lower, as investors eyed a mix of economic news, S&P’s downgrade of 22 banks and President Obama’s proposed overhaul of the financial regulatory system. But the market was also retreating after the rally. Stocks, as measured by the S&P 500, spiked more than 40% between March 9 and June 12th. On that date in March, the S&P 500 and Dow both touched a 12-year low while the Nasdaq hit a more than 6 year low. As of Friday’s close, the S&P 500 was up 35% off the lows.0:00
/2:32Blame the baby boomersFederal Reserve meeting: The central bank meets this week to discuss interest rate policy. The two-day meeting ends Wednesday with a decision due at around 2:15 p.m. ET. The bankers are expected to hold the fed funds rate steady at an historic low near zero, as they did at the April meeting, despite the recent run up in long-term interest rates.The recent spike in the 10-year note yield has raised concerns for stock investors that the Fed may need to start raising short-term rates later this year, particularly after the 10-year hit a 7-month high of 4% earlier this month. But reports on consumer and wholesale inflation have showed pricing pressure remains tepid, even as oil and gas prices have been on the rise. With little inflationary pressure, the Fed is unlikely to raise interest rates at this meeting, particularly as the economy remains in recession. Of greater interest will be what the Fed says about the state of the economy and what it says about its ongoing program to buy back its own debt, known as quantitative easing.Recent reports have added to the bets that the pace of the recession is slowing — something the Fed said in the statement accompanying the April meeting. But worries have also surfaced in the last two weeks that the stock market has gotten too far ahead of itself and that a recovery may start later than Wall Street realizes. Wall Street is also looking to see if the bankers hint at an upcoming expansion of the quantitative easing program, a 300 billion debt buy back program the Fed has enacted to try to keep a lid on spiking bond yields.The U.S. government has been selling trillions in debt to fund its recovery efforts, driving up yields. While this can have positive implications, it also drives up mortgage rates, which could knock the wind out of any burgeoning housing market recovery.To counter this, the Fed has been buying up its own debt.On the docketTuesday: May existing home sales is due out before the start of trade from the Census Bureau. Sales are expected to have risen to a 4.83 million unit annual rate.Tuesday also brings a report on mass layoffs from the Labor Department. Mass layoffs refers to the number of layoff announcements involving at least 50 workers.Oracle reports earnings after the close. It’s expected to have earned 44 cents per share after earnings 47 cents a year ago. Wednesday: Durable goods orders are expected to have declined 0.9% in May after posting a surprise rise of 1.9% in the previous month. The Census Bureau report is also expected to show that orders excluding transportation fell 0.5% after rising 0.8% in the previous month.The May new home sales report, also from the Census Bureau, is due out after the start of trading. Sales are expected to have risen to a 360,000 annual unit rate from a 352,000 unit annualized rate in April.In Washington, the House Financial Services Committee holds a hearing on regulatory restructuring beginning at 10:00 a.m. ET.The weekly crude oil supply report from the Energy Information Administration is also due in the morning.The Federal Reserve decision is due at 2:15 p.m. ET.Thursday: The weekly jobless claims report from the Labor Department is likely the big market mover of the day. Last week continuing claims dropped for the first time since the week ended Jan. 3. Continuing claims is a measure workers receiving benefits for a week or more.Investors will also check out the revised reading on first-quarter GDP growth. Federal Reserve Chairman Ben Bernanke will testify before a House of Representatives Committee regarding the Bank of America purchase of Merrill Lynch. Friday: May personal income and spending reports are due in the morning from the Commerce Department. Income is expected to have risen 0.2% after rising 0.5% in April, while spending is expected to have risen 0.4% after falling 0.1% in April. The PCE deflator, the report’s inflation component, is likely to show that pricing pressures remain moderate. PCE is expected to have risen 0.2% after rising 0.3% in April.The revised reading on consumer sentiment from the University of Michigan is also due, but it’s not usually a market mover.

NEW YORK (Fortune) — Washington’s most dramatic foray into the nation’s financial sector since the Great Depression began on Oct. 13 with a misnamed acronym, an unwitting tribe of CEOs, and a confused staff of Treasury officials. It was a foreshadowing of the misadventure to come. “I don’t even know who the 9 companies are. Do you?” Michele Davis, assistant secretary for public affairs, wrote in an e-mail sent at 7:15 a.m. on that history-making Monday. “No clue,” Treasury chief of staff Jim Wilkinson responded. “Let me get the list.”The list held the names of nine companies that Hank Paulson and Tim Geithner, at the time the Treasury secretary and the New York Federal Reserve president, planned to draft as the leaders of a parade of banks to get capital injections as protection against the financial panic. Paulson had spent Sunday evening calling the CEOs of the firms with a next-day summons to Washington. But by Monday morning, top Treasury staff and the arriving executives remained in the dark about the 3 p.m. meeting Paulson had insisted they attend. In one e-mail out of a series obtained through the Freedom of Information Act by the conservative group Judicial Watch, Citigroup (C, Fortune 500) CEO Vikram Pandit’s deputies suggested sending someone else in his place. “If this is a briefing of industry group, I don’t think VP can go back to DC. If it is something else we need to know,” wrote Citi vice chairman Lewis Kaden. But the Treasury wanted to maintain the element of surprise, saying in a midday news release only that the executives were there to “work out details” of the 700 billion bank rescue plan Congress had passed days earlier.By then, everyone knew the rescue plan by the acronym TARP, for Troubled Asset Relief Program, and its passage through Congress had been a tormented affair, with the stock market collapsing after an initial thumbs-down by the House. When TARP finally passed, it was supposed to jump-start the lifeless credit markets by deploying taxpayer money to help banks shed toxic assets that were crushing their balance sheets.The government, however, changed its mind. At this dramatic Monday meeting, TARP morphed into something altogether different — a more direct program in which the Treasury would pump fresh capital into the system by buying preferred shares of individual banks. And in the months that followed, TARP would morph again and again, especially in terms of political perceptions that became a perplexing new hazard for the more than 500 banks, thrifts, and other financial institutions that had signed up for the deal.Pandit, among the last to arrive, was joined that afternoon by eight other titans of the shaken world of American finance, including J.P. Morgan Chase (JPM, Fortune 500) CEO Jamie Dimon, Bank of America (BAC, Fortune 500) CEO Ken Lewis, Wells Fargo (WFC, Fortune 500) chairman Richard Kovacevich, and Morgan Stanley (MS, Fortune 500) CEO John Mack. As the men checked in at the Treasury entrance, department staff scrambled to figure out how to keep the media at bay, but by that point the whole financial world was watching. “There are cameras at the gate,” headlined an e-mail that was quickly followed by a decision to corral the media into Lafayette Park across the street, from which they would snap pictures of the bankers emerging with 125 billion more than they had when they went in.Inside Treasury, some of the bankers initially balked at Paulson’s offer, but he wasn’t taking “no thanks” for an answer. “We don’t believe it is tenable to opt out because doing so would leave you vulnerable and exposed,” he said, according to his talking points. At 4:01 p.m., just one hour after the meeting started, Wilkinson e-mailed an update to the White House: “We are there except for one. This deal will get done.” Treasury staffers had set up individual offices for the bankers so that they could call their boards and other colleagues without leaving the building. By 6:25, all nine executives had scrawled their signatures on single white sheets of Treasury paper, inserting the amount, in tens of billions, that they had been told to accept. “We now have 9 out of 9,” wrote Wilkinson. The next day the Treasury issued a press release declaring, “These healthy institutions have voluntarily agreed to participate.”Was the rescue program necessary? We can probably assume that those signatures helped stave off a far more damaging economic collapse. Some banks, notably Citigroup, wouldn’t be alive in their current form without TARP funding. But for those that had a choice (or think they did), accepting taxpayer dollars was a decision that came with costs to their reputation as well as damage to their view of Washington politicians, most notably Congress.Eight months into a program designed as a three-year capital infusion, the banks allowed to leave TARP are doing so. On June 17, 10 large U.S. banks, including five of the original nine, announced that they had repaid a total of 68 billion in bailout funds, following 2 billion in repayments by smaller banks. The rush to the exit door by relatively healthy banks means that TARP is on the way to becoming what Treasury has always insisted it wasn’t: government welfare, a taxpayer-funded propping-up of failed institutions. While taxpayers can’t be expected to be sympathetic to complaints from a sector that vaporized hundreds of billions of dollars, it’s worth understanding their motivations as they bail out of the bailout or chafe within its strictures. This is a story exploring the point of view of the often vilified parties on the receiving end of a historic experiment in government intervention, one of many that will play out in the coming years. Banking executives say this is what they’ve learned:A signed deal with Treasury is not a done deal. If taxpayer dollars are on the line, Congress will have something to say, and that something holds the force of law.Populism isn’t good for business — but it’s the overriding sentiment in Congress today, fueled by a 24/7 news cycle that feeds on outrage. The House actually passed a 90% tax on bonuses, which died only when the headlines had moved on.Good intentions don’t control the message. The Treasury website still insists the TARP capital-injection program is “not a bailout.” But amid a backlash against Wall Street, TARP transformed from a seal of approval to what J.P. Morgan’s Dimon called “a scarlet letter.”The strings attached are not always obvious in the heat of crisis but emerge as major disadvantages in a normal competitive environment.What starts out as all-for-one breaks down as participants pursue their self-interest. Treasury boasted that the first nine banks moved “quickly and collectively.” It didn’t last.The experience has reminded business leaders why the government is considered a rescuer of last resort. As they repay TARP money, executives at stable institutions are vowing they will never again be tethered to a fickle Washington and a vindictive Congress. In normal times, that would merely be a sign of the free market’s healthy skepticism toward government. But these aren’t normal times — the Obama administration needs the private sector to pitch in: healthy banks to lend more than they might otherwise; prospective investors to buy the illiquid assets weighing down lenders. And what happens if “there’s another crisis and the private sector doesn’t trust the government. What will we do?” asks a former top bank regulator. The bad blood runs deep.Four months after signing Paulson’s term sheets, CEOs from the same nine banks were hauled before a House committee to be derided by one lawmaker as “captains of the universe” and told by another that “no one trusts you anymore.” Within days financial institutions that were encouraged to accept taxpayer money under one set of rules issued by the Treasury would be subjected to a new set of rules issued by Congress. They were shamed into canceling corporate events — “employee recognition” outings in their minds but “lavish junkets” in the language of posturing politicians. (Who got hurt the most? Probably workers in the travel and hotel industries.) Customers called their bankers, angry that the institutions had been “bailed out” and demanding their own bailout from burdensome mortgages and credit cards. “There was this belief that this was free money,” says Wells Fargo CEO John Stumpf. “But it was not a bailout, and we never asked for it.”Executives now refer to the “reputational risk” of participating in government-funded programs, while Treasury Secretary Geithner worries that the “stigma” associated with TARP funds is preventing needed capital from getting into the lending pipeline. According to a study by the investment bank Piper Jaffray, shares of those banks that accepted TARP funds suffered compared with those that did not. “Public, investor, and government perception toward recipients has turned negative,” the study concluded. Among stable banks there is a “recognition that participating in a government program with a subsidy is not necessarily a good choice,” says former Sen. John Sununu, a member of the congressional panel overseeing TARP.In the TARP saga, executives list a range of complaints: Dimon, whose J.P. Morgan Chase has a global workforce of nearly 225,000, has called the restrictions on hiring foreigners “a complete and utter disgrace.” Every executive interviewed complained that Congress’s pay limits were driving away top talent. But mostly they complain about the unpredictability that Congress injected into their operations. “Whoever gets TARP will be punished after the fact,” Kovacevich told Fortune. “Is this good policy? Does any of this make any sense?” Further down the size spectrum, CEO Tom Geisel of New Jersey-based Sun Bancorp (SNBC) (assets: 3.6 billion) says he wasn’t prepared for the changing terms of the deal. “When we signed the contract, the biggest risk was the fact that we didn’t know what we didn’t know,” says Geisel, whose bank stayed out of the subprime business. “The government was a partner that could do whatever it wanted. That’s not a partnership. I’ve never signed a document like that before in my life, and I’ll never sign one again.”The Treasury, which is legally authorized to change TARP terms at will, was not the primary source of the problem: It was Congress. From issuing new rules on compensation to high-level talk of nationalizing the banks, the turmoil in Washington stirred an uncertainty in the financial sector that can’t have helped recovery efforts. Says former Treasury chief of staff Wilkinson: “Institutions need to know the rules, and the rules keep changing.”TARP began as a three-page document that Hank Paulson rushed to Congress in September, during the worst week of the financial crisis. The next month, after critics urged that the toxic-asset plan should be replaced with a capital-injection campaign similar to Britain’s approach, Paulson came around to the new idea. Once embraced, Treasury was determined to make it happen. “We would rather have erred on the side of getting too much capital into the system than too little,” Neel Kashkari, the Treasury official who ran the program until May, told Fortune. From the outset, it was billed as an effort to shore up the financial system, not individual banks. Recalls Stumpf: “There was a sense that we were in this together.” However, the results of this spring’s stress tests suggest that at least some of those big banks did need the government’s cash after all. Wells Fargo and Bank of America were among 10 banks told to raise more private capital, as was Citigroup, which is turning over a one-third ownership stake to the government, making it a virtual ward of the state.While the original nine were told they had no choice but to accept, others did have a choice — yet soon lined up at the door, having faced mounting losses and worries about financing. Nonbanks American Express (AXP, Fortune 500) and CIT Group (CIT, Fortune 500) converted into depository institutions to qualify for TARP. Community banks mounted a lobbying campaign to be included. “I guess my invitation got lost in the mail,” Camden Fine, CEO of the Independent Community Bankers Association, joked to a Treasury official on learning of the Oct. 13 meeting. By January hundreds of banks, thrifts, and other financial institutions were in the system, encouraged by Treasury, which sent out the message that only healthy banks need apply. Treasury was approving applications at a rapid clip, despite a cost to the banks of the 5% annual preferred stock dividend, which would rise to 9% if not paid in five years.Even though taxpayers stood to profit under those terms, lawmakers from both parties were nursing their own frustrations — over constituents unable to get loans, over Paulson’s sudden shift in direction, over the torrent of federal rescue money Treasury was unleashing with minimal congressional input before the fact. “It was like a fire hose,” recalls Rep. Scott Garrett (R-N.J.). “They were being totally dismissive” of alternatives.The event that set off the populist tsunami — and forever changed the public view of TARP banks — came days after the inauguration of a new President, one who had campaigned against the “greed” of Wall Street. On Jan. 29, New York state comptroller Thomas DiNapoli issued his annual report on Wall Street compensation, which concluded that bonuses in 2008 had fallen 44% over the previous year. But what caught everyone’s attention is that they still totaled 18.4 billion, even at a time when the companies were collapsing from their bad bets. New President Obama condemned the bonuses as “shameful” and “irresponsible.” Lawmakers picked up on the theme, generating headlines and passing an amendment to the 2009 stimulus bill to impose new compensation rules on executives whose banks had signed on to TARP.Lawmakers mined it for good theater. CEOs from each of the nine banks that had signed the initial deal were summoned Feb. 11 before the House Financial Services Committee, where lawmakers demanded an accounting of the taxpayer money they had accepted. Arrayed across the dais as cameras rolled, the nine men were lashed with scolding and sarcastic gibes like the one by Rep. Michael Capuano (D-Mass.): “Basically you come to us today on your bicycles after buying Girl Scout cookies and helping out Mother Teresa, telling us, ‘We’re sorry, we didn’t mean it, we won’t do it again, trust us.’ ” Of course, some bankers haven’t done themselves any favors by continuing to enjoy perks like the use of company jets for personal trips while accepting TARP money, as the Wall Street Journal reported.Participation in TARP by healthy banks began to decline as banks began to witness the political costs. That dropoff accelerated a few weeks later, after it was disclosed that bailed-out AIG (AIG, Fortune 500) was planning to give its executives 165 million in retention payments and the House responded with its confiscatory 90% tax on bonuses. “The media goaded Congress,” recalled Rep. Melissa Bean (D-Ill.), an influential member of the House Financial Services Committee and one of six Democrats who resisted the goading. “That created fears.”Eighty banks withdrew their TARP applications or declined the funds after being approved. Others, like Geisel’s Sun Bancorp, began returning their money in March and April. “What began as a positive partnership between business and government to get the economy back on track quickly became politicized,” he says. In Geisel’s case, he was initially encouraged by regulators to acquire weaker banks, but Congress, steeped in a big-is-bad sentiment, was threatening to amend the program again to add a series of hurdles to acquisitions.By then the collective spirit was unraveling, and the big banks wanted out too. When top bankers met in March with Obama in the White House, J.P. Morgan’s Dimon reportedly presented Geithner with a fake check for 25 billion, the amount of his bank’s TARP investment. Geithner didn’t accept the souvenir, and Obama didn’t accept their protests either. “Be careful how you make those statements, gentlemen. The public isn’t buying that,” Politico reported Obama saying. “The anger, gentlemen, is real.”No wonder the White House was concerned. The stigma attached to TARP was beginning to affect other relief efforts the administration was trying to get off the ground. Analysts blame the initial lackluster performance of the Term Asset-Backed Securities Loan Facility — designed to bolster student, auto, and credit card loans — in part on political fears. Another program still hasn’t gotten off the ground, one that was the original intent of the TARP bill: The Public-Private Investment Program to lift toxic assets (now redubbed “legacy” loans and securities) from the banks’ balance sheets has had trouble attracting investors. Pricing assets is one obstacle, but investors are also reticent about making money off a government program. “Who wants their employees subjected to death threats and their homes picketed?” asked a hedge fund executive in a pointed reference to the AIG bonus debacle.The lesson for Wall Street is hard to miss: Profiting off a government-subsidized program is a recipe for a political nightmare. Prospective investors “correctly believe that if they were to make a profit, Congress would come along and claw them back,” says Peter Wallison, co-director of financial policy studies at the conservative American Enterprise Institute.So has TARP done its job? “It was one of the largest government appropriations in history,” says Thomas Chen, CEO of the investment bank Piper Jaffray. “And a mere seven months later we’re letting capital be returned on the basis that the problem is fixed. So you have to ask: (1) Has it all been fixed?, or (2) Was it necessary in the first place?” Chen believes the program had a short-term calming effect on the economy — more than a financial effect. Says Thomas Nides, Morgan Stanley’s chief administrative officer: “The original concept was to accomplish one thing: to stop us from going off the cliff, to send a clear message that the government was not going to let the system collapse. For that I give them an A+.”Paulson’s team has acknowledged that Treasury officials should have communicated better with Congress as the program expanded, bringing lawmakers onboard with the message that was communicated to the nine CEOs on that Monday afternoon: We’re all in this together. “We were trying to get the political will to prevent the financial system from collapsing,” says Kashkari. “But our political system is better at cleaning up after a mess than reaching consensus to prevent one.”Our political system is also fraught with turmoil and unpredictability. Capitalism, however, thrives on contractual certainty. The Obama White House has drawn many lessons from the Great Depression — insisting, for example, that the crisis demonstrated the need for early, bold, and large-scale government intervention. But that era also holds lessons about the costly unpredictability of government rules. In her 2007 history of the Great Depression, The Forgotten Man, which became a hot book this spring among conservatives, author Amity Shlaes argues that the economy took longer than it should have to recover in the 1930s and contends that F.D.R.’s stated strategy of “bold, persistent experimentation” spawned fear of commitment in the markets.That is the theme that TARP veterans return to time and again — sanctity of contracts, the importance of certainty in market rules. This is American business culture, one that is at odds with the vicissitudes of American political culture. Right now Congress thinks it knows better. But too much bold, persistent experimentation just might undercut the recovery lawmakers say they want.–Reporter associates: Alyssa Abkowitz, Marilyn Adamo, and Adam Lashinsky

Source:CNN

PARIS (Fortune) — It’s certainly a unique father-son relationship. The man who created one of the largest fortunes in history, now in his second career as a philanthropist, has his dad working for him as co-chair of the world’s largest charitable organization — the 27.5 billion Bill & Melinda Gates Foundation. Actually, this is a second act for both men. Bill Gates, 53, stepped down from day-to-day work at Microsoft last June, while his father, Bill Gates Sr., 83, retired from the prominent Seattle law firm Preston Gates & Ellis (now known as K&L Gates), in 1998. These days both men give counsel to each other, but for years, of course, Dad doled out indispensable advice to his son. I recently sat down with this unlikely buddy act in the famed Leonard Bernstein suite at the Htel de Crillon on Paris’s Place de la Concorde to ask them about the best advice they ever got.Bill, I’d like to ask you about the best advice that you’ve ever gotten from your dad.Bill Gates: Well, my dad and my mom were great at encouraging me as a kid to do things that I wasn’t good at, to go out for a lot of different sports like swimming, football, soccer, and I didn’t know why. At the time I thought it was kind of pointless, but it ended up really exposing me to leadership opportunities and showing me that I wasn’t good at a lot of things, instead of sticking to things that I was comfortable with. It was fantastic, and now some of those activities I cherish. They had to stick to it because I pushed back a lot, but it was fantastic advice.Mr. Gates, do you remember specifically dispensing advice, or was it something that was just a natural part of parenting?Bill Gates Sr.: I think to some extent his mother and I were explicit about this, but it was mostly just instinctive. We did feel like he ought to go turn out, go and play on the neighborhood softball team and things of that kind. We thought it would be good for him and that he’d enjoy it, and apparently it turned out to be good advice.B.G.: Even though I wasn’t very good at it.B.G. SR.: You were okay.You make it sound very easy, but all of us who are parents know that raising a family is not always that way. In your new book you mentioned dinners on Sunday nights and wearing the same kind of pajamas [on Christmas]. Does that stuff really work, Mr. Gates?B.G. SR.: Well, I guess on the basis of one family’s experience, my answer is a loud yes.What do you think, Bill?B.G.: I think family traditions that get you to come together and talk about what you’re up to — going on trips together, always sitting at dinner and sharing thoughts — really made a huge difference. We learned from our parents what they were trying to do, whether it was United Way or a volunteering activity or the world of business. I felt very equipped as I was dealing with adults to talk to them in a comfortable fashion because my parents had shared how they thought about things.Things weren’t always so smooth, though, between the two of you. Like any father and son, you’ve had some rocky moments, right?B.G.: That’s right. I don’t think I was easy to bring up. I had a lot of energy and stubbornness about things that I wanted to do. At one juncture, when I was in my last year of high school, I got a job offer and it would take me away from school, and I was amazed that my dad, after meeting with the headmaster and getting all the data, said, “Yeah, that’s something you can go and do.” Most of the rockiness had been before that, when I was still confused about, was I trying to prove something vs. my parents. There was actually a professional who I went and visited, who my parents had me chat with. [That person] explained to me that there wasn’t really any benefit to fighting with my parents. It was all about the issues, the battles were going to be about the real world, and they were really on my side. And that was fantastic. It just changed my mindset. I was only 12 or 13 at the time. I think it made things a lot smoother from that point on.A lot of times 12- and 13-year-olds are told that their parents are not their enemies, and it goes in one ear and out the other. Yet you were able to actually take this advice and listen to it, and you began to become closer to your parents after that?B.G.: That’s right. As I was starting Microsoft (MSFT, Fortune 500), I’d go over on Sundays and share with my parents what the challenges were and get some thoughts, just vent about what was complicated. I remember when we were taking the company public, I was saying that I thought that would have some real drawbacks, and we talked about how to mitigate those.So there was a lot of camaraderie that came from the fact that we’d gotten on an even keel, and they were very encouraging even though it was a business that was mysterious in some ways. The scale of the opportunity was beyond what would have been predicted.You guys have this incredible working relationship, and obviously a close familial one as well. What do you think the secret to that is?B.G. SR.: One of the [best pieces of advice] I ever had is related to what you just asked about, and that is the business of getting along with and encouraging the right things with your youngsters. Bill’s mother and I early on were involved in parent effectiveness training, [an] activity at the church we went to. And the thing that the people there taught us and emphasized, which is so central and so significant, is that you should never demean your child. When you think about the centrality of that, in terms of the relationship with an offspring, you’re off to a really good start. I’m a great fan of my son’s. I think he’s an incredible citizen and a wonderful businessman, and we let that show in the things we do together.B.G.: I think it’s because we have well-defined roles. I’m kind of a driving, “Why haven’t we gotten all these things done?” [kind of person], and dad is the voice of wisdom. We’ll be having a meeting, talking about the calendar or the cost or those things, and he’ll make a comment that will get everybody to stop and think, You know, we missed that way of looking at things. And his being there at the foundation full-time really has shaped the values. When we have the foundation meeting, people get up and applaud because they see that that really makes a difference. And to create a family foundation, when I was busy, and yet to know that the values were going to be right and strong, I give credit for that to my dad.And your son maybe didn’t always take your advice, Mr. Gates. I mean when he told you he was going to drop out of Harvard, what did you say to him?B.G. SR.: Well, the first time he said he was going to take a period away and then go back, the emphasis was on, well, he will go back. Second time around, after he did go back, then he again felt like he had to go to Albuquerque, where the company was, and work there more. We were much more concerned the second time. The company was becoming very demanding, and Paul Allen was out there in Albuquerque, and Bill needed to help him.Bill, let me ask you about another one of your mentors. What’s the best advice Warren Buffett has ever given you?B.G.: Well, I’ve gotten a lot of great advice from Warren. I’d say one of the most interesting is how he keeps things simple. You look at his calendar, it’s pretty simple. You talk to him about a case where he thinks a business is attractive, and he knows a few basic numbers and facts about it. And [if] it gets less complicated, he feels like then it’s something he’ll choose to invest in. He picks the things that he’s got a model of, a model that really is predictive and that’s going to continue to work over a long-term period. And so his ability to boil things down, to just work on the things that really count, to think through the basics — it’s so amazing that he can do that. It’s a special form of genius.If you’re getting too balled up with a lot of complicated things on your schedule, do you actually go back and think, What would Warren do?B.G.: Yeah, sure. I think Warren is so nice to everybody — how does he say no in a nice way? Or how does he think about priorities and have that explicitly in mind? And he turns down an unbelievable number of things, and yet everybody feels great about it. His grace in talking to people where he’s always saying, you know, “You probably understand this better than I do, but here’s how I messed it up when I first got involved in this.” You know, that’s a special talent, and I do find myself thinking, Hmm, how would Warren say this in a friendly fashion?There was a case at the annual meeting where somebody asked a question about should you sell the stocks that have gone up and keep the ones that have not? And he sort of said, “No, you look at the value of the business.” And then Charlie [Munger] added, “He’s telling you your conceptual framework is all wrong.” Which is in fact what the answer had been, but there wasn’t one element of, “Hey, dummy …”What about growing up, Bill? Teachers in high school or at Harvard? Were there any experiences you had there where you got a piece of advice that kind of gave you an ah-ha moment?B.G.: Well, my parents were nice enough to have me go to a great high school. It was a private high school. And a lot of the teachers there were very encouraging in my math and science and giving me the books that they liked, letting me read ahead. And the whole computer experience, the exposure came because Lakeside was sort of forward-looking. They were truly amazing — that when the teachers found it too confusing, they let the students take over. Most schools would have just, I don’t know, shut the thing down or something. It was a very weird deal where we kind of took charge and even the whole way we started using computers to pick when the classes would meet — that was a friend and I in charge of doing that.So they had a comfort, and you know, there were a few teachers that I would give a lot of credit to — they let us go and dream about where we would take it.Do you remember their names?B.G.: Yeah, Fred Wright was the key person who ran the math department, and I think [he] deserves most of the credit. There was a physics teacher, Gary Maestretti, who encouraged me. Even when I was first in 8th Grade, and I was doing very well on these national tests, a guy named Paul Stocklim was incredible at just saying — Hey, you should have more confidence. You’re really good at this stuff. Getting that kind of encouragement — it was very helpful, and that was a great environment. All those teachers were thoughtful. I think I got more than my fair share of their energy because, you know, I was so excited about the subjects and the frontiers. They kept throwing new stuff at me because of that.So Mr. Gates, why did you decide to write this book? In this book, there’s a fair amount of advice and learning, and obviously, you feel compelled to share some of that. What was it that prompted you to do this?B.G. SR.: It started with writing a memoir and really as much as anything, my colleague in that work, someone by the name of Mary Ann Mackin whose name is on the cover of the book, encouraged me to think in terms of making it more of a book than just one that I would give to the family or friends as a memoir. I was reluctant about that, to be candid, but she persisted, and finally, well, okay, okay, let’s go that way. And I’m delighted that I decided to. It’s really been an interesting experience. I mean it’s an industry I knew nothing about, and it’s really revealing and fun to see how the book business works, and I’m tickled with the book.Has it surprised you that you’ve met all manner of associates and friends of your son’s and that these people have ended up being peers and people that you work with? Did you ever imagine that would come to pass that way?B.G. SR.: No, no, that isn’t the kind of thing you would expect to occur, and you describe it well. It’s a surprise. It’s not a prediction I would have made, the way my life was going to work.Who were some of your son’s associates or friends that you feel have really contributed to your learning process?B.G. SR.: Well, a good many of them. Certainly, his two key associates, Paul Allen and Steve Ballmer, would be in that category. Very bright, insightful, thoughtful human beings.B.G.: And I’d also say probably Patty Stonesifer.B.G. SR.: Yes.B.G.: Together with my dad, [Patty] really created the foundation, the whole approach, the values. I think the integrity, humility. Together with Patty they thought through a lot of things so that once I was ready to go full-time, it was a thriving concern that was pretty far into some interesting, complex problems. And so it’s been an incredible gift for me that as I move over, it’s not a startup, it’s a going concern with amazing people, and Dad’s values have really shaped the direction it’s gone in.B.G. SR.: The other person who would be on that list, by the way, would be Melinda Gates, who is more than just a daughter-in-law. She’s a friend, and she brings wisdom to the table.Bill, as you move from Microsoft to the foundation world, from computer science to natural sciences and beyond, have you gotten advice and learned new things from this whole new group of people that you now associate with?B.G.: Yeah, it’s a different world, and you want to make sure you’re bringing what’s good about the business environment and the kind of engineering world that I spent most of my life in, and abandoning some elements that aren’t going to work.What about advice or lessons learned as you were growing Microsoft from say, Andy Grove or people at IBM?B.G.: We learned [a lot] about quality control, particularly from IBM Japan. Our Japanese customers on the whole were so tough about quality and precision — that was fantastic, because we did a lot of business there early in our existence. Intel (INTC, Fortune 500), we kind of grew up with together. Andy would sometimes be very friendly, offer good advice. Sometimes he was very tough on us. But it was all very helpful. I mean, he’s brilliant. And he helped us think about things in new ways. Apple (AAPL, Fortune 500) is a competitor, but in terms of getting the Macintosh to critical mass, Microsoft was the key partner who had all the early software. You know, that was an interesting learning curve. Working with Steve Jobs is also exciting and not totally predictable, but he was brilliant and inspired us in a lot of ways.Is there anything you specifically learned from Steve Jobs over the years?B.G.: Well, Steve’s kind of a fanatic about things, and you know, I think fanaticism is underrated. I’m a fanatic about running the engineering groups and the quality of them. Steve is a fanatic about the user experience and the design, and it clearly has made a huge difference for Apple that he says that it all has to come together — not some committee-type view that has a list of things, but rather a holistic view. That’s a deep insight.Do you guys celebrate Father’s Day? What do you guys do to mark that day?B.G. SR.: We do birthdays and things like that pretty assiduously, but Father’s Day, we’ve occasionally had a dinner or somethingB.G.: Yeah, we always talk on the phone on Father’s Day.B.G. SR.: Yes, we do.B.G.: Our rituals are more around Thanksgiving, birthdays, July 4th, Christmas. But it’s a nice opportunity to call dad and tell him he’s been [an] amazing father and set an incredible example.

PARIS (Fortune) — It’s certainly a unique father-son relationship. The man who created one of the largest fortunes in history, now in his second career as a philanthropist, has his dad working for him as co-chair of the world’s largest charitable organization — the 27.5 billion Bill & Melinda Gates Foundation. Actually, this is a second act for both men. Bill Gates, 53, stepped down from day-to-day work at Microsoft last June, while his father, Bill Gates Sr., 83, retired from the prominent Seattle law firm Preston Gates & Ellis (now known as K&L Gates), in 1998. These days both men give counsel to each other, but for years, of course, Dad doled out indispensable advice to his son. I recently sat down with this unlikely buddy act in the famed Leonard Bernstein suite at the Htel de Crillon on Paris’s Place de la Concorde to ask them about the best advice they ever got.Bill, I’d like to ask you about the best advice that you’ve ever gotten from your dad.Bill Gates: Well, my dad and my mom were great at encouraging me as a kid to do things that I wasn’t good at, to go out for a lot of different sports like swimming, football, soccer, and I didn’t know why. At the time I thought it was kind of pointless, but it ended up really exposing me to leadership opportunities and showing me that I wasn’t good at a lot of things, instead of sticking to things that I was comfortable with. It was fantastic, and now some of those activities I cherish. They had to stick to it because I pushed back a lot, but it was fantastic advice.Mr. Gates, do you remember specifically dispensing advice, or was it something that was just a natural part of parenting?Bill Gates Sr.: I think to some extent his mother and I were explicit about this, but it was mostly just instinctive. We did feel like he ought to go turn out, go and play on the neighborhood softball team and things of that kind. We thought it would be good for him and that he’d enjoy it, and apparently it turned out to be good advice.B.G.: Even though I wasn’t very good at it.B.G. SR.: You were okay.You make it sound very easy, but all of us who are parents know that raising a family is not always that way. In your new book you mentioned dinners on Sunday nights and wearing the same kind of pajamas [on Christmas]. Does that stuff really work, Mr. Gates?B.G. SR.: Well, I guess on the basis of one family’s experience, my answer is a loud yes.What do you think, Bill?B.G.: I think family traditions that get you to come together and talk about what you’re up to — going on trips together, always sitting at dinner and sharing thoughts — really made a huge difference. We learned from our parents what they were trying to do, whether it was United Way or a volunteering activity or the world of business. I felt very equipped as I was dealing with adults to talk to them in a comfortable fashion because my parents had shared how they thought about things.Things weren’t always so smooth, though, between the two of you. Like any father and son, you’ve had some rocky moments, right?B.G.: That’s right. I don’t think I was easy to bring up. I had a lot of energy and stubbornness about things that I wanted to do. At one juncture, when I was in my last year of high school, I got a job offer and it would take me away from school, and I was amazed that my dad, after meeting with the headmaster and getting all the data, said, “Yeah, that’s something you can go and do.” Most of the rockiness had been before that, when I was still confused about, was I trying to prove something vs. my parents. There was actually a professional who I went and visited, who my parents had me chat with. [That person] explained to me that there wasn’t really any benefit to fighting with my parents. It was all about the issues, the battles were going to be about the real world, and they were really on my side. And that was fantastic. It just changed my mindset. I was only 12 or 13 at the time. I think it made things a lot smoother from that point on.A lot of times 12- and 13-year-olds are told that their parents are not their enemies, and it goes in one ear and out the other. Yet you were able to actually take this advice and listen to it, and you began to become closer to your parents after that?B.G.: That’s right. As I was starting Microsoft (MSFT, Fortune 500), I’d go over on Sundays and share with my parents what the challenges were and get some thoughts, just vent about what was complicated. I remember when we were taking the company public, I was saying that I thought that would have some real drawbacks, and we talked about how to mitigate those.So there was a lot of camaraderie that came from the fact that we’d gotten on an even keel, and they were very encouraging even though it was a business that was mysterious in some ways. The scale of the opportunity was beyond what would have been predicted.You guys have this incredible working relationship, and obviously a close familial one as well. What do you think the secret to that is?B.G. SR.: One of the [best pieces of advice] I ever had is related to what you just asked about, and that is the business of getting along with and encouraging the right things with your youngsters. Bill’s mother and I early on were involved in parent effectiveness training, [an] activity at the church we went to. And the thing that the people there taught us and emphasized, which is so central and so significant, is that you should never demean your child. When you think about the centrality of that, in terms of the relationship with an offspring, you’re off to a really good start. I’m a great fan of my son’s. I think he’s an incredible citizen and a wonderful businessman, and we let that show in the things we do together.B.G.: I think it’s because we have well-defined roles. I’m kind of a driving, “Why haven’t we gotten all these things done?” [kind of person], and dad is the voice of wisdom. We’ll be having a meeting, talking about the calendar or the cost or those things, and he’ll make a comment that will get everybody to stop and think, You know, we missed that way of looking at things. And his being there at the foundation full-time really has shaped the values. When we have the foundation meeting, people get up and applaud because they see that that really makes a difference. And to create a family foundation, when I was busy, and yet to know that the values were going to be right and strong, I give credit for that to my dad.And your son maybe didn’t always take your advice, Mr. Gates. I mean when he told you he was going to drop out of Harvard, what did you say to him?B.G. SR.: Well, the first time he said he was going to take a period away and then go back, the emphasis was on, well, he will go back. Second time around, after he did go back, then he again felt like he had to go to Albuquerque, where the company was, and work there more. We were much more concerned the second time. The company was becoming very demanding, and Paul Allen was out there in Albuquerque, and Bill needed to help him.Bill, let me ask you about another one of your mentors. What’s the best advice Warren Buffett has ever given you?B.G.: Well, I’ve gotten a lot of great advice from Warren. I’d say one of the most interesting is how he keeps things simple. You look at his calendar, it’s pretty simple. You talk to him about a case where he thinks a business is attractive, and he knows a few basic numbers and facts about it. And [if] it gets less complicated, he feels like then it’s something he’ll choose to invest in. He picks the things that he’s got a model of, a model that really is predictive and that’s going to continue to work over a long-term period. And so his ability to boil things down, to just work on the things that really count, to think through the basics — it’s so amazing that he can do that. It’s a special form of genius.If you’re getting too balled up with a lot of complicated things on your schedule, do you actually go back and think, What would Warren do?B.G.: Yeah, sure. I think Warren is so nice to everybody — how does he say no in a nice way? Or how does he think about priorities and have that explicitly in mind? And he turns down an unbelievable number of things, and yet everybody feels great about it. His grace in talking to people where he’s always saying, you know, “You probably understand this better than I do, but here’s how I messed it up when I first got involved in this.” You know, that’s a special talent, and I do find myself thinking, Hmm, how would Warren say this in a friendly fashion?There was a case at the annual meeting where somebody asked a question about should you sell the stocks that have gone up and keep the ones that have not? And he sort of said, “No, you look at the value of the business.” And then Charlie [Munger] added, “He’s telling you your conceptual framework is all wrong.” Which is in fact what the answer had been, but there wasn’t one element of, “Hey, dummy …”What about growing up, Bill? Teachers in high school or at Harvard? Were there any experiences you had there where you got a piece of advice that kind of gave you an ah-ha moment?B.G.: Well, my parents were nice enough to have me go to a great high school. It was a private high school. And a lot of the teachers there were very encouraging in my math and science and giving me the books that they liked, letting me read ahead. And the whole computer experience, the exposure came because Lakeside was sort of forward-looking. They were truly amazing — that when the teachers found it too confusing, they let the students take over. Most schools would have just, I don’t know, shut the thing down or something. It was a very weird deal where we kind of took charge and even the whole way we started using computers to pick when the classes would meet — that was a friend and I in charge of doing that.So they had a comfort, and you know, there were a few teachers that I would give a lot of credit to — they let us go and dream about where we would take it.Do you remember their names?B.G.: Yeah, Fred Wright was the key person who ran the math department, and I think [he] deserves most of the credit. There was a physics teacher, Gary Maestretti, who encouraged me. Even when I was first in 8th Grade, and I was doing very well on these national tests, a guy named Paul Stocklim was incredible at just saying — Hey, you should have more confidence. You’re really good at this stuff. Getting that kind of encouragement — it was very helpful, and that was a great environment. All those teachers were thoughtful. I think I got more than my fair share of their energy because, you know, I was so excited about the subjects and the frontiers. They kept throwing new stuff at me because of that.So Mr. Gates, why did you decide to write this book? In this book, there’s a fair amount of advice and learning, and obviously, you feel compelled to share some of that. What was it that prompted you to do this?B.G. SR.: It started with writing a memoir and really as much as anything, my colleague in that work, someone by the name of Mary Ann Mackin whose name is on the cover of the book, encouraged me to think in terms of making it more of a book than just one that I would give to the family or friends as a memoir. I was reluctant about that, to be candid, but she persisted, and finally, well, okay, okay, let’s go that way. And I’m delighted that I decided to. It’s really been an interesting experience. I mean it’s an industry I knew nothing about, and it’s really revealing and fun to see how the book business works, and I’m tickled with the book.Has it surprised you that you’ve met all manner of associates and friends of your son’s and that these people have ended up being peers and people that you work with? Did you ever imagine that would come to pass that way?B.G. SR.: No, no, that isn’t the kind of thing you would expect to occur, and you describe it well. It’s a surprise. It’s not a prediction I would have made, the way my life was going to work.Who were some of your son’s associates or friends that you feel have really contributed to your learning process?B.G. SR.: Well, a good many of them. Certainly, his two key associates, Paul Allen and Steve Ballmer, would be in that category. Very bright, insightful, thoughtful human beings.B.G.: And I’d also say probably Patty Stonesifer.B.G. SR.: Yes.B.G.: Together with my dad, [Patty] really created the foundation, the whole approach, the values. I think the integrity, humility. Together with Patty they thought through a lot of things so that once I was ready to go full-time, it was a thriving concern that was pretty far into some interesting, complex problems. And so it’s been an incredible gift for me that as I move over, it’s not a startup, it’s a going concern with amazing people, and Dad’s values have really shaped the direction it’s gone in.B.G. SR.: The other person who would be on that list, by the way, would be Melinda Gates, who is more than just a daughter-in-law. She’s a friend, and she brings wisdom to the table.Bill, as you move from Microsoft to the foundation world, from computer science to natural sciences and beyond, have you gotten advice and learned new things from this whole new group of people that you now associate with?B.G.: Yeah, it’s a different world, and you want to make sure you’re bringing what’s good about the business environment and the kind of engineering world that I spent most of my life in, and abandoning some elements that aren’t going to work.What about advice or lessons learned as you were growing Microsoft from say, Andy Grove or people at IBM?B.G.: We learned [a lot] about quality control, particularly from IBM Japan. Our Japanese customers on the whole were so tough about quality and precision — that was fantastic, because we did a lot of business there early in our existence. Intel (INTC, Fortune 500), we kind of grew up with together. Andy would sometimes be very friendly, offer good advice. Sometimes he was very tough on us. But it was all very helpful. I mean, he’s brilliant. And he helped us think about things in new ways. Apple (AAPL, Fortune 500) is a competitor, but in terms of getting the Macintosh to critical mass, Microsoft was the key partner who had all the early software. You know, that was an interesting learning curve. Working with Steve Jobs is also exciting and not totally predictable, but he was brilliant and inspired us in a lot of ways.Is there anything you specifically learned from Steve Jobs over the years?B.G.: Well, Steve’s kind of a fanatic about things, and you know, I think fanaticism is underrated. I’m a fanatic about running the engineering groups and the quality of them. Steve is a fanatic about the user experience and the design, and it clearly has made a huge difference for Apple that he says that it all has to come together — not some committee-type view that has a list of things, but rather a holistic view. That’s a deep insight.Do you guys celebrate Father’s Day? What do you guys do to mark that day?B.G. SR.: We do birthdays and things like that pretty assiduously, but Father’s Day, we’ve occasionally had a dinner or somethingB.G.: Yeah, we always talk on the phone on Father’s Day.B.G. SR.: Yes, we do.B.G.: Our rituals are more around Thanksgiving, birthdays, July 4th, Christmas. But it’s a nice opportunity to call dad and tell him he’s been [an] amazing father and set an incredible example.