Portfolio.com: World According to ...

Robert Shiller

Fri, 02 May 2008 16:30:00 GMT

Eight years ago, when he predicted a looming bust in the stock-market bubble in Irrational Exuberance, his bestselling book, Barron's magazine called Yale economist Robert Shiller "the new Dr. Doom." The nickname still applies as Shiller muses that the steep slide in housing prices—with the collateral damage on Wall Street—could end up exceeding that of the Great Depression.

Since blurting out his scary scenario last week at the New Haven Lawn Club—in a speech that prompted gloomy headlines around the country—the professor has been trying to sooth shattered nerves (including those of his business partners, who are trying to get the Securities and Exchange Commission to sign off on a new financial instrument to join Shiller's two-year-old housing futures on the Chicago Mercantile Exchange).

The 62-year-old Shiller has been an academic superstar for years, largely because of the Standard & Poor's/Case-Shiller home price indexes, which he developed with Wellesley College economist Karl Case as the nation's most authoritative source on housing price trends. But when Portfolio.com caught up with him in Manhattan for an exclusive interview last week, Shiller was chastened and cautious, noting that he better not make any more predictions during the S.E.C.'s required "quiet period" before the registration of the new instrument.

"I don't even really remember what I said exactly," he protested. "I always think the opposite of people around me," he added. "That's sort of an oppositional personality."

Lloyd Grove: How did you get into this line of work?

Robert Shiller: You mean property derivatives?

L.G: No, I mean how did you become interested in economics and being a market theorist?

R.S.: Well, I think I'm a polymath. I'm interested in everything. When I was a senior in college at the University of Michigan, I was dazzled by the choice set that we had. Young people, you can do whatever you want, and I was disappointed that I had to choose one, realistically. You like to be a renaissance man and do everything. I took long walks trying to decide whether I wanted to be a physicist or a medical doctor or a sociologist, whatever-a scientist, an astronomer.

L.G.: Did you grow up in Michigan?

R.S.: I grew up in Michigan. My father was an engineer in Detroit, and we moved to the suburbs, Southfield, when I was 13. Actually, I'm a product of the auto industry in the important sense that in 1914, Henry Ford—I don't know if you know this history—he announced that he was paying $5 a day for assembly-line workers, which was twice the going rate. This was a very bizarre thing for him to do, and it got a deluge of applicants. So one of my grandparents was living in Gardner, Massachusetts, working in a stove shop, and my other grandfather was a tailor, operating in Chicago. And they both responded and came to the same River Rouge plant, and both took the jobs. If they hadn't converged in Detroit, my parents never would have met, and I would not exist. So it turns out that Henry Ford—it was really kind of a dumb thing—is responsible for my being here. He was a little bit of a loose cannon, but he was saved by inflation. Because World War I came right after that, and he never had to cut back. Otherwise, he couldn't have afforded to pay those salaries, as my understanding of history goes.

L.G.: Right, and $5 a day—that's big money.

R.S.: It was twice what my grandfather was making in Gardner, selling stoves. So the auto industry has always been in our family, except my father worked for an industrial-oven company that sold ovens that did things like bake the paint enamel on the car body.

L.G.: Is there any hope for the American auto industry?

R.S.: Maybe in the long run, they will prevail. I know they're having hard times now. And they're a manufacturing industry, and they did have a labor-cost disadvantage as compared with other countries. That may not be insurmountable. But in the long run, in these other countries, I'm hopeful that their wage costs will go up too. So maybe American ingenuity will prevail in the end.

L.G.: You were among the first people who were warning about a crash in the housing market.

R.S.: Right. In 2003, I published a Brookings [Institution] paper with Case, which was titled with the question "Is There a Bubble in the Housing Market?" [in Brookings Papers on Economic Activity 2: 2003]. He's the same guy who worked with me on the Case-Shiller indexes. We had been doing a survey on home buyers, to try to assess their attitudes. In 2003, we noted in our paper that people had very high expectations for future home-price appreciation. We thought then that it might help explain the boom that was emerging. If people were having high expectations, then maybe they're willing to pay more for houses. But we didn't reach a conclusion-well, it was all carefully worded back then. We thought that there might be a bubble.

L.G.: Back in 1996, at a lunch meeting with Alan Greenspan, you warned about a stock-market bubble. And then a few days later, he used the words "irrational exuberance," which became the title of a book of yours. By 2005, you were already sounding the alarm about housing.

R.S.: Right. You can see that in the book Irrational Exuberance, in the second edition, in 2005, I raised the possibility of there being a major crisis.

L.G.: And that was ahead of a lot of people, obviously.

R.S.: It was.

L.G.: So then you had meetings with various quasi-government entities—Freddie Mac and Fannie Mae. What did you tell them?

R.S.: That they should be hedging their portfolio risks for the possibility of a decline in home prices. We just never really got their attention. We told them they had a portfolio that was heavily exposed to real estate risk and that it would be sensible for them to take hedging positions that would offset that risk, especially given their public G.S.E. [government-sponsored enterprise] status. The government officially disavows any guarantee to Fannie and Freddie. However, their debt tends to have a lower yield than other corporates. And people believe that they will be bailed out if there's ever a problem. So we were arguing that they have an obligation to the public to manage their risks.

L.G.: And their reaction was to listen politely?

R.S.: Yeah, that's what happens all the time. We'd talked to insurance companies 15 years earlier about home-equity insurance. And sometimes it's a little bit more than polite listening-they actually sounded enthusiastic at the meeting. So we told insurance companies, "You have homeowners' insurance, insurance against fire. So what if you expanded that to cover and insure against losses on the home? Wouldn't that expand your business a lot?" Actually what they typically said—I think it's mainly what Fannie and Freddie said—is, "Well, there isn't an established market for home-price risk. So we couldn't hedge the risk." And I suppose that's also what Fannie and Freddie thought, that they have a portfolio measured in billions, and we're just talking very hypothetically because we didn't have any market price, and we didn't have any obvious ability to make a risk-management contract of any size. So it came across to them as just a pipe dream. And I suppose that's just the general thing.

L.G.: Were you visiting them in your capacity as a company?

R.S.: Yes, our company, Case-Shiller Weiss, was publishing indexes, and we were advocating for risk management.

L.G.: And some of the people who met with you said that they've been doing their own due diligence. Tell me about that.

R.S.: I had a conference at Yale, and it was Frank Nothaft [the chief economist of Freddie Mac] who told about the risk management. And this is actually in my book that's coming out-I'm scooping my book here.

L.G.: Well, we'll flog your book and make sure people know it's coming out in two months.

R.S.: That would be good.

L.G.: Princeton University Press—what's the title of it?

R.S.: The Subprime Solution: How Today's Global Financial Crisis Happened, and What to Do About It.

L.G.: Consider it flogged.

R.S.: Flogged? What does that word mean?

L.G.: I guess flogged is what happens in Singapore if you spit on the sidewalk. So, okay, go ahead and scoop your book some more.

R.S.: I have a publicity manager, and he said I shouldn't talk too much about it.

L.G.: Okay, but why don't you tell me that story at least.

R.S.: Well, that story was that Frank Nothaft claimed that they had considered price declines as much as 13.5 percent. And I said, "What if it was worse than that?" And he said, "It's never been worse than that." And then he corrected himself. "Except for the Depression." I don't remember exactly what I said to that, but plausibly it was something like, "Well, that could happen again too." So again, I started to sound at that point too academic-something like this isn't real anymore.

L.G.: Why do you think people just have trouble listening to these things?

R.S.: Well, I can talk as a sociologist—which I'm not trained to do—but there's a social construction of reality that happens. This is a basic principle of sociology. We have a "collective consciousness," to quote sociologist Maurice Halbwachs. As far as I know, he coined the term. And the point is, we talk so much. The human species is incessantly talking, and this incessant talk reinforces certain memories and facts. And other facts are not reinforced because no one's talking about them. So they elude our consciousness, and then we can't remember them. We can't act on them anymore, and so a certain sort of reality-construct forms. It's also informed by some kind of intuitive thinking. In the case of real estate, people think that the growing population is inevitable, and that means home-price increases are inevitable. And these are not economists thinking clearly about what that means. An economist who thinks about that would say, "Yes, but that doesn't make them a good investment." If everything is priced at the present value of the cash flow with the same interest rate, then it doesn't matter whether the cash flow is growing or not, and then everything is equally good as an investment. That's not something that the general public understands.

L.G.: The people who were getting into subprime mortgage-backed securities presumably understood all this. They're very sophisticated people. So what was driving them?

R.S.: Some of them were very sophisticated people [laughs], and there was a failure to communicate and a failure to put all this information together and act on it in a systematic way. There's a famous book written by Irving Janis, who's a psychologist, about 30 years ago, called Groupthink. He's a social psychologist, and he points out how even expert groups can make very colossal errors. He did a number of case studies in the book, and what tends to happen—suppose you imagine yourself and a group of experts who seem to have converged on an enlightened opinion which has arguments to support it, and it has prominent influential people saying that. It can be difficult for someone to stand up in that room and air what seem to be half-baked or half-formed doubts about it. It can be kind of damaging to your reputation. And you imagine that they have a reason to dismiss these doubts. But you don't want to be responsible for bringing it up—especially when they're reaching a decision. Sometimes they're trying to make an important decision. And at that time, you would think that people who have doubts should stand up and thrust them to the fore. But, in fact, they often retreat at that point, because they may just have a sense that they're being annoying, that they will lose status in the group. If we're close to a decision on something, and I'd raise doubts, and they're going to go ahead anyway and do it, you might think that's good—because it could be a disaster, and they'll remember that you had doubts. But the likelihood is to focus on, instead, "Now I'm kind of the party pooper," you know. "When they're going to implement this plan, they're not going to turn to me because I was the guy who doubted." Things like that went through peoples' minds, and they don't air doubts. And when Janis interviewed people afterward and asked them their memories of the discussion, they would say things like, "I think we had a very open and fair discussion, and everyone raised their views." That was their memory of what happened, but they couldn't remember the other arguments. So it wasn't happening—there was somebody who was expressing doubts, but not effectively. And so I think that's the kind of thing that happens when there's just a general presumption which becomes repeated everywhere.

L.G.: And do you think that's the sort of dynamic that might've been operating, not only in quasi-government agencies like Fannie Mae and Freddie Mac, but also in the banks on Wall Street?

R.S.: Yeah, I mean, it became the idea that risk was just not there.

L.G.: That's not been a problem of yours, because you're not part of that particular group.

R.S.: I'm an academic, and academics have a tradition of standing up more. Even so, this groupthink happens even in academia. But I think that's actually something about my personality. I always think the opposite of people around me. My wife complains about that. She said, "You always have to take the other side." And I said, "But on the other hand...." My wife's name is Virginia, but I call her Ginny. She's a psychologist.

L.G.: So you often take the opposite side of what she says.

R.S.: Right.

L.G.: Like that old Monty Python routine: "This isn't an argument. It's just a contradiction!"

R.S.: I imagine so, yeah. So what would that be? That's sort of an oppositional personality.

L.G.: But presumably you say these things because you have cause to believe them. You're not just being contrary. You actually did believe that there was going to be a bust and that there were too many subprime mortgages out there. But what's surprising to a layman like me, who knows nothing about this, was there were so few people who were willing to analyze that. And you were not only saying it-you were actually trying to get people to do something about it. And no one listened to you at the time.

R.S.: No, I think they started to listen. Everything happens with a lag through time. So for example, the O.C.C. [Office of the Comptroller of the Currency] did eventually issue guidance, but it took them a while.

L.G.: Now Alan Greenspan has been taking a lot of heat for his alleged role in all of this. And he recently tried to mount a sustained defense of himself. You probably saw that.

R.S.: I saw a Financial Times piece.

L.G.: Well, he's been doing it everywhere—I saw it in the Wall Street Journal. He's gone on a self-defense campaign.

R.S.: Yeah, that's probably a good thing for him to do because people thought he was a genius. He got out in 2006, which was almost exactly the peak. So he timed his departure right. But now he's out, and he didn't anticipate this. Even if you look at his autobiography, it's not there that he anticipated this crisis.

L.G.: So do you think he deserves some of the credit, or blame?

R.S.: Well, I actually think he's a very smart and well-meaning man, but I have differences of opinion and so I can't fault him for that. I don't think he was dishonest. I think he was calling it as he saw it. I guess as a Fed chairman, you do have a little bit of a bias toward optimism. Because if you say anything vaguely pessimistic, it gets you in trouble. In fact, the reason why the term irrational exuberance is famous—and people forget the reason for that—is because when he uttered the words, the stock market crashed almost immediately. He did this talk in the evening, and the U.S. markets were closed, but the Japanese markets were open—and they crashed immediately. So that was the news story at the time. He just utters the words irrational exuberance, and that just causes a cascade.

L.G.: Just two words in a very long speech.

R.S.: Yeah, I told you about my experience yesterday [April 22]-a few words in my speech at the New Haven Lawn Club somehow got amplified. [In a breakfast talk that made doom-and-gloom headlines nationwide, Shiller warned that the housing market slump could be worse than the 30-percent price drop of the Depression, requiring bailouts for millions of homeowners. "I think there is a scenario that they could be down substantially more" than the historic slump of the Depression, Shiller was quoted as saying.] They took from my speech that I was saying that the home-price declines could exceed those of the Depression. And that's it. That was the story. I don't even really remember what I said exactly, but it was a comparison I might've made in the course of making this presentation.

L.G.: It's known obviously that you have—coming up on two years—these housing futures. And you said when you started doing this that there'll be other instruments. So you're doing another one of those. We don't know what it is. You can't talk about it during a quiet period. But talk about what's already there. How's that doing?

R.S.: Well, we have a futures market. I have a chart of the open interest. It rose from nothing at the beginning to over a hundred million dollars, and we were very optimistic.

L.G.: How many trades did that represent?

R.S.: I don't have the numbers.

L.G: I saw something that initially it was like 2,000 some-odd trades.

R.S.: Well, each trade has a notional value of $60,000, and it seemed to me that generally the highest it got for a day was about 100 trades. So that would be $6 million—I'm not sure I remember that exactly right. So if you added up the total volume of trades, I thought it was something like $600 million.

L.G.: So the volume of the trades sort of slacked off a little bit?

R.S.: That's right. Because [the housing market] is in decline, yeah. I'm hopeful that it will come back.

L.G.: Right, but already you've bested the London FOX [the London International Financial Futures and Options Exchange, which offered property futures from May through October 1991.]

R.S.: That one ended totally in a few months [in a scandal involving the artificial manipulation of trades].

L.G.: Have you ever considered scandal futures?

R.S.: [Laughs] No.

L.G.: Tell me, what do you call your futures?

R.S.: The Chicago Mercantile Exchange Housing Futures and Options.

L.G.: Tell me what function they serve.

R.S.: Well, futures markets are open to the general public. However, most of the general public don't trade in them. They're considered sophisticated instruments that usually are left to professionals. But there are some individuals who do it. So I suppose I should say what I think professionals would do with them mostly. And that is, they would then want to use them to help them create retail products that would help individuals. I call them continuous workout mortgages. So you can develop a mortgage whose balance reflects the change in price of your house, so that you can't get your home equity wiped out, and you can't end up underwater, as has happened to so many people now. If mortgage lenders had a futures market that was deeper than the one we had, that was more liquid, then they could write such mortgage policies and then hedge themselves from any implied risk. So we thought of them as an infrastructure for developing better financial instruments.

L.G.: That would theoretically reduce foreclosures to a lower level. Theoretically, it would be zero.

R.S.: Well, there would still be some, but for other reasons.

L.G.: People who were just incorrigible, stopped paying entirely-but people of good faith and good heart who are actually trying to pay their mortgages would benefit?

R.S.: Right. That's why I'm writing another book now. This is a time when I've been having trouble getting people to appreciate the advantages of these kinds of things. But now, this is a time when they might suddenly see it. So I wrote a New York Times column some months ago pointing out that the '30s was a time of great innovation, and it was because people saw the crisis. What people saw in the '30s was a deterioration of faith in our government and institutions, because people saw that the Depression was happening and nothing was being done about it. And so, this gave—actually, the Hoover administration as well, but mainly the Roosevelt administration—the heart to make big changes.

L.G.: Have you managed to persuade anybody in a position of power—a legislator or the Treasury Department—that this idea you have of continuous workout mortgages is something that should be enacted?

R.S.: This is new. This is going into my book. Although in 2003, I had a different name for it. I called it income-linked mortgages, and I had home-equity insurance attached to mortgages. So I have a new name for it. But it's the same concept.

L.G.: The mortgages can be renegotiated according to what the market is doing, and it's done on a continual basis, not an emergency basis. And then the financial institutions are hedging their risk with these instruments?

R.S.: Right.

L.G.: You know Chris Dodd [the Democratic senator from Connecticut who is chairman of the Senate Banking Committee]. I'm assuming he's a friend of yours. He's your senator.

R.S.: I have never met him. I have to call him up and try to meet him.

L.G.: You really are an academic!

R.S.: Yeah, I know. I've talked to his staffers. I've talked to Barney Frank [the Democratic representative from Massachusetts who is chairman of the House Financial Services Committee] about this.

L.G.: What is Barney's reaction?

R.S.: He has his own plan. But, you know, I should contact him again, now that you mention that, because I want mine attached to his plan. And whether that's a possibility, I don't know. It's a shame that our presidential election campaign has Barack Obama and Hillary Clinton trading insults instead of talking about these issues.

L.G.: And John McCain has sort of talked a bit about it. All of them have put forward some kind of proposal.

R.S.: There's some idea that there should be a bailout, which I agree with. I think it's obvious that something has to be done about people who otherwise are going to be thrown out of their houses. This has been obvious to lawmakers. Every time there's a financial crisis, going back to the early 19th century, they realize that you don't just let millions of people get thrown out of their houses, thrown into debtors' prison. We're not going to let that happen.

L.G.: Have you heard anything you like so far about any of these three? McCain? Obama? Clinton?

R.S.: Um, I'm not involved with politics at the moment. Whichever one wins the election, I'll work with.

L.G.: Sounds like you are involved with politics!

R.S.: I'm not mentioning any of them in my book.

L.G.: Well, good. Then we can talk about them without fear of scooping your book.

R.S.: But I didn't want to mention them because I think when the book comes out, that'll be almost over.

L.G.: Well, it may not be over. But do you get politically involved? Do you give money to candidates?

R.S.: Generally, I'm not that involved.

L.G.: Have you contributed to anybody's campaign?

R.S.: A little bit—basically not. I don't want to get into that. Let's say I haven't, basically not. It would've been trivial. [Federal Election Commission records show that Shiller gave $300 to the Democratic Congressional Campaign Committee in November 2006 and $500 to Connecticut senator Joe Lieberman's presidential campaign in January 2003.]

L.G.: This idea of "the ownership society" which George W. Bush has touted—you treated with skepticism. Why?

R.S.: I think it has some merit. In fact, the promotion of homeownership is a very important, stabilizing force. The Federal Housing Administration and the Veterans [Benefits] Administration have helped people of low income and also people particularly of minority status become homeowners. If we had a nation where low-income and minority people were all renters, I think it would have a different psychology. They feel more like part of this nation when they own a home. It is a good thing.

L.G.: That's the good side of it. What's the downside?

R.S.: The downside is that homeownership is not for everyone. It involves responsibilities, and it's possible to get in over one's head. So I think the rental market makes a lot of sense for people if they have more flexibility and they have less responsibilities. Often, managing a house is something that could be better left to professionals, rather than all of us individually. "My gutters need cleaning"—it's very inefficient. It could be mass production. We have an apartment building, and so somebody does it for the whole building.

L.G.: And it's possible that the smartest and more prudent thing to do, if you had a pile of money, rather than buy a house with it and put a down payment on a house, is to rent—and rents seem to be lower right now—and to take the money and put it in some mutual funds.

R.S.: Right, diversify. That does sound like the logical thing. Why should your investment portfolio match your consumption of housing services? When you rent, you're much more flexible. You can move out quickly without incurring transactions costs, and everything is professionalized, all the management. So the only problem that people don't like about renting is that it's a little bit too standardized, and they want to have their own home. They put up their own swing set in the backyard for the kids, and they decorate it to their own taste. That matters a lot to people.

L.G.: Because most people think of their house not as an investment or a speculative kind of thing but as the roof over their head?

R.S.: As an expression of themselves. Maybe there's an instinct, a homing instinct. One of the things that people derive the most pleasure from is working on their house. It's part of our basic instincts, I'm imagining—I'm just talking off-the-cuff here. To some extent, you're allowed to do that with a rental. You can decorate it as you like, but you have more limits.

L.G.: But if human beings operated purely on a rational basis and coolly analyzed the economic consequences of their actions, then it would make more sense to rent? Put your money elsewhere? Compare the growth of capital in the housing market to the other markets in which people put their money-what would be the answer?

R.S.: If you want to invest in real estate businesses, that is a sector of the economy that should be part of a diversified portfolio, but in proportion. If you invest in single homes by yourself, then you're buying something that you need to know more about.

L.G.: Right, but can you compare the performance of somebody putting money into some mutual funds that are well managed?

R.S.: Yeah, the thing is, from 1890 to 1990, there was no real appreciation in housing values. So that means if you picked a random house, you would've made a profit only on the rent, if you bought a house as an investment and rented it out. And so then you'd have to be judging that cash flow. And if you picked something that rented at a high enough rate, you'd make money. But the capital gains part of it would've been—for the average house—nothing, in real terms.

L.G.: I see. You're talking to someone who is in a co-op, a small one-bedroom on the Upper West Side. Manhattan is a different sort of housing market than Indianapolis, obviously—I'm just asking as a point of personal privilege, I guess.

R.S.: How is Manhattan doing? Maybe I shouldn't even comment on that.

L.G.: Oh, Bob.

R.S.: I don't know. I'm getting in trouble.

L.G.: I'm not talking prospectively. We're not predicting.

R.S.: In the recent past, the co-ops and condos in Manhattan have done better than in the broader market. I'm basing that on information from Miller Samuels, which produces condo-price data, and the interpretation tends to be that Manhattan is a separate market. It's the financial center of the U.S.—or the world—and it's behaving similarly to how the City of London behaved until very recently. Last time I heard, they were both strong, and I think it reflects the strength of the financial sector, which is their prime industry.

L.G.: So Manhattan has been somewhat insulated or totally insulated from the housing price slump?

R.S.: It has been. Yeah.

L.G.: Tell me what your life is like now. You're a superstar.

R.S.: I don't know about that. The Case-Shiller index has been getting a lot of coverage. It's kind of nice because we've been producing the index for 20 years now, and for 18 of those 20, they got very little attention. I think it's because of the futures market—even though the futures market isn't very active—it's getting a lot of publicity. And it's also Standard & Poor's, which has a very good reputation. When we brought out the possibility of creating a futures market, that heightened attention to the quality of the index.

L.G.: But you're constantly on the road. You're traveling around the globe. How many miles do you log?

R.S.: I never totaled it up, but this week was crazy. I just know that I'm exhausted. Yale is taping my courses. They have this thing called Open Yale, and so they do this for maybe five or 10 professors a semester. It's a new thing, so I'm going to be online now for the whole world to see. So I feel like I'm on camera, in my lectures. So I did that two times this week.

L.G.: This is your class, Financial Markets?

R.S.: Yeah, and then I was talking to the [New Haven] Lawn Club. Then I gave another talk—sort of associated—about another person's book. But I gave a comment on it, also in New Haven. And then I gave a presentation at a departmental meeting. Then I'm here, and then I'm going to the Chicago [Mercantile] Exchange tomorrow. And then Friday I'm going to my publisher. These are all the talks. Recently, I spent a week at the New Economic School in Moscow, and that was very interesting.

L.G.: But you're sort of a celebrity academic at this point—you've had a bestselling book. How long has that been going on?

R.S.: Probably since 2000, when Irrational Exuberance came out.

L.G.: And I'm sure Princeton University Press expects a similar performance from your next book. That's a prediction. But you have a lecture agent, right? Alan Greenspan has, for instance, pocketed $250,000 for one night. Are you up to that level yet?

R.S.: I do have a speaker's bureau.

L.G.: You're now literally a brand name. How has that affected your life just as a person?

R.S.: Well, I had to get a full-time secretary at Yale to handle this, and there was some resistance from some people at Yale. I had to go all the way to the provost to get it, but now I do have a full-time secretary. So it's just not a normal level of business that I've had.

L.G.: And I'm sure all of your colleagues in the economics department are just delighted with all the positive attention you're getting—and the money you're making!

R.S.: [Laughs.] I don't know what you mean by that. I've had some animosity, yeah.

L.G.: What's the old saw about academic battles being so vicious because there's so little at stake?

R.S.: Oh yeah, I know the quote you're looking for, something like, "The viciousness of academic battles is exceeded only by their lack of consequence."

L.G.: And I'm not sure, but I would assume that you're being hit with the term popularizer. You're writing popular books. You're not doing "serious" work.

R.S.: There is some of that, although my books are university-press books, and they are not so obviously popularization. I'm presenting them as serious, so I'm not dismissed that way—not to my face anyway. But there is some sense that I'm not, among some people—what would be the word—central to the field. The way universities work is, the market is divided up into different fields. There's microeconomics, macroeconomics, labor economics, and so on, and often when we search for a new professor, we search by field. And this puts polymaths at a disadvantage. I remember Ben Mandelbrot, who used to be at Yale, and he would complain—he's the one that invented fractals, and he's one of the eminent mathematicians in the world—but he complained he couldn't even get a job in the university, because everyone said, "He's not my department." And he was doing work in physics and mathematics and meteorology. So I'm not quite as universal a man as he.

When you get to scholarly work, the most important thing is that you're original, and so you shouldn't feel confined. It seems to me that human knowledge is so complex that it doesn't fit neatly into fields. And you may discover that your background-what you learned at this point in your life-creates opportunities for research that nobody else is doing. So, for example, like my creating a home-price index back to 1890. It's kind of a strange thing that no one else had done it. Why is that? I don't know, but it may have something to do with the divisions. It's also a sense of what you would be rewarded for in your work. And academics want to be central to their field, and this is just data collection, and so, "What does that do for me?" If they just think, "Well, there's probably some government agency that's doing it. If not, they ought to be doing it-not me." It's too lowbrow. It's not that it's unscholarly, because it can be done in a careful way.

L.G: Certainly you were very particular about the data you used.

R.S.: Yeah, the other thing is, this may reflect that my father was a mechanical engineer, and he got patents in industrial ovens. He started his own company, which didn't succeed. But I think, years later, some of his values reassert themselves in my imagination. And so it made me a bit of an engineer, and that kind of mentality doesn't abound in economics departments.

L.G.: But back to the superstar thing. Now you're to the point where you have to be careful with things you say in public, because things that you say could move markets. What's that like?

R.S.: Um...that's an interesting thought. One time, I was on a TV show on business news, and before I went on, the host said, "You realize the market is falling right now? And we're going on the air." He didn't explain what that meant. But there was a suggestion that I could be a problem—my bearish sentiments.

L.G.: You've always been pretty much a bear?

R.S.: Not always. In 1982, I was a real bull. I had 100 percent of my money in the stock market.

L.G. Now you got it all out, but you still have Kmart?

R.S.: How'd you know I still have Kmart? Yes, my mother gave me Kmart, so I didn't want to sell it.

L.G.: But mostly you're in Treasury notes or something?

R.S.: Largely in that, and inflation index notes.

L.G.: You're a homeowner?

R.S.: Two houses. One in New Haven and one on an island in Long Island Sound. It's a summer home. My neighbors don't want the name of the island in the story. That's what my neighbors have said.

L.G.: Really? Do they think your groupies are going to swim over?

R.S.: I don't know what they think.

L.G.: Do you have groupies now?

R.S.: [Laughs] I wish I did.

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NoahTepperberg

Thu, 17 Apr 2008 05:00:00 GMT

Nightlife impresario Noah Tepperberg—"charmingly schlubby," as he was once described—has achieved a special kind of fame as the co-owner of Marquee and other posh nightclubs in New York and beyond: He is a celebrity to celebrities. Jamie Foxx, Leonardo DiCaprio, and Britney Spears are among the stars who count him as a friend.

The 32-year-old Tepperberg, a former New York City teenage chess champion, joined forces in high school with Jason Strauss to start a party-promotion business. Fifteen years later, they are presiding over a growing marketing, entertainment, and branding company, Strategic Group, while casting themselves as social arbiters in the Darwinian world of glitz and glamour.

In an exclusive interview with Portfolio.com, the usually reticent Tepperberg tells how he gets customers to pay $400 for a $30 bottle of vodka, how to convert boldface names into fun and profit, why the velvet rope is a force for good, and other business secrets.

Lloyd Grove: Tell me a little bit about your background. You come from a family that was heavily into medicine—your father was a doctor.

Noah Tepperberg: My father was a pediatric neurologist, and my mother was an editor of a travel magazine for physicians. And my eldest sister is a doctor up in Boston.

L.G.: And you had a brief flirtation with medicine as a teenager. Tell me about that.

N.T.: When I was 13, I spent a summer volunteering at Maimonides hospital [Maimonides Medical Center, in Brooklyn], where my dad worked, on the pediatric floor. And after that, I decided that I didn't want to go into medicine.

L.G.: Because you just found it too depressing?

N.T.: Just for a lot of reasons. You know, I saw how emotionally attached my dad was to some of his patients and didn't know if I wanted to go through life with the same attachments. For some reason, spending my whole life in that world didn't seem as exciting as it had my previous 13 years.

L.G.: And you were a good student, weren't you?

N.T.: Yeah. I mean, I went to Stuyvesant which, you know, is a top high school in the city. And then I went to the University of Miami, where I got almost straight A's. I had a double major in entrepreneurship and business management. When I was in school, my job was a full-time student. My job was to get good grades—and so I did.

L.G.: By the time you had worked at Maimonides, you were also a chess champion.

N.T.: Yeah, I played chess competitively. I studied with Jack Collins, who was Bobby Fischer's teacher. I took lessons with him. I started playing chess at eight, and I played until I was about 16, very seriously. I grew up with Josh Waitzkin, who they made the movie Searching for Bobby Fischer about. I probably met him when I was about eight. His father and one of my parents' closest family friends were best friends. I'm pretty sure I went with Josh to his first chess tournament—it was probably my fifth chess tournament up at Hunter [College] High School. And obviously he's one of the most famous chess players now that they made the movie about him. Did you see that movie, Searching for Bobby Fischer?

L.G.: I did not, but it's one that's on my list. I kind of went off Bobby Fischer when I found out that he was such a kook.

N.T.: Right. Well, I played chess competitively. I was the New York City under-age-13 champion. I was a member of the Marshall Chess Club and the Manhattan Chess Club. I played for Stuyvesant. We were national champions. I wasn't on the team the year we won national champions, but all the players I played with were. And then I didn't stop playing, I just stopped playing competitively at about 16. And since then, I've only played a couple of times. I did get to meet [Garry] Kasparov, which is great. I played him when I was about 14—no, even younger, maybe 13, and that was pretty amazing. He played a "simul" for like 40 New York City school kids. And then I actually got to meet him again, so randomly—at a party in the Hamptons, maybe five years ago, that Ted Field threw—and it was pretty amazing. The guy remembered playing me, 14 years earlier, as one of 40 kids who played in the simul. He remembered the game!

L.G.: It takes a certain kind of intelligence to be good at chess, and I assume a pretty good memory for things like that, does it not?

N.T.: Yeah, I mean chess takes a certain type of, I guess, thinker. I don't know if intelligence is necessarily the perfect word, but you learn to think a certain way when you play chess. You really need to be able to look at a board and see things in a big picture, kind of play things out in your head very quickly. And it's the thought process of, if I do this, what does your opponent do next? And if they do that, and you do that, what's then next? And if that happens, then you really need to be able to think through many scenarios. You have to be able to think through scenarios that move off moving parts all the time.

L.G.: So the obvious question is, how do you think, if at all, that translates into what you're doing now?

N.T.: I think that having that experience and that sort of training as a child really has 100 percent influenced every day of my life. I think I benefit from having that training, you know?

L.G.: Well, see if you can tell me, while you briefly recount for me your career so far in the party-promotion, nightclub, and branding-promotion businesses, how your chess training has influenced you? Maybe you'll think of ways in which your feel for strategy and moving parts and seeing around corners has helped you in business.

N.T.: Well, I mean that's a very long conversation-I'm happy to have it with you—it's a long conversation. It's probably a whole book.

L.G.: Let's not have that conversation. Instead, Noah, tell me how you got into the business.

N.T.: At Stuyvesant, I started throwing parties for the cast of the school play that took place every year. It was a cast party for SING! [a New York City high school musical theater competition]—they actually made a movie about SING! too—and I have a lot of friends in the club business and a brother that played in a very popular band, through his relationships.

L.G.: You must tell me the name of the band.

N.T.: The band was called the Skadanks. They were a popular band in the late '80s, early '90s, in New York City. My brother's name is Ricky Tepperberg—his real name is David—he goes by Ricky.

L.G.: I hasten to ask, your real name is Noah, right?

N.T.: Of course. Hold on one second—we put in these new servers today, I can't even explain what it means, but I've had just this major piece of equipment in my office. I don't know how to use it, but now I have the email capacity to have, like, hundreds of people working off the server as opposed to the previous one I've had. You don't really think about these things when you start your business. You don't expect it to grow. Literally just put a server in, they could have a thousand users on it. So hopefully there'll be that many people working with me one day.

L.G.: It seems like you're on the right trajectory for that.

N.T.: Well, knock on wood.

L.G.: So you started off throwing a cast party for SING!

N.T.: Right. And from there, I started working for different clubs. I was promoting and at that time was literally handing out invitations. There were no emails. There was no text messaging. It was collecting phone numbers, and making personal phone calls, and promoting different clubs that worked. That's where I met Jason [Strauss]. He was doing the same thing. I remember going to a club that he promoted, going to one of his parties, and talking to him about working together there. That was a club called Bacchus-now Eugene, on 24th Street. I know the first party Jason and I did together was when we were seniors in high school. We threw a party at the Country Club, on 85th Street between Second and Third. It was actually the night of the Columbia Prep Prom, and Jason was at that prom. He came and he showed up with 200 people from the prom. [Laughs]

L.G.: And what qualities did you possess, do you think, that gave you a talent for party promotion and hosting parties?

N.T.: Well, first, there was the business side of it. My friends would come to the parties I promoted because they knew they'd get in. They knew they would have a good time. They knew there would be a certain crowd there, a certain theme. They knew they would see their other friends. So how did that happen? Well, I always did good deals with the venues to make sure that wherever we were doing our parties, our people would get in and they would have a place. There was a room for them, whether it was their own room in a bigger club. Or we had our own person at the door. We had our own entrance. We were always making sure that our crowd was taken care of. At that age, that was really important. Doing deals with club owners at that age was not always the easiest thing, but I carried myself well. This was when I was 16, 17, 18.

L.G.: And you were first in a club at age 14, right, when your dad brought you to your brother's band performance. So to get this out of the way quick-unlike many people in your business, you never succumbed to the temptations of drugs.

N.T.: Never.

L.G.: And you're a moderate drinker.

N.T.: Yep.

L.G.: Excellent. So you and Jason sort of joined up in the party-promotion business.

N.T.: Officially, we became partners when we were 17. I went to Stuyvesant, and he went to Riverdale [Country School, in the Bronx], which is a private school.

L.G.: So you were a very academically successful kid who could very well have followed your dad into medicine. Tell me how your parents reacted to the idea of "My son, the party boy"?

N.T.: I think originally, at the beginning, they weren't thrilled. I don't think they sent me to college and invested all the time that they did into bringing me up the way that they did to run parties. But that's when they thought that I was running parties to have fun. Once they realized that there's a real business there, their tunes quickly changed.

L.G.: What persuaded them that was the case?

N.T.: Well, first of all, I think when I bought my first apartment—at age 21. It was in the Village. It was a co-op, and my dad had to co-sign it so they would approve me. Same building I live in now, on West Twelfth Street. And I think they realized—Wow!—and that was with the money I saved working in clubs throughout college. And they realized that I was a good businessman. And they thought that was very smart of me. All my friends were still living at home or renting rooms with other people.

L.G.: Do you mind my asking, since real estate is kind of the new pornography, how much did you pay for it?

N.T.: I paid $65,000 for a studio. [Laughs]

L.G.: [Laughs] Which today would probably go for-

N.T.: Probably go for, like, $400,000.

L.G.: That was obviously very prescient of you. And now you live in a much larger apartment in the same building.

N.T.: I'll tell you because it's public, but I don't want to sound like I'm boasting.

L.G.: No, you're not boasting—I'm asking you. I'm demanding to know.

N.T.: I actually just moved into a three-bedroom apartment. I bought it from Peter Eisenman, the architect. It's fantastic.

L.G.: Since this is also a matter of public record, what did you pay for it?

N.T.: Please don't put that in. I hate that. I know that's a hard thing to ask you to do, but I hate it. Considerably more than my first studio. How about I give you a multiple?

L.G.: Okay, what's the multiple?

N.T.: I have to take out my calculator—I think 300 times. No, 50 times. Sorry.

L.G.: [Laughs] Well, that'll do. Whatever, it'll be 300 times in due course. But tell me, why did you choose Miami for college?

N.T.: I had a lot of family that lived in Miami. And my dad was sick, actually, when I was in school, and he used to like to go down there a lot. My brothers live there, and I like the city. I wanted to go to a school in the big city because I grew up in New York, and I didn't know how well I would acclimate to a college town. But I wanted to go to a real college. And with my family living there, and my parents spending a lot of time down there, and just the year I was applying to school, I read the "Soho in the Sun" story—I never forgot it—the cover of New York magazine. The month I was making my decision, they had a whole feature on South Beach and how it was the new Soho. It was Soho in the sun! It was a picture of the Clevelander Hotel and some girls in bikinis. It was this great story about how Miami was the new place with hot clubs, all the artists, and fashion. I just thought it would be a good place for me to go to school. The school itself had a great reputation for the business school. And I liked the city. It was near New York, good weather. And that's why I went. It was one of the best decisions I've ever made.

L.G.: By the way, I suppose that as a high school kid, you were making in the thousands of dollars a week, perhaps, promoting parties?

N.T.: Not really. We weren't making a lot of money. It was really more toward the end of college. In high school, it was small-more like the other benefits, the social benefits, and the fact that we liked it. We liked going out and organizing the guest lists. It was fun.

L.G.: And did you run across this character in New York club lore named Baird Jones?

N.T.: I did meet Baird a few times in high school and college. [Jones, a former doorman at Studio 54, was a New York party promoter and the self-proclaimed inventor of "midget bowling," among other pursuits. He died in February at age 53.]

L.G.: He was also doing party promotion for nightclubs, but his business model was different from yours.

N.T.: Yeah, Baird used to hand out these small "get in free with his card" cards.

L.G.: And then he established himself as the Webster Hall curator. And every time his name was in a gossip column with Webster Hall, he got paid a certain amount of money by Webster Hall.

N.T.: I guess that's how it worked. I didn't really know what the deal was.

L.G.: [Laughs] I just told you. At least, that's what Baird said, may he rest in peace. But, in any event, you and Jason decided actually to get into the nightclub business yourselves. Tell me about that.

N.T.: Well, we had been promoting a few different clubs every week. And we had always done very successful parties in the Hamptons. We had a big following out there, and we were approached to open our own club.

L.G.: By whom?

N.T.: A guy named Bill Masterson and Andrew Sasson. The two of them came to us and said, "We'd like to do this club." Andrew owned Jet East, which was right up the road. And they wanted to do a club. At the time, it was going to be positioned as more of the hot place for a younger crowd. I was 23. Jason was 24.

L.G.: And this was Conscience Point in Southampton.

N.T.: That's right. So we opened that in the summer of '99. I'd graduated college in the summer of '97, opened Conscience Point in the summer of '99. About two years after college, I opened my first place.

L.G.: And so things went pretty well there for a while.

N.T.: Yeah, we were successful for a seasonal Hamptons club. We had the club for '99, 2000, and '01. So we sold it, after the summer of '01.

L.G.: After the summer of '01. And let's not forget to mention that Conscience Point became very famous in the popular culture and will forever be associated with the immortal line, "Fuck you, white trash."

N.T.: You said it, not me.

L.G.: I didn't say it. Lizzie Grubman said it.

N.T.: Lizzie was our publicist. And she got the club a lot of publicity.

L.G.: She sure did. [On July 7, 2001, Grubman, the daughter of powerful entertainment lawyer Allen Grubman, apparently angry at being ordered by security officers to move her car, backed her dad's Mercedes S.U.V. into a crowd outside Conscience Point, injuring 16 people, then fled. She ended up serving 37 days in jail.] And that whole incident was really a tabloid melodrama. And I remember that somebody put out a crazy computer game on the internet, in which there was a Lizzie icon in a car that would be running over people and repeating that line every so often. Did you ever see that?

N.T.: Yes, I did.

L.G.: Hours and hours of fun and amusement. But, in any event, did that whole thing hurt or help business? Or was it business neutral-or what?

N.T.: I really don't want to talk about the whole thing. Can we just leave it in peace? [Laughs]

L.G.: We're off the actual incident now, but I'm just wondering what the impact of it was.

N.T.: Well, I just don't want to be quoted about that. I never do think about that situation.

L.G.: Not even to the extent whether it had any impact on your business?

N.T.: Well, yeah, it's hard to say. It had a small impact.

L.G.: But let me just stipulate here that I know Lizzie, and I like her, and she's very good at what she does. Obviously, that was not a great moment in her life. But she seems to have recovered from that and seems to be doing well and is a mom.

N.T.: Business was different after that, that's for sure. There were only a couple of weeks left in the summer-and then we sold the club. We sold it after that summer.

L.G.: So then what?

N.T.: In between the opening and the closing of Conscience Point, we opened a restaurant called Luahn, a restaurant-lounge which we had for a year. And then after Luahn closed, in 2000, we started Strategic Group. We had basically stopped promoting, except for maybe one club, and stopped almost all of the club-land activity and started Strategic Group. At the time, we had two employees and we had an office above Luahn, a one-bedroom apartment. It was Jason and me and two others, and our first clients were Guinness beer and Smirnoff Ice and Stuff magazine. And we started doing events. We started doing the idea of "influencers" for marketing-getting noteworthy people, or influencers, to try products, and getting those sightings mentioned in the newspapers. You know, figuring out a way to take these brands and kind of make them cool, helping these clients navigate the world of nightlife and fashion and just popular culture. And we saw that as a really amazing sort of opportunity. At the time, there were not many people doing it.

L.G.: This was in 2000, so this was a relatively unpopulated business at that point.

N.T.: Yeah, there weren't any real agencies doing what we do. We moved into a much bigger office in early 2001. We hadn't really been doing much work in the club business for a few months. And then, kind of randomly, some friends of ours came to us and asked us to get involved with a new bar that they wanted to open. Jay and I went and we looked at it. It was tough not being in the nightlife business. The phones would ring every night, great people wanting a place to go, and we'd have no place to take them. So we kind of got back into the business after getting out of it for a few months. And we took over a place for which we actually came up with the name. It was called Suite 16. Jay and I did a management deal where we ran the place, we operated it. And we created Suite 16. It was on 16th Street and Eighth Avenue. It was right around the time that Bungalow 8 and Lotus opened in Chelsea. It was a small bar, a small renovation. It had been a Re-bar. And we opened this place—it was a huge runaway success. I mean, this place for three years was one of the best and hottest places to go-between 2001 and 2004.

L.G.: And what made it so hot?

N.T.: We had a great crowd, tons of celebrities, tons of girls. It was a beautiful crowd there. The energy was great. We had all these wonderful nights. Monday nights, Samantha Ronson moved her karaoke night from Moomba to our club. Tuesday night, we had these really great promotions, a really edgy downtown thing. And Thursday was, like, a line around the corner. The weekends were great. I mean, that's the club where Britney [Spears] and Justin [Timberlake] first ran into each other after they broke up! And we used to have—literally every star in town would come there. It was a very cool bar-lounge.

L.G: How did you manage to attract these young celebrities to your venue?

N.T.: We have, through our agency, and through just being in the business for so long, from the people we knew growing up. Our network and our relationships are pretty vast. Friends of friends [in the entertainment business]. We end up bringing them to our place. We just created a following and a reputation for having very, you know, cool, edgy, sort of entertainment, celebrity-friendly venues. The hospitality was always great, and people would come.

L.G.: Was it worth it for you, if celebrities came, just to comp them? Just because of the added buzz?

N.T.: Some celebrities we would comp. Some will pay. It's a case-by-case situation.

L.G.: How do you make that decision?

N.T.: It's so case by case. Sometimes it depends who brings them. Sometimes you'll comp them, or sometimes you're comping the person who brought them. Really, it's different because with every celebrity, there's a different relationship there. Some pay every time. Some never pay. There's no formula for it.

L.G.: Are there any celebrities that you now bar from your clubs? Because of bad behavior or whatever?

N.T.: No, nobody comes to mind.

L.G.: Okay. What's the utility of a famous person coming to your club? What's the business benefit of that?

N.T.: Every type of celebrity has a different utility, has a different value. Some people just are great. Having them there creates a lot of excitement inside the venue.

L.G.: Give me an example.

N.T.: When Jamie Foxx is in the club, he loves to get on the mic. He's always standing on top of the banquette, you know. He puts on a show, and he's a great actor. He's a talented singer. He just brings really good energy. He loves to, like, amp up the crowd. And people love seeing him. He's really just a good example of someone who brings an extra-special energy to the place when he's there.

L.G.: Well, I hope to God that you comp Jamie Foxx.

N.T.: Yeah, I mean, I'm sure we do. I wouldn't remember, but I'm pretty sure that we do.

L.G.: Now, let's talk about Marquee, with which you and Jason are very much associated in terms of your public image. Just how do the economics of these nightclubs work? I mean, is the profit center selling the liquor? I mean, $400 bottles of vodka?

N.T.: Yeah, the liquor, the cover charge. Corporate events are a major profit center inside the nightlife business.

L.G. And why would any person who's not deranged want to pay $400 for a $30 bottle of vodka?

N.T.: I'll turn that around on you. Why do people pay $2,000 for front-row seats at great concert? In other words, inside nightclubs, there's a show that goes on. There's a voyeuristic aspect. It's this social show. People want, you know, to have a good seat in the middle of that. And they pay a premium for the liquor, which is really just another way of charging for the real estate.

L.G.: Surely you, Noah, would never pay such an extravagant price for something like that!

N.T.: I pay from time to time.

L.G.: So you, too, have let yourself be gouged for vodka?

N.T.: I've paid for overpriced bottles, yes. I go out to places where I don't know people, just to see what other people are doing. Sometimes, you know, when I'm overseas in other places. Sometimes I pay out of respect to other people in the business.

L.G.: Now Marquee is obviously very successful. Today, it's throwing off about $13 million a year. Correct?

N.T.: Last year that's what our gross revenue was. Correct.

L.G.: I remember going there for the first time for the 50th birthday party of Richard Johnson, the editor of Page Six in the New York Post. I think it was January 2004, not long after you opened. How important was that event? I remember it was just huge, with lots of celebrities there. I remember Uma Thurman and her then-boyfriend André Balazs making out at the bar, just a huge scene. And a lot of media people there obviously.

N.T.: The event was great. It was definitely one of the most prolific nights ever at that nightclub—or at any other nightclub that I've been to or heard of. It was a fantastic event. It was a great way for us to introduce the brand-new space to a lot of people, very quickly.

L.G.: It obviously got a fair amount of publicity in the Post and in other places as well.

N.T.: I remember you wrote a lot about it.

L.G.: I wrote a bit about it. When I had my gossip column in the Daily News, I would periodically write about the goings-on at Marquee. And once, as I recall, I even wrote about one of your publicists sending out a memo asking that the gossip columns please respect the privacy of a whole list of celebrities who frequented Marquee, including Giselle Bundchen, Leonardo DiCaprio, Lindsay Lohan, Mark Wahlberg, P. Diddy, Michael Strahan, Jeremy Shockey, and Tom Brady. Now, as I recall, my reaction was to laugh heartily and then make fun of it. But did anyone accommodate this wish for celebrity privacy in nightclubs?

N.T: I would say yeah. I think so.

L.G.: So I was alone.

N.T.: You were the only one who mocked us for that request.

L.G.: [Laughs] Really? So once again, I missed the point. I mean, I thought at the time that it might've been a clever publicity ploy.

N.T.: Not at all.

L.G.: You were seriously trying to protect the privacy of these people in your club?

N.T.: Yes. We felt like we, as a club, provided a lot of fodder for the columns. And we just asked that they respect a certain select group of our guests' privacy and not write about them in their columns.

L.G.: So you've got a number of things on your plate. Tell me about the other places that you're opening or have opened.

N.T. We opened Marquee at the end of '03. We're in our fifth year, and it's going really, really well.

L.G.: Which, in nightclub terms, is like the Galápagos tortoise.

N.T.: Exactly. We've maintained our status as a really hot, trendy, popular place, and one of the best clubs in the city-if not the best. And we joined forces with Mark Packer and Rich Wolf, who owns Tao New York and opened Tao Nightclub in Las Vegas two-and-a-half years ago. And now Jason and I brought in a partner to Strategic Group almost four years ago named Seth Rodsky. It's always important for me to mention my partners. He was an agent at CAA [Creative Artists Agency] and joined our company as our partner on all our ventures. And then on Tao in Vegas, we partnered with Mark and Rich. And now Jason, myself, Seth, Mark, and Rich have again partnered to open a new place in Las Vegas, which will be opening in about three months in the Palazzo hotel. It's a restaurant and a nightclub, rather large, and it's going to be called Lavo. We have about three other projects right now that are in the queue-one in New York, another one in Vegas, which make three in Vegas and two in New York-and one in Miami. That's on one side, the restaurants and clubs. So within 18 months, we'll open four new places, six to seven places total between us and our partners. We also have a place in Southampton called Dune, in which we're small partners. And we took over Bridgehampton Polo four years ago.

L.G.: It's a great singles scene?

N.T.: It's a great event. It's a great property. Our corporate clients love to actively sponsor the events. And on the other side, Seth, Jason, and I built up Strategic Group from what was 30 people in 2000 to almost 50 full-time now. We have 30 and change working in our New York office and another 16 full-time employees in 15 other cities.

L.G.: And they're doing what, Noah?

N.T.: We do five things. We do special events. We conceptualize them, build them, invite the people, do the decor, handle the P.R.

L.G.: And this is for corporate clients like Donna Karan, Maxim magazine, Absolut Vodka, and Yahoo? And you also have celebrities as clients too.

N.T.: Sort of. Not necessarily them directly, but their businesses. So we've worked with Pharrell [Williams] on his clothing line, his store openings. We've worked with Puffy [Sean "P. Diddy" Combs] on his vodka launches. We've done business with a variety of celebrities, usually via their other business entities. We've worked with Usher on his charities. I think part of what Strategic does is talent procurement. And we handle putting together host committees for charity events. We put together appearance deals, concerts. We book artists. We book D.J.'s. We book guest appearances all day long.

L.G.: And celebrities—people that you know of personally—can make as much as, say, a million dollars for getting involved in these sorts of things?

N.T.: Yep, that is true.

L.G.: And that business—which is separate from your nightclub and restaurant business—is throwing off about $23 million a year in revenue at the moment?

N.T.: That's gross revenue. So we do five things: We have a talent resources division. We have the special-events division. We do consumer promotions. We have thousands of people who work as independent contractors for us in 17 cities. And they give out our products or do events for consumer brands-whether the goal is to market products to people, you know, or in some cases to specific age groups and specific types of people in other cases.

L.G.: And the trick is to do the sorts of events that attract media attention?

N.T.: Well that's on the events side. Because the promotions side is a different type of event. This is the consumer side. Say, Yahoo wants a million people to go to their website for a specific purpose. So you figure out a way to drive that traffic. Or Brand X wants to give out 600,000 samples of its new product to college students. And we figure out how to do that and put people on the street to actually do that. It's all marketing, but that specific type of business is a consumer-driven model as opposed to marketing that's media driven or celebrity driven. So we do consumer marketing-consumer promotions we call it. And the third division is public relations—Sam Ong and his team. They do P.R., and I don't need to tell you what that is. And the fourth part is creative. We are a creative agency. We come up with campaigns, taglines, slogans, graphics, and art. And we do branding. Brands come to us and they say, "Hey, I have this new product. This is my target demographic. Can you give me some ideas of how I can get the word out about it?" And we come up with plans-you know, here's an idea, here's a stunt. This will get you a lot of press. This will make people go to your website. This will make people go to your stores. And we come up with ideas. And sometimes we'll just get hired for our ideas, and we don't actually execute the work. But we are full-service, sort of top-to-bottom marketing services. It's a great business.

L.G.: So let me just get you on this whole fascinating notion of the velvet rope and the exclusionary aspect. Because when you started out, you were very inclusive. Because it was all your friends, and bringing people along, and come one, come all. But now, they're lined up in front of Marquee, for instance. And there are people that aren't permitted in by your door people. What's that all about? I'm talking about people who have money to burn. Sometimes they're not allowed in. Tell me what that's about. Explain that process to me.

N.T.: Let me put it into this context: Marquee is a product. It's a brand. Just like artists will make things in limited quantities or any apparel designer will make limited-edition items. It creates demand. Not everybody can get it or buy it. And that creates a demand for the product. There is a premium paid for those products once the demand is there. So with regard to the nightclubs, sometimes having a tough door policy helps create the demand for the club. It's a premium product that has demand for it. And part of what you're able to do, if you have a premium product, is charge more money. So by having a tough door policy, making it not so easy to get into the club, it allows us to charge more money for people who do get in. And then it has created demand for people who will now wait on line or pay a premium to get in.

L.G: People who are influential, powerful, famous, generally have no trouble getting in. And people who are good-looking, like a good-looking young lady, will probably have no trouble getting in. But regular people from some suburb might have a great deal of trouble. What is that calculus all about? Is it the same thing?

N.T.: I mean, it is, again, the same theory of why do people pay more money for front-row seats?

L.G.: That's fascinating to me, how you arrive at kind of the proper balance. It's different from other premium products. I mean, if I have sufficient funds, I can go buy a Van Gogh. And no one's going to deny me the right to spend tens of millions of dollars on a famous painting, if it's for sale. But with nightclubs-and not just yours but just in general—I can flash a wad of bills, and I can be told by the guy at the door to go rent movies at Blockbuster.

N.T.: Well, it's not all about the money. It's also about having the right mix of people and the right balance of people. That's how we operate our business. The doorman's job is to ensure that there's the right balance of people inside the nightclub. The doorman has been trained. [Marquee doorman] Wass has been doing the door for about 15 years. He's been in the business for a long time. And he knows how to judge the room. He's updated on the cliques, how many people are inside, how many men, how many women. It's important to have a good ratio: 60-40, women to men, is a good ratio.

L.G.: Otherwise, it starts getting a little too competitive on the women's side? Or puts out a weird vibe?

N.T.: I just think that people have the most fun when it's at that proportion.

L.G.: Okay. And Paris Hilton is always getting in. She always adds a little something?

N.T.: Paris always gets in.

L.G.: But not necessarily Brandon Davis?

N.T.: Nope, Brandon gets in too.

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