BRIEFING BOOK

Data Information Knowledge WISDOM

HOWARD LUTNICK

is chairman and CEO of and is also chairman and Co-CEO of BGC Partners, a trade execution firm formerly known as eSpeed.

Forbes Townhouse, , NY

About .…………………………………………………… 2

Forbes on Lutnick “Why Howard Lutnick still hasn’t recovered from Sept. 11 th,” 08/15/05 ... 3 “About Face,” 11/12/01...... ………………………………….. 5 “The Electronic Future of Cantor Fitzgerald,” 10/05/01..…….. 6 “Getting Between the Wall and the Wallpaper,” 10/20/97……. 8

The Lutnick Interview……………………………………………………... 18 ABOUT HOWARD LUTNICK Intelligent Investing with Steve Forbes

Howard Lutnick is chairman and CEO of Cantor Fitzgerald and is also chairman and Co-CEO of BGC Partners, a trade execution firm formerly known as eSpeed.

Lutnick was also chairman and CEO of eSpeed, an online operation that developed electronic financial marketplaces and trading technology. In 2008, eSpeed merged with BGC Partners.

The September 11, 2001 terrorist attacks claimed nearly two-thirds of Cantor Fitzgerald’s New York-based employees, including Lutnick’s brother, Gary. (Lutnick himself survived only because he was taking his son, Kyle, to his first day of kindergarten.)

After the attacks, Lutnick faced criticism after he ordered a cessation of salary checks to the deceased employees on Sept. 15, 2001. Lutnick still defends the decision and says it was able to put the firm in a position to provide over $180 million to help the families of the firm’s lost colleagues, making Cantor Fitzgerald’s payments at least, or more, generous than other comparable firms. Each year, the company donates 100% of their profits on September 11 th to worthy causes in honor of their employees’ lives.

Lutnick graduated from Haverford College in 1983, with a degree in economics. He joined Cantor Fitzgerald that same year and quickly became mentored by the firm’s founder, Bernie Cantor. Lutnick was named president and CEO in 1991 and Chairman in 1996.

Lutnick grew up on Long Island, New York, as the son of college professors, both of whom passed away while Lutnick was still a teenager. He and his wife, Allison, a former Legal Aid attorney, have three children and reside in Manhattan.

- 2 - FORBES ON LUTNICK Intelligent Investing with Steve Forbes

Companies, People, Ideas On the Run Daniel Kruger, 08.15.05

Why Cantor Fitzgerald's Howard Lutnick still hasn't recovered from Sept. 11

A month after the tsunami Cantor Fitzgerald LP Chairman Howard W. Lutnick was speaking at the World Economic Forum in Davos, Switzerland about how corporations respond to disaster. Lutnick has credentials: He led his firm through the aftermath of Sept. 11, when Cantor lost 658 people, three-fifths of its total workforce, among them Lutnick's brother and lots of senior management. But at the same time he was winning an international reputation as a crisis manager, he was neglecting big turmoil at home. Cantor was losing ground in Treasury trading.

Privately held Cantor had long maintained a dominant position in the business of brokering trades of U.S. Treasury paper--acting as neutral middleman when, say, a big wanted to unload $100 million of bonds and a securities firm wanted to buy. But the business has been changing, with mouse clicks replacing phone calls.

Cantor has a large piece of digital-era trading, too, by dint of controlling publicly traded Espeed. Espeed by itself is the second-largest broker of Treasury bond trades (after BrokerTec). Between them, Cantor and Espeed broker roughly 40% of the $125 trillion in annual trades of U.S. Treasury securities. In the wave of sympathy and admiration that came Cantor's way after the Sept. 11 tragedy, that share briefly rose to an estimated 70%. Within two years Lutnick frittered away all that goodwill.

How? First, by introducing a new tool ironically called "price improvement." It gave buyers a chance to jump in front of other bidders on a given block of bonds- -not by bidding higher but by paying up to three extra fees on a trade. Each price improvement fee cost buyers $9 per $1 million in bonds traded versus about $2.50 per $1 million for a large firm's standard trade. (Sellers paid nothing.) Clients hated "improvement." In the 18 months after introducing the gimmick, Espeed lost an estimated 20 percentage points of market share.

Next Lutnick ignored a potent threat from two rivals that merged to form BrokerTec. Key point: It charges as little as $2 for a big firm's $1 million Treasury bond trade, around 50 cents less than Espeed.

- 3 - By September 2003 BrokerTec had 30% of the market for on-the-run (recently issued) Treasurys, Espeed's bread-and-butter business--and Lutnick was forced to take notice. But instead of dropping price improvement or addressing customer problems, Lutnick slapped BrokerTec with a suit, claiming it had violated Espeed's patents on such bond-trading conventions as the "work-up" (a practice that gave a trader, buying or selling at a given price, the right to execute all trading at that price until he's done) and "trading time" (the grace period a trader has to act under a work-up). But such conventions predate electronic trading by at least a generation. "People looked at it as Espeed's vain attempt to stop their momentum," says a veteran trader. A federal jury agreed:In February it found that BrokerTec had unintentionally copied Espeed, awarding no damages.

Time for damage control. In June 2004 Lutnick hired the Bond Market Association's general counsel, Paul Saltzman, as chief operating officer, giving Espeed a more reasonable public face. Traders credit Saltzman with persuading Lutnick (after seven months of pleading) to drop price improvement. "When we had the time and the resources to listen to our customers, we removed it," Saltzman says.

One person familiar with Lutnick's thinking says that the terrorist attack robbed him of lieutenants who could have saved him from himself--by dissuading him from initiating price improvement. Now Saltzman, by visiting trading floors and taking key customers out to dinner, is trying, he says, to "win back the trust and confidence of the dealer community."

BrokerTec has a 60/40 edge in on-the-run bonds--and bigger leads elsewhere. Espeed's profits dropped 28% to $26 million last year; its stock is near a three- year low at $9. Saltzman can do only so much. Says a former Espeed employee: "[You can't] solve everything overnight if people hate you."

- 4 - Follow-Through Susan Adams, Forbes Magazine, 11.12.01

About-Face

Cantor Fitzgerald Chief Executive Howard Lutnick has finally decided to be more generous to the families of employees who died in the World Trade Center attack. Shortly after Sept. 11 Lutnick wept openly on network television and proclaimed the firm "would do everything we can … to take care of" the families of the 700 people he says his bond brokerage firm had lost. But off camera, Lutnick was stiffing the families, as FORBES' Elizabeth MacDonald reported in television appearances. This may not surprise FORBES readers who remember our feature four years ago about Lutnick's power grab and suspect dealings at the firm.

Cantor cut off salary checks four days after the attacks, effectively concluding that employees were dead even while families and rescue workers clung to hope. Cantor informed some families they would receive no health benefits after Sept. 30 and capped life insurance payments at $100,000--substantially less than the expected payout of twice annual salary (it did say early on it would expedite life insurance payments). And Cantor said it might not pay bonuses.

Lutnick blamed lack of funds, but Cantor pulled in a $140 million profit last year. Two days after the attack it was back in operation.

Succumbing to media pressure, Cantor said it would pay all bonuses and commissions by Thanksgiving and offer free health benefits for ten years. It will give grieving families 25% of future profits for the next five years--minus the cost of health benefits.

- 5 - Companies The Electronic Future Of Cantor Fitzgerald Paul Maidment, Forbes.com, 10.05.01, 1:40 PM ET

Wall Street took another small step towards getting back to business with the resumption of trading in the shares of Cantor Fitzgerald's electronic brokerage eSpeed--and gave another glimpse of what its future looks like.

ESpeed's shares were last traded on Sept. 10, the day before two hijacked aircraft slammed into the World Trade Center in New York. The headquarters of the two firms high up in No. 1 WTC were destroyed with the loss of over 70% of the approximately 1,000-person staff, including many top executives. Howard Lutnick, who is eSpeed's chief executive officer and Cantor Fitzgerald's chairman, confirmed to analysts on Oct. 4 that the group's electronic technology platform was "completely intact," but that most of its telephone brokers did not survive the devastation.

As a result, Cantor Fitzgerald, which operates the leading interbroker-dealer exchange for U.S. Treasuries, has halted its traditional voice trading of bonds and is conducting its business for now through its electronic arms: eSpeed for fixed income products and TradeSpark, which deals in energy products.

"While the Cantor Fitzgerald voice brokerage operation has ceased, eSpeed's fully electronic market for U.S. Treasuries has been virtually unimpaired," Lutnick said.

ESpeed, which was spun off from Cantor Fitzgerald in December 1999--six months after being set up--and lost $3.3 million in revenue of $66 million in the six months to June 30, will also not replace its lost World Trade Center data center, but operate instead from its other existing centers in London and Rochelle Park, N.J.

Both decisions reinforce trends that have been changing Wall Street in recent years: the switch from physical to electronic markets and the dispersal of operations away from into the suburban areas of the greater New York metropolis and beyond.

Before the attacks, Cantor had about one-quarter of the daily $250 billion market in interdealer trading of U.S. Treasuries. It resumed trading through eSpeed two days after the attack and has maintained "a dominant share" of the U.S. Treasuries markets, Lutnick told analysts yesterday.

Since Sept. 11, traders have said competitors such as BrokerTec and TradeWeb, both of which are owned by consortia of Wall Street investment , have eroded some of eSpeed's market share. In part this has been because eSpeed's trading platform has suffered several outages, brokers say. But also the loss of

- 6 - voice brokers has made it more difficult to reestablish high transaction volumes. Cantor Fitzgerald's traditional bond voice trading business provided much of the liquidity for eSpeed.

ESpeed's shares dropped 30% in early trading Friday, to $6.03 from their closing price of $8.69 on Sept. 10, as investors struggled to grasp the future of a company that has had such a devastating loss of human capital.

ESpeed says it will "aggressively pursue" the repurchasing of its stock. The day before the attack, its board approved the buyback of up to $40 million of stock to help bolster a share price that had fallen by more than 50% in the previous three months.

- 7 - Getting Between the Wall and the Wallpaper Forbes Magazine, 10.20.97

At 36, Howard Lutnick is the youngest chief executive of a major Wall Street firm. From his lofty perch on the 105th floor of New York's , the managing general partner of Cantor Fitzgerald, L.P., can peer down on the lesser skyscrapers that house far bigger and better-known brokerages. Though it dominates the brokering of U.S. government bonds, Cantor is no Merrill Lynch or Morgan Stanley, Dean Witter Discover or Goldman, Sachs. But never mind; Lutnick has ambitions as towering as the aerie he occupies.

Cantor has come up as a niche player. In a single day, on average, $100 billion in U.S. government debt is traded through brokers like Cantor, which reigns supreme in brokering long bonds; 30-year maturities. It also is a major broker for other segments of the Treasury market. Not least, it supplies the Treasury bond pricing data that are the bread and butter of Dow Jones & Co.'s electronic information service.

Though the Cantor partnership's capital of $185 million is only a pittance compared with Morgan's $13 billion or Goldman's $5.8 billion or, soon, the $9 billion of Travelers' Salomon Smith Barney, Lutnick is expanding Cantor into a supermarket of wholesale brokerage services in all kinds of fixed-income paper, foreign exchange, derivatives, futures and interest rate swaps. And it is in equities with institutional sales and trading. Cantor already employs over 2,300 people; more than half of them at its New York headquarters, about 675 in London.

A nondescript man of average height with thinning black hair, Howard Lutnick has come a long way from the modest home on Long Island, where he grew up as one of three children of a college professor. With his 40th birthday still nearly four years away, Lutnick already boasts membership on the executive board of the Nasdaq stock market and sits on the board of managers of his alma mater, Haverford College. Lutnick, his lawyer wife and their 18-month-old son live in Manhattan's showy Trump Palace, where they are served by an English butler.

His social ambitions match his business ambitions. This summer the Lutnicks vacationed at the ritzy Grand Hôtel du Cap Ferrat on the French Riviera, in a $42,000-a-week villa.

His mentor

Lutnick bootstrapped himself from obscurity by being useful to now-legendary Wall Streeter B. Gerald Cantor. When Bernie Cantor died last summer, at 79, he was buried in the small Los Angeles cemetery in which Marilyn Monroe lies. His fortune was estimated at $500 million, and his art collection was world-famous for its hundreds of Rodin sculptures.

- 8 -

Cantor's was a classic rags-to-riches tale. As a poor teenager in the Bronx he hawked hot dogs at Yankee Stadium. He quit New York University to become a broker, served as a paratrooper during World War II and in 1945 founded his own securities firm in New York. But it was in Los Angeles, the entertainment capital of the world, that he made his mark, numbering Kirk Douglas and Zsa Zsa Gabor among the clients of his Cantor Fitzgerald & Co. (Fitzgerald, long gone, was an early associate.)

Long term wasn't Cantor's style. He kept moving around, looking for an edge. Arbitrage was his real love; small, quick profits with little or no risk. Cantor knew his way around the convoluted tax code, and his interpretation of its finer points made him a master of tax shelters, straddles and other such schemes. Besides collecting Rodins, Cantor collected politicians. He and his wife, Iris, were among those to rent a room for the night at the Clinton White House.

Many in the securities industry are like Bernie Cantor, prowling about for an edge, but Cantor broke from the pack of edge-seekers in 1972. The equities business was crowded, and, save for the Nifty Fifty, equities were drooping. The government bond market was less crowded and; handily; less tightly regulated.

Sensing opportunity, Cantor invested about $3 million in Telerate, an electronic data service that disseminated commercial paper interest-rate information. He also opened Cantor Fitzgerald Securities Corp., a wholesale broker-dealer of government securities now registered separately from his Cantor Fitzgerald & Co.

The way the government securities market had worked until that point was that wholesale brokers like Cantor arranged trades between primary dealers. The primary dealers dealt with retail customers; retail being in this case not the general public but big institutions, financial houses, large hedge funds and the like.

There are currently around 35 primary dealers, mostly huge firms like Salomon, Merrill Lynch and Lehman Brothers. Why do they need wholesale brokers? To cover their tracks. The lion's share of the volume in government securities comes from the primary dealers trading amongst themselves. If a is liquidating a huge position, it doesn't want that fact known, lest others, smelling a huge sell order, try to crowd ahead of it. By going through a wholesale broker, the primary dealer expects anonymity.

Enter Cantor. As a wholesale broker, Bernie did what his rivals hadn't thought of: He made the market more efficient by putting the bids and offers from primary dealers on Telerate's screen network. This made the market more transparent but preserved anonymity.

- 9 - Today there are plenty of other bond quota screens. But when Cantor first got into it, Telerate was an innovation. It filled a gap. Through the Telerate network of screens everyone could see; more or less in real time; what was going on in the Treasury market, though they couldn't see the names of the players. Cantor's timing was exquisite. Stocks were soon to turn dull, and they were to remain so for a decade. But as the federal deficit swelled, the government bond market boomed. Cantor moved in deeper, soon doing business directly with larger retail customers as well. He sold his controlling stake in Telerate for a huge profit in the early 1980s, but continued to milk it by charging it for the data Cantor supplied. Though the operation turned into a disaster for Dow Jones, it was one of the best things that ever happened to Cantor.

Bernie's boy

Into this lucrative setup stepped young Howard Lutnick in 1983. Whereas Bernie had dropped out of college, Lutnick had a degree in economics from prestigious Haverford. But just a bit underneath the patina the young man and the old man were much alike. Cantor liked the kid. When he was just 24, an age when many young people are still in graduate school, Lutnick was trading for some of Cantor's personal clients. That was in 1985.

That same year Cantor let Lutnick start the Investment Strategies Group division of Cantor Fitzgerald & Co. Cantor was moving further down the distribution chain in the Treasury market, now dealing directly with retail customers such as regional banks, medium-size businesses, wealthy individuals and others.

In December 1990, when Lutnick was only 29, Cantor named him his second-in- command and designated successor. "Bernie wouldn't hear a bad word about the kid," says an ex-Cantor executive. "If you presented him with evidence that Howard had crossed the line, he'd say, 'Don't worry. He's young. He'll learn.'"

If he himself had not been the victim, Bernie Cantor might well have admired the way Lutnick grabbed control of Cantor Fitzgerald as his mentor lay dying.

In 1990 Cantor, in his 70s, went on dialysis. By 1994 he had been declared legally blind. Lutnick convinced him to change the firm from a corporation into a partnership, to avoid double taxation. The deal closed in September 1992.

Cantor had started with a 73% stake, but he and his stylish wife, Iris, took out profits to finance their high living. (By the time Cantor died, he owned just 47%.) The partnership structure still gave him absolute power; though Bernie's days were numbered, Lutnick apparently was getting antsy. He made an ally of Stuart Fraser, Iris Cantor's nephew, naming him head of the firm's government securities brokerage. In 1995 Lutnick, Fraser and a third partner tried to buy out the Cantors, but Bernie was still able to say no.

- 10 - But on Jan. 2, 1996, when Bernie Cantor had been put on life support, Lutnick made his move. He activated the five-member incapacity committee provided for in the partnership agreement. Three members voted to take the reins from Cantor's failing hands; Iris Cantor and the fifth member abstained. Howard Lutnick, though he held just 14% of the partnership, was now the boss.

Iris Cantor, newly in charge of the holding company through which Bernie owned his partnership units, was furious. Lutnick has claimed she wanted to sell the firm. Iris claimed that she merely wanted a say in operating it. In May 1996 they went to Chancery Court in Delaware to have it out. After two days they settled. Lutnick won: Iris Cantor would get a lot of money but have no voice in running the firm. When Bernie was buried two months later, Iris barred Lutnick from the cemetery.

A master of the universe

If Lutnick grieved, it wasn't for long. The weekend after his mentor's death, Lutnick and a crowd of guests celebrated his 35th birthday by gambling for charity at New York's Metropolitan Club.

Lutnick was by now; in novelist Tom Wolfe's felicitous phrase; a master of the universe.

What gives Lutnick and the firm clout in an investment world dominated by far bigger and more respected firms? Certainly not prestige. Its clout derives from its highly specialized position. This is a business in which margins are so thin that it takes real expertise to make money on them. Lutnick likes to refer to it as "getting between the wall and the wallpaper."

The wholesale market in government securities operates in price increments as small as 1/256 of a point, which translates to $39.06 on $1 million worth of bonds. In the retail market, increments typically are in 1/32 of a point, translating to $312.50 per million. Commissions? A primary dealer that trades through Cantor's wholesale government securities brokerage operation normally pays a commission of $30 per $1 million. The customers of Cantor's retail arm would pay a minimum commission on their trades of $39 per million. There's not a lot of paste between that wallpaper and that wall.

There is, however, a hell of a lot of wall and wallpaper. These tiny margins are worth pursuing because the market is so huge. In a market where $100 billion a day is traded, even $30 per $1 million comes to $3 million.

If you can wring a few extra pennies on a business in the billions, you've got real money. Think of it as highly sophisticated coin-clipping; a clip here, a clip there, often so tiny as to be unnoticed across trillions of coins.

- 11 - Lutnick's critics say he has not always been scrupulous in getting between the wall and the wallpaper. Here's one episode about which Forbes has seen the relevant documents: In the late 1980s a U.S./German outfit, International Participation Corp., was running investment money for 6,000 European investors, mainly Germans. Indianapolis-based Vancorp Financial Services took on the management of $29 million of the capital. Vancorp opened an account at, among others, Cantor Fitzgerald & Co., trading mostly in Treasury bonds and over-the- counter options on Treasurys.

From late May to September 1989 the Cantor account lost $3.1 million and, elsewhere, futures accounts lost $1.1 million, yet Vancorp collected over $4 million in commissions and fees. When Vancorp returned the IPC funds to Germany that fall, only about $17 million of the $29 million was left.

So complex was the bookkeeping; and so convoluted the trail; that it took until May 1994 for the Commodity Futures Trading Commission to file a complaint. In January 1997 Cantor agreed to pay a $500,000 fine to settle CFTC charges that it had assisted in fraud.

But the German investors are still suing Cantor Fitzgerald & Co. for fraud and asking for more than $7 million in damages, plus three times that in punitive damages. The case is scheduled to go to trial Nov. 18 in federal district court in Los Angeles.

Extracurricular gains?

Where was the alleged fraud? The suit alleges Cantor agreed to broker Vancorp's trades for $156.25 per $1 million face value of Treasury bonds but in most cases collected almost three times that. It also alleges that Cantor acted not as a broker but as a dealer, without disclosing it to the client. Cantor denies the charges.

Howard Lutnick personally executed Vancorp's orders. His trading was conducted through three inventories; H, W and L; the initials for Howard William Lutnick.

Forbes has reviewed trading records relevant to the case. On Aug. 4, 1989 for instance, Cantor made a $150,000 profit (before commission) on a trade involving $20 million of long bonds that it purchased from Vancorp on the same day. In a trade this size the straight brokerage commission due Cantor at the agreed-upon $156.25-per-million rate would have been just $3,125. Did Vancorp's customers get full value for their bonds?

Forbes examined hundreds of transactions in which securities were traded between Vancorp and Cantor Fitzgerald & Co.'s Investment Strategies Group, and between ISG and other entities, most typically Cantor Fitzgerald Securities'

- 12 - government securities brokerage. They involved some $4.75 billion worth of positions and included over 80% of Vancorp's trades with Cantor.

Cantor defends its outsized gains on these transactions as simple reward-for- risk. But in the transactions reviewed by Forbes Lutnick lost money only about one time in ten. Cantor's take from the trades we examined was around $2.8 million. Close to half of that was rung up in four house inventories, almost all of it by H, W and L. Lutnick has admitted to a 30%-to-40% interest in the trading profits of those inventories. The other $1.5 million or so was credited as gross commissions to the salesman who covered the Vancorp account. After the salesman took his cut of that $l.5 million, Lutnick got a big chunk of what was left over.

The Vancorp account yielded profits in other ways. Cantor collected over $1.2 million of net interest. There were foreign exchange consulting fees. Commissions were rung up when house inventories sold positions acquired from Vancorp. Getting between the wallpaper and the wall? Cantor seems to have made quite a bit of space for itself in these transactions.

There are many, many ways to play the Treasury bond market. Howard Lutnick was well-versed in "rolls." What are rolls? A roll trade takes place between the day the Treasury announces it will auction off a new issue of a government security and the day the auction occurs.

Bond traders thrive on playing the spreads between existing securities of comparable yield and maturity and the forthcoming issues. Lutnick needed to figure out how to use Cantor's edge. According to a number of ex-Cantorites, for a time Lutnick and his Investment Strategies Group traders had access to the internal screens that the wholesale brokers used in Cantor's government securities brokerage rooms. At the bottom of those screens is a data crawl known as a waterfall that shows, by account number, which customers have been the buyers and sellers in the last few trades in a given security.

The brokers use the waterfall to keep track of the order flow. But knowing who is doing the trading is a clue to how big or well-informed the buying may be. Is it a primary dealer like Lehman? Is it a smart hedge fund like George Soros' Quantum? Or just a large company investing surplus cash? The customers are not supposed to have this information.

Cantor denies that the traders in Investment Strategies Group ever had access to the waterfall, but that is flatly contradicted by several former Cantorites. James Avena is now the president of New York-based Tullett & Tokyo Securities, but from 1982 to 1990 he ran Cantor Fitzgerald Securities. Avena says he told Bernie Cantor that Lutnick and his crew were peeking at the waterfall while trading. Cantor put a stop to it, Avena says.

- 13 - First Nevada first

Howard Lutnick kept looking for other ways to leverage the franchise. In the late 1980s Bernie Cantor did not want to use his firm's scarce capital for trading, but he was willing to let Lutnick trade on his own. So Lutnick set up Solomon Partners, a private trading partnership named for his father. It was open from 1988 to 1990. He must have done well, because Cantor soon wanted a bigger piece of the action. In 1990 Lutnick created a better-capitalized private partnership, First Nevada Associates, with most of the capital coming from Bernie Cantor.

Though in theory First Nevada was a separate entity, it functioned like a house inventory for Cantor Fitzgerald & Co.'s Investment Strategies Group. When it was inconvenient for Cantor Fitzgerald to carry a position on Cantor's books, it might be carried on First Nevada's. Or First Nevada might be used to process a transaction or book a profit. First Nevada was active from October 1990 through December 1992. Between its founding and mid-March 1992, the account generated over 1,000 pages of transactions, nearly all of them in U.S. government securities.

Was First Nevada a sham account, a way for the house at times to covertly trade for itself against customers? Cantor Fitzgerald has always maintained that First Nevada was an independent customer of the firm. Yet several times in January and February 1992 First Nevada's profit-and-loss position was noted in the margin of Cantor Fitzgerald & Co. blotters exactly the same way that such notations were regularly made for the house's alphabetical inventories. On many days First Nevada's trading easily made it Investment Strategies Group's biggest customer.

On Mar. 11, 1992 the Wall Street Journal broke the story that the Securities & Exchange Commission was investigating Cantor. A month earlier the brokerage statement covering First Nevada's trading was a record 191 pages long. The day after the story broke, First Nevada abruptly stopped trading on margin. Over the rest of 1992 the account was wound down.

In 1994 the SEC made Cantor Fitzgerald & Co. cough up $90,000 in profits and interest and fined it $100,000 for poor record-keeping in connection with a complex scheme to accumulate risk-free positions at Treasury bond auctions.

Gary Lutnick, 32, Howard's younger brother, joined the firm in 1991. He has run the trading team of Cantor's Global Trading Strategies group, the renamed Investment Strategies Group. According to people who worked with him over the years, Gary developed a clever way of squeezing a bit extra for the franchise. A retail customer would make an offer to buy long bonds. If there was a flurry of buying in the bond, Gary would sometimes grab bonds on the screen in front of the customer and then sell the customer his newly purchased bonds at a slightly

- 14 - higher price; again getting between the wall and the wallpaper. He could do that because customers see the trading screen, but don't see who bought the bonds ahead of them.

Anxious to dispel rumors that Cantor's government securities brokerage was giving Gary Lutnick better execution for his trading than it gave to its other wholesale customers, the firm this year hired Richard Breeden, a former chairman of the SEC, to investigate. Breeden told Forbes that the electronic trade-matching system Cantor installed in its government securities brokerage rooms last year made the possibility of such preferential treatment remote.

But Breeden admits his inquiry was "fairly narrowly focused." He says: "We came in and looked at the way things run today. We did not go back and look at the last two years, five years, ten years, to inquire."

All that Breeden's "fairly narrowly focused" probing proves is that nothing fishy was going on while he was looking. A half-dozen former staffers of Cantor's renamed Global Trading Strategies Group have told Forbes that over the years the firm frequently traded ahead of its retail customers.

A Japanese bank gets a hosing

Howard Lutnick's efforts to win respect for Cantor Fitzgerald keep hitting the wall. In early 1996 there was the case of Cantor and Tokyo-based Norinchukin Bank, Japan's leading financial institution for agricultural cooperatives. The Japanese bank took a real hosing on some overnight orders it left with Cantor to fill. Did Gary Lutnick wield the hose? Sources tell us he did.

In its trading of U.S. Treasurys, Norinchukin favored what is called a scale trade. This means you buy a bit at a time, hoping that the market will be temporarily weak and let you lower your average cost. You can do this by putting in an overnight buy order on a descending scale. That can be dangerous on a volatile day.

Apr. 5, 1996 was such a day. It was Good Friday, when the market was open only half a day, and unemployment numbers were due out that morning. As it turned out, unemployment had dropped, which was bad for bonds. The long bond slumped sharply, losing around two points.

Gary Lutnick, our source says, had an order to buy nearly $1 billion worth of long bonds for Norinchukin on scale-down. Instead of filling the order as the price fell, the source says, Gary waited until the bond had dropped considerably, then bought bonds and sold them to Norinchukin at the higher prices specified in the scale order. Our source says he made the house roughly $800,000 in a matter of hours.

- 15 - The Norinchukin Bank won't say much about the April 5th episode, but in mid- 1996 it quit trading Treasurys in limit orders; and sharply cut back its business with Cantor.

Cantor Fitzgerald won't comment on the Norinchukin trading, but it did provide Forbes with a copy of an interoffice memo on its trade execution policy for customer level/limit orders. It was dated May 9, 1996, just a month after the alleged Good Friday incident. Personnel of the then Investment Strategies Group were instructed to explain the policy to their customers.

In the letter, after the usual boilerplate Cantor clearly warned: ". . . while holding your unexecuted order, we may trade for our own account at prices that are equal to, or better than, your level/limit." Isn't that a frank admission that it reserved the right to front-run customers? Front-running is of course illegal in stocks: In Treasury bonds it's a gray area.

Has Cantor Fitzgerald cleaned up its act, as Richard Breeden's findings would suggest? In a June 24, 1997 letter to Forbes , Cantor said that its policies and procedures forbid brokers in its government securities brokerage to take positions. Yet on June 6 of this year, according to sources, Timothy Coughlin, a star Cantor broker of ten-year notes, took a large position on which Cantor wound up losing an estimated $1.5 million.

We could go on and on with examples of transgressions and alleged transgressions we have uncovered in more than a year of research on Cantor Fitzgerald.

Since Lutnick took over Cantor's daily management in 1991, its revenues have tripled, to nearly $600 million last year, due in part to all the new businesses he's gone into. Keep this in mind, however: The growth was financed from profits from government bond brokerage, the equities business and income received from the sale of pricing data (a revenue flow the firm shares with an outfit now controlled by Iris Cantor). Many of those new businesses lose money or don't make much. European operations, led by the huge London office, gush red ink.

In short, Lutnick has yet to prove that he can turn Bernie Cantor's specialized money machine into a profitable full-service Wall Street house.

Skating on thin equity

Net profits rose during Lutnick's first years in charge, but from 1994 to 1996 they dropped from around $80 million to under $60 million. This year so far has seen another drop in profits, in part because of Lutnick's breakneck expansion.

Howard Lutnick's ambitions are huge but thinly capitalized. As of Mar. 27, 1997, there were $7.9 billion of assets but only $185 million of partners' capital.

- 16 -

The equity base looks even thinner when you realize that much of it is borrowed money. Last year the partnership retired a big chunk of Iris Cantor's partnership units and then it reoffered units to Lutnick and other partners; Lutnick's share is now 25%. Financing for the deal was provided by a Chase Manhattan-led syndicate. Thus Lutnick's partnership units; as well as those belonging to many other partners; are pledged as security for the loan.

Just as we were preparing to go to press, after months of reporting on the story, we received a press release from Cantor Fitzgerald. It announced the firm was, among other changes, shutting its fixed-income trading unit, Global Trading Strategies, Howard Lutnick's old stamping ground and more recently Gary Lutnick's. The announcement said the firm would concentrate on executing trades for customers. We note the irony without comment.

- 17 - THE LUTNICK INTERVIEW Intelligent Investing with Steve Forbes

[00:00] Steve: Recovery by Spring?

Welcome, I’m Steve Forbes. It’s a pleasure and privilege to introduce you to our featured guest, Cantor Fitzgerald CEO Howard Lutnick. He’ll tell us why October was his company’s best month ever.

But first...This ongoing financial crisis is driven by fear, not by a lack of cash or liquidity in the global markets. There is no reason why our economy can't get back on track by springtime. But how do we get there form here? One answer is that we simply let financial markets work.

The economy still has very real strengths, and we know how smart, pro-growth policies work. We also already know what doesn't work. Tax and spending does not work. One-time stimulus checks have no lasting effect. But if we actually lowered tax rates, including corporate tax rates, we'd see real stimulus.

Even Detroit could self-repair, if we'd let it. Right now they make money everywhere but North America. Why? Because they aren't allowed to count the thrifty cars made overseas towards their efficiency standards. This makes no sense. Also, consider how the economy would roar ahead if we got rid of the government’s crazy mark-to-market accounting rule and had a sensible monetary policy and a strong dollar. Because if the dollar isn't right, the world isn't right economically. That’s the bottom line.

Our security is at risk if we don't get the economy right. And when this country is in crisis, rogue nations become a lot bolder. Just look to World War II for examples. This is an economic crisis, but it's also a crisis of confidence. If we lower taxes and back the buck and America would regain its natural optimism in a hurry.

And now...my conversation with Howard Lutnick.

[02:01] They Have To Sell The Bonds

STEVE FORBES: Well, thank you for being with us, Howard. Let me lead off with the obvious question. How is Cantor doing in this environment? You're making money, which is shocking, isn't it?

HOWARD LUTNICK: Well, volatility is a friend of ours. And extreme volatility is our best friend. We never really owned the stuff. So, we didn't try to make money when the markets were going up. And therefore, we don't lose any

- 18 - money when the markets go down. So, volumes mean we're going to be doing more business. And fortunately for us, the markets are very busy now. And they're expected to be busy in the future. So, we're doing great, best we've ever done.

STEVE FORBES: Were you ever tempted to, as many Wall Street firms did, to take positions and try to trade for your own account in a big way?

HOWARD LUTNICK: You know, the best way to say it is Cantor Fitzgerald has $1 billion in capital, which is a lot for regular people. But when you're with all these big gorillas on Wall Street, you know, $1 billion is kind of small. Bear Sterns had $13 billion. Lehman had $17 billion. So, these companies were much bigger than us.

So, that $1 billion meant we needed to protect it and defend it, protect our self, which means we just don't take that kind of risk. We just won't take that kind of risk. But you can hire us to help you do the things you want to do on Wall Street. And that would be our motto. We want to help the customer do what they want to do, be the "hired gun," if you will, on Wall Street. So, we're insiders, deep insiders. We know where everything is. But we're not doing it for ourselves. Let us know what you'd like to do and we'd be glad to help you. And that's kept us, when the waters were rough, safely on the beach. It's a nice place to be when the waters out there are really, really, really rough.

STEVE FORBES: Now, your business is going to boom even more now with the prospect of trillion-dollar deficits and all these hundreds of billions in bailout. I mean, they have to sell the bond somewhere, right?

HOWARD LUTNICK: Well, right. So currently, interest rate volumes in America are down. Because there were a lot of hedge funds trading, a lot of markets. And they've sort of retreated to the sidelines. But with the prospects of the U.S. government issuing maybe $2 trillion worth of new bonds, you know, Barack Obama maybe being the first trillion-dollar-deficit President, you're going to see huge issuance. And that means government bonds, two-year notes coming every month, probably three-year notes starting to come back. They used to be three-year notes in the years of deficits in the past.

They'll be back. Five-year notes every month, seven years coming back, ten- year notes every month. Maybe 20 years in 30-year bonds. So, our cup will runneth over with debt. And since we are in the market of trading that debt and making markets in that debt and distributing that debt, I think our business will be in super shape because of that.

STEVE FORBES: Now, any prospect of, you've once heard in the past, things like 50-year bonds or anything like that, or perpetual bonds?

- 19 - HOWARD LUTNICK: Well, I don't hear it much, you know. We would be happy it if happened. But I think the 30-year, sort of, their issuance stopped completely under Clinton. They thought no, it'd be better just to issue two-year notes. This was the concept of "starve the long end of the market and drive mortgage rates down, and everyone will refinance."

And that would sort of create a special Clinton-Rubin tax cut. But I think that idea of having only short-term debt out there is kind of long out of favor. So, I think we'll see potentially the 30-year bond really being a good place to issue. I mean, let's face it, 30-year bonds at four percent with what's going on now with the credit in the world, if you could sell, U.S. Treasury could sell 30-year bonds at four percent, that's something they should deeply be considering doing a lot of. And I don't think we can convince them to do 50 years. But sounds good if we could.

[05:39] Safety In Liquidity

STEVE FORBES: Right. Now, with rates so low, you mentioned four percent or so in the neighborhood for 30-year bonds. Why would anyone want to buy that stuff when you have inflation on the horizon? Just the uncertainty. We may know something, what's going to happen in the next few months. But 30 years, why take the risk? Was it just a flight to safety that we see unfolding here?

HOWARD LUTNICK: It's a fear-factor model now. When you have treasury bills under one percent, I mean, why would anybody have treasury bills under one percent when you know two trillion are coming? But as compared to where? I mean, are there not 500 billion coming in Europe, 500 billion now in China, right, 500 billion coming out of Asia? There's 500 billion coming everywhere.

So, the fact that we're two trillion, it's just more of it. The fact is, there is no other market in the world where if you put your money in, you know you can get it out. There's no more liquid market in the world. There's no Euro market that you could buy if you were, let's say, a foreign government and you had 50, 150 billion of reserves. Where can you put that money where you know if you need it, you can sell and get it back? And so, when the world gets afraid, you know, everybody talked about the Euro replacing the dollar.

Right? But think about it now. Did people really want to own Euro government bonds? There is no Euro government bond. There's a French bond. It's illiquid. There's a German government bond. It's illiquid. We are the biggest traders in the world of that stuff. We're making markets. We're not doing it for ourselves, for our clients, of course. But the fact is, they're thinking about trying to come together to create an issuance like the U.S. But until they do, which is reasonably a long way off, the U.S. government market is the place to put your money because you can get it back.

- 20 - STEVE FORBES: Safety in liquidity?

HOWARD LUTNICK: Safety in liquidity. Boy, are those two words that resonate hugely and loudly in the current environment.

STEVE FORBES: Now, you mentioned earlier the big gorillas which are now very thin, or totally disappeared gorillas. Looking at the future, will investment banks, will new ones emerge again? And will they just be the old traditional partnerships instead of morphing, going public and doing the things they did?

HOWARD LUTNICK: Well, clearly the independent-investment-bank-as-big- gorilla has fallen out of favor. You can't operate with 30 times leverage in this world and people give you confidence anymore. So, that has gone. And they've all become banks: becoming a bank, Morgan Stanley a bank, Merrill Lynch going into becoming a bank, Lehman Brothers going out of business and then going into Barclays, which is a bank. So, I keep saying the word "bank." You say the word "bank, bank, bank" and that way, they can get deposits.

But the fact is that the market for those kind of businesses has changed. The leverage that people will let these kind of institutions take is much smaller. And therefore, the views in the future will be different. But I think the business of banking as we turn out of this cycle and the downward stops, the consolidation of banking and the business of banking will never be better. I think the first companies to come out of this hugely profitable will be the banking sector. I think three to five years from today, there won't be a better business to be in, than to be in the business of banking.

[09:00] Private Equity on Wall St.

STEVE FORBES: Now, will there be new players coming in, people forming partnerships? Will equity funds come back and morph into something replacing what we used to see in the old days with Goldman or Morgan Stanley? Or how do you see the environment reshaping in the next three to five years?

HOWARD LUTNICK: Well, I think it's a great business. So, there should be the private equity firms, when they see their ability to exit, sort of deteriorate. And you have great minds in the private equity business, you know, the Blackstones, TPG, KKR. I mean, what kind of businesses would they get into?

Well, they're kind of in anyway. So, why not do more investment banking? They don't really do much sales and trading. But there's a lot of talent out there. So, I could see those kind of firms becoming investment banking firms. And they're not really boutiques. They kind of start with a bunch of muscle. So, I think those kind of firms will get into that space. And it would not surprise me if all three were effectively the investment banks, you know, of

- 21 - the next step. So, I think those people will come in the market and be pretty big. And then you've got the whole next level of private equity firms, which might decide to do the same thing. Take a look at the exodus of senior people on Wall Street who are not in the investment banking private equity side but in the sales and trading side.

And when you see the guys from sales and trading going to work for these firms, you see that's where they're thinking. They're starting to think, "How can I get into that space?" So, that's number one. And the new banks I think is going to be a huge business. And eventually, I think the U.S. government's going to figure out that unless they start new banks, there are not going to be any lending out there.

So, I think new banks are the place where the U.S. government could actually get lending to go. Because right now, consolidating banks doesn't help create any loans whatsoever. I just don't think the moves they've made so far are going to take any help whatsoever in getting the velocity of money and lending back started again.

STEVE FORBES: So, how quickly will these new banks emerge?

HOWARD LUTNICK: Well, a ) they have to stop talking about consolidating banks, right? Because they give PNC money and it buys National City. So, you're a client of either PNC or National City, and you call them up for a loan. They'd say, "Gee. We have this whole integration, call us in a year."

I mean, they're just not going to be out there lending money. So, the government puts in $5.7 billion. And does it create new loans? I just don't think it creates new loans. We need new banks. Maybe the government comes up with the Fannie Mae/Freddie Mac equivalent for regular lending. I mean, because right now, there's just no velocity of lending. Why would the government, if I walk in...

STEVE FORBES: After the problems of Fannie and Freddie, we're going to create, you know, Fubby or Flubbie or something?

HOWARD LUTNICK: Well, rather, we should start thinking of the acronym, right? So, we can name it early.

STEVE FORBES: Call it Howard.

HOWARD LUTNICK: No, don't call it Howard. Definitely don't call it Howard. But if you think about it, Fannie and Freddie were designed to create the American dream, right? To have home ownership be available for those who are creditworthy, and to be able to coordinate, consolidate, and then sell those into the capital markets.

- 22 - And as Fannie and Freddie Mac became publicly traded companies, right, the government sort of distanced themselves from them somewhat. And they started to try to be more diversified and not racial profiling. Remember in 1999 there was this whole thing about Fannie Mae and Freddie Mac were racial profiling and they weren't lending to low-income people, and they should be more social good?

Right, so we combined money with social good. And you end up, of course, with tremendous financial stress. But who is going to lend money to corporations if you go to a bank right now, and you ask the bank will they lend you money? They're going to compare it. They could say, "I can buy Fannie Mae paper government-backed at 8.5 percent. So, what rate are you going to pay me to make it interesting for me at the bank? Are you going to pay me 9.5? Well, one percent versus the U.S. government is not enough for me, thanks very much."

And they pat you on the head and send you out the door. That, people don't understand. They think the banks are hoarding money. They're not hoarding money. The alternative investment, here's another example. A bank that's TARP money, right? And they go out and the first thing they do is buy back their own debt, which is yielding 11 percent, right?

So, they'd say, "Should I lend you money? Well, I'm going to pay myself back at 11 percent." So, until we sort of get bond credit yields down, banks aren't going to lend money. Now, if the government set up new charters and said, "Look, I'll give you a charter and maybe I'll invest in you," or have a Fannie Mae equivalent and say, "I'll buy loans but only against real new loans that are out there," then what'll happen is they'll start making loans to clients. New banks will start taking clients from the old banks. And the old banks will say, "You know what? When the credit markets start to come down, I'm going to lose my clients. I've got to compete." And without competition, we know where we're going.

[12:07] Boutique Banking Reborn

STEVE FORBES: You going to be one of these new banks?

HOWARD LUTNICK: I would. I think that's exactly the concept. Because I don't know everybody's business. I don't know the auto business. I don't know a variety of businesses. But there are a variety of businesses I know really well, just like you know the publishing business really well. And if you guys had a bank, you would focus on the kinds of publishers and the kind of things you know really well, where you would think, "Hey, that's a really good risk. Other people don't understand it. I do."

See, that's the kind of business. So, we could focus on the kind of people in the finance business who are under-banked right now, that we could finance because I like their business model, because I know it. And the concept of not

- 23 - having these big, universal, gigantic banks by trying to be everything to everyone, but rather let specialized people bank their industries. Because we've got a broken banking/lending system now. They're going to fix it.

STEVE FORBES: So, instead of one shop you have the bank for autos, the bank for chemical companies, the bank for oil companies, et cetera?

HOWARD LUTNICK: Absolutely right. Because who's going to know it better? The concept of one giant bank knowing everything, the fact is, all they got to do is make one mistake. Right? It wasn't AIG that had problems. It was AIG Financial, right? Sort of 300 guys in that-- tens of thousands of employees, 300 people blew all the money, right?

You get out of the area of your expertise. That's where you have pain. That's why we're doing well. I'm too afraid to do things that I don't understand. My motto is, if you can't explain it to us so we really understand it, we don't want to do it. I don't care how much money another guy's making. Maybe he's smarter, maybe he's dumber. But if we don't understand it, we're not going to do it. We're just not going to do it.

STEVE FORBES: Now, this gets to the structure of what a proper investment bank should be. As you know, they all went public. Should they be the old partnership where bank takes the losses, the partners' bad news, not the systems?

HOWARD LUTNICK: You're just being nice 'cause Cantor Fitzgerald's still a partnership, right? So, this is just, you know, "Okay, Steve. You're throwing me a beach ball." I mean, I think partnerships, they start by protecting their own.

STEVE FORBES: I'd like a beach ball in this weather.

HOWARD LUTNICK: You know. You know, look. We are very, very cognizant of protecting our own money, you know. And people, maybe they do think differently when it's other people's money. And, you know, the whole concept of the CEO owning 100th of one percent of the stock, and he makes a business deal and gets paid really well on the business deal, does he have the interest of the shareholders at the top of the list or not?

Maybe has his own interests first. A partnership always will put the partners' money first, which is, "You got to protect it." Right? It's one thing to sit in front of my partners and tell them we've made money. How much we've made is interesting. But if I told them we'd lost money, this is an entirely different model.

This is how the difference between doing accretive deals, which make us more, than doing a deal that's, quote, "strategic," or another way to say it is we'll make less, right. If I stood in front of all my partners, I said, "I did this great acquisition

- 24 - and we're going to make less money next year," I might as well bring the tomatoes with me and hand them out so they could throw them at me.

STEVE FORBES: Is that why you turned eSpeed into, brought that back into the fold?

HOWARD LUTNICK: Well, eSpeed was our technology company that went public. And it went public during the dot-com boom where eSpeed was a great business. It was a technology business. And they paid us 50 times,

STEVE FORBES: Earned their own money, yeah.

HOWARD LUTNICK: Right? It's all in the future, in the future. But it allowed us to invest huge amounts in our technology, over $1 billion in that technology. So, as that fell less in favor, right, we put, actually, our wholesale brokerage business together with it, sort of put back the pieces as they should be together. So, now the company makes far more money and hundreds of millions of dollars a year. But of course because it's a financial service company, people think, "Well, you're in the financial services. Bad things must be happening to you."

BGC Partners, which is public, doesn't touch the stuff. We don't make any money when it goes up. We don't lose any when it goes down. We really provide the banks, the systems, to trade with each other, to play with each other. And as long as it's busy, we're going to do well. How did we do last quarter? Beat all the analysts' expectations. And we put out our October numbers, which of course were far, far in excess of their expectations. Because they still think we're going to touch the stuff. And we are scared to death of touching the stuff. That's for big gorillas, big, giant banks, not for us.

[18:34] Howard’s Trading Rules

STEVE FORBES: You once said there are 20 ways to trade stocks. Could you elaborate on that a little bit?

HOWARD LUTNICK: Well, I think there's a fundamental rule that people should have when they trade stocks for regular people, which I call the "tightrope rule," which is, if I put a wire between this building and the one next door and said, "Walk across on a tightrope," you'd say, "No, thanks." I say, "Well, how about I put a safety net below you?"

You'd say, "Okay. I'll take a safety net." Why don't people trade stocks with a safety net? If they buy a stock at 20, it's 'cause they think it's going to go up. Why not put it in a safety net that says, "But if I'm wrong, when it hits, what, 16, I mean, come on, heck, I'm wrong by 20 percent? I'll sell it."

- 25 - Why do they trade stocks like a marriage? You know how many people I've gone out with, and they talk, "Well, I bought the stock. In the beginning, it was really good. And then we went through this tough time and now it's for better or for worse, till death do we part." Why is that? I think people should trade stocks fundamentally, the two simplest things. One, they should date them, not marry them. And two, a safety net. When you're wrong, choose what's wrong and then sell it. That's all. If you went in for a certain purpose, right, then for whatever reason it was wrong, get out and try something else, 'cause that one certainly wasn't right. It makes you a more healthy investor.

[20:02] Derivatives Explained!

STEVE FORBES: Now, derivatives have a bad name these days. But you see virtue in property and equity derivatives. You have something called the Hollywood Stock Exchange? Carbon trading? Can you talk a little bit about that?

HOWARD LUTNICK: Sure. You know, derivatives are simply a way for people who have a vested interest to hedge themselves with someone who wants to have a vested interest. So, one of the simplest examples I can give you would be a property derivative. So, the owner of this building, right, well, the owner of an office building, maybe you well own this building.

STEVE FORBES: We still do.

HOWARD LUTNICK: So, the owner of an office building thinks, you know, "I'm afraid rents are going to go down." And so, his two choices would be sell the building or not. It's not really true. He just thinks rents might go down. Now, let's say there's a pension fund who thinks that rents are going to go down but not nearly as much as the owner of the building.

The owner of the building thinks they're going to go down $20 a foot. And the pension fund thinks they're only going to go down $10 a foot. Right? So, they'd like to buy it at that price. And the owner of the building would like to sell it. It sounds like there's a deal to be done because you have two differing opinions. And that's a match. That's a derivative.

That's all it is. It takes people who want to do different things with each other, and makes it natural. So, credit derivatives get a bad name because people don't understand that it's about the bonds. If Morgan Stanley has a 12-percent bond and the insurance of it defaulting is four percent, 12 minus four is eight percent.

You can invest in Morgan Stanley insured by, let's say JP Morgan, right, with a credit default swap. And that's an eight-percent bond. JP Morgan knows the credit. They're in the credit business. They're capable of writing the insurance. You then are willing to lend Morgan Stanley the money. Because while 12

- 26 - percent was too much risk, eight percent with JP Morgan backing it makes sense to you. That's the same kind of thing. It's creating a syndicate. Someone with money and someone who does the credit coming together. And therefore, Morgan Stanley gets the money. So, credit default swaps, if done correctly, are just like any other derivative, people coming together to meet each other.

[22:22] Years of Pain

STEVE FORBES: Right. So, what is your bold prediction for the future?

HOWARD LUTNICK: Well, I think that the markets are going to have a difficult time, not for weeks, not for months, I think for years. I think the workout of this credit issue is going to take years and years.

STEVE FORBES: It's just a long deleveraging process?

HOWARD LUTNICK: Well, it's more than deleveraging. It's, how are people going to borrow money? I mean, I want to grow my business, right? So, I'm a regular businessman. I want to grow my business. If I go into the bank and they're comparing my rates to Fannie Mae all the time, right, or to Pepsi. IBM borrowed at LIBOR plus 450. The baker used to borrow cheaper than LIBOR plus 450.

So now when the baker goes in to borrow money just to buy his goods, what's the price of his loan? The answer now is, "I'm not going to lend it to you at all." So, that's years to come. If people say, "No, it can't really be years," last October there were people saying it might last a year.

Okay. It's this October. We are nowhere? We are nowhere. So, I think it's going to be multi-years, three to five years. My call is that the banking system with its consolidation and the ability for the banks now to charge that ever-higher fee, because people now realize borrowing money means they might lose it, so they have to pay the bank to take that risk, the banking business three years from today is going to be the business everyone dreams of, and five years from today. All these banks, you name the name of the bank, they're going to be printing money like there's no tomorrow. But not next month, starting three years and watch them go up.

[24:05] Something Always Breaks

STEVE FORBES: So, what is the best financial lesson you've ever learned?

HOWARD LUTNICK: Well I think, the best financial lesson? That's a good question. I've learned so many different ones, but mostly, I've learned about experience, I guess. For instance, on September 11th. In 1993, we had a disaster recovery site that was designed for 80 percent of our business, you

- 27 - know, to take care of the most important parts of our business. And then when the bombing in '93 happened, and I was standing in our disaster recovery site on Saturday deciding if it was a go or a no-go, I decided that we had to abandon it. Six years of paying money for a disaster recovery site because it was only 80 percent. And I figured out that if my clients came, I can't have only 80 percent of the waiters. That's just not service.

Either you serve your clients 100 percent or in fact, you've got an inferior product. And so, I realized that unless we were perfect, we were nowhere. And you could've never taught me that lesson. You could've told me it 100 times in a row and I never would've known except when I was standing there in 1993.

So, on September 11th, 2001, when we lost everything in our building, we had perfect technology backup. And also, one other word. We didn't believe in backup computing, because we had learned in '93, you know what a backup means? You got to go turn it on. And if it doesn't go on, you're dead. So, what we did is, we did something called concurrent computing. Your backup has to be your front. So, you have to have two fronts.

Or we, in fact, did three fronts because something always breaks. And so, because we believed only in triplicate from then on, and only concurrent computing, after September 11 th , when we lost everything in America, we were able to open. When the stock market opened, we opened. And we opened the bond markets of America. So, the lesson I learned was, if you don't provide your clients 100 percent of service, you're doing them a disservice. And that was not something I could've been taught. I had to learn it the only way really smart people ever learn something: experience.

STEVE FORBES: Yeah. So, what is the one misplaced assumption, or biggest one in our business today? Is it the feeling this will only last a year, or this will last forever? What do you see out there that's conventional wisdom that you think is not right?

HOWARD LUTNICK: I think people are naturally optimistic. They have a natural optimism, which sort of goes exactly to your point. And I think that's the difficult sort of piece in the puzzle now, which is we're all naturally optimistic. I mean, we go to the movies. There's the star. He's in an impossible situation. He's definitely going to die. And some miracle comes and he gets the bad guy and sails off into the sunset, happily ever after. I mean, I think we've seen one too many of those movies. And when bad things really happen, actually bad things happen to everybody. No one's had a perfect life. It really happened. But we're all looking at these financial difficulties optimistically by saying something like, "Oh, I don't know if it's going to be a week or a month." You know, this is a difficult, difficult problem. And I think you need to have a bit of pessimism, not because it's healthy. Because it just will offset your natural optimism that we all have. And that's why we live and smile. Because we're here to be happy. But

- 28 - these are tough times. And we need to throw a little salt in there to keep us balanced.

[27:52] The Hollywood Stock Exchange

STEVE FORBES: So, what is the Hollywood Stock Exchange?

HOWARD LUTNICK: So, the Hollywood Stock Exchange will do for movies what we do for stocks. So, you're a movie company. And you've made a movie. And it's ready to go. And you print an advertising budget. It's going to be $30 million. Right? You have a big blockbuster coming.

STEVE FORBES: Howard the Great ?

HOWARD LUTNICK: Yeah, I'm sure a few people would go see that, maybe my kids, and that's about it. You can sell to the equivalent of an IPO. And you can sell an interest in that movie to the domestic box office, a knowable, definable number to people and they can invest in it. So, if you think, you know, Julia Roberts' next movie is going to be great or lousy, or the next James Bond movie is great or lousy, those companies can sell an interest like an IPO.

And you can buy it. And then our domestic stock office, the domestic box office, a little better, a little worse. So, that's the concept. It will help finance movies. It's not betting. It's classic finance. It's what people forget in these kind of markets. You know, people get mad at Wall Street.

You know, and they say, "Those greedy SOB’s." Wall Street and Main Street are the same. If you can't raise money on Wall Street, you can't service Main Street. And people get disconnected when they talk about Wall Street as if somehow, it's not where the money is raised. So, this is a way to let Main Street finance the entertainment business, because we all go and love the movies. And we all have an opinion. And we know they don't know. Because if they did, they'd only make good movies. They wouldn't make the ones sometimes we have to suffer through.

STEVE FORBES: And the same concept with carbon trading?

HOWARD LUTNICK: Well, I think carbon trading is slightly different. Because it's really a model of what the governments want to do. If the governments want to clean the air, they can tax it. They can quota it and reduce it, or they can let you trade it. They can say, "Look. We want to take five percent out of the world. You guys go figure out who's doing it."

And the ones who are doing it a little less, right, if you want to clean yourself, so here's an example of how we do it. Let's say you have a big smokestack and it's

- 29 - spewing a lot of junk in the air. To clean it costs $2 million. Let's say to put in scrubbers and to clean the thing costs $2 million.

But cleaning it does a social good. So, the government gives you $1 million. It gives you credits, these carbon credits. And we would go into the guy who sells the scrubbers, and say, "If you can sell a scrubber, I'll help you sell the credits." And you can go sell the scrubbers to the company for only $1 million.

Reduce the cost of cleaning the world. If the government makes the right rules, we can combine them, much like a credit-default swap if done correctly comes with a bond. If a carbon credit comes with cleaning the environment, it's a good thing. It's people who are just trying to sell credits who are doing nothing, that's nonsense. But if you clean the environment, I literally clean that smokestack and you gave me a credit, that's good. Or let's say I go buy a 1975 car and crush it that would be good. Because stop spewing all that junk in the air. So, that's how we do. We always connect the good, right, with the derivative, the good with the credit. Because that way we know our business will be sustainable, even after the hype goes away. If it doesn't have a core business that I can understand, I don't want to do it because I don't believe it'll be there tomorrow. And it's not worth investing our partners' money.

STEVE FORBES: Partners' money. Howard, thank you very much.

HOWARD LUTNICK: Thanks, Steve.

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