Al Gore: On The Shorts' List
By Andy Serwer

(FORTUNE Magazine) – You no doubt remember the headlines a few weeks back: AL GORE TO BECOME VICE CHAIRMAN OF L.A.-BASED INVESTMENT FIRM. But if you read the stories, they really didn't tell you much. Stuff like, "Gore will join Metropolitan West, an investment company with over $50 billion of assets." That's about it. What struck me as strange is that I had never heard of MetWest before. And I wasn't alone. "I know them," one Wall Street CEO confessed to me, "but I don't really know what they do." So I decided to check 'em out!

As it turns out, MetWest is a pretty interesting story. The company is a major player in the arcane business of securities lending. What is that? Well, I'll explain in detail in a minute, but basically, securities lending is what facilitates hedging and short-selling. That's right! The guy who helped preside over the country during its greatest market boom ever now works for one of the biggest players in the business of betting that stocks will go down. (Gore was unavailable for comment.) Of course, that's a gross oversimplification, and I believe short-selling is vital to the functioning of our markets. Still, there is a certain irony....

MetWest is largely the brainchild of a guy named Rich Hollander, 44, the company's founder and CEO, and Al Gore's new boss. Hollander came to Wall Street in 1980 and worked as a bond salesman at Paine Webber. A few years later he joined Drexel Burnham Lambert in its infamous Beverly Hills office, which was headed by Michael Milken. But Hollander never worked in the junk bond business--the heart and soul of Drexel. Instead he ran the firm's high-grade bond business. Which is sort of like playing basketball at Nebraska (or football at Kentucky--you get the drift).

In 1988, Hollander left Drexel and set up the Signature Group, a fund that invested in distressed real estate. Four years later two guys running BankAmerica's securities-lending group, unhappy with an upcoming merger, approached Hollander about joining him. And so they did, bringing along some $2 billion, forming the base of MetWest. Since then Hollander and his team have grown this business to the tune of some $35 billion. Not bad.

So how does securities lending work? Well, big institutional clients, like Calpers, the giant California state pension fund, turn over a portion of their portfolio--it may be several billion dollars--to MetWest. The company is constantly tracking stocks to see which ones are in demand by shorts or by arbitrageurs. Say a big hedge fund wants to short Intel. The short-seller would call up Morgan Stanley, for example, which would in turn borrow Intel stock from MetWest. The key is that Morgan pays MetWest cash, which it then invests in commercial paper or Treasuries yielding, say, 3.5% or 4%. At the end of the month MetWest splits the proceeds with its client, Calpers. "This is not a very high-margin business," says Hollander, "but, knock on wood, it has been a very secure one." (MetWest is private, and Hollander wouldn't talk bottom line.)

Dramatic as the growth in MetWest's securities-lending business has been, Hollander decided he wanted to be in more profitable areas of money management as well. Five-and-a-half years ago another team of money managers--this time bond guys at a company about to be bought by Merrill Lynch--defected to MetWest. That group, which is a fixed-income management biz much like PIMCO, now runs $16.5 billion. Same thing happened with an equity group that later joined MetWest and now manages $2 billion.

Remarkably, through deals like these, Hollander has been able to collect over $50 billion in assets--in most cases, not by buying them (he did pay for a junk bond business run by former Drexel colleague Larry Post) but by having them walk to him (i.e., the money managers who run the dough)! Which brings us to an asset he did have to pay for: Al Gore.

So what does Gore bring to the table? Hollander--who for the record says he's a Republican--suggests that Gore, whom he met with "repeatedly," will help build up the next apples of his eye, a private-equity business and another that focuses on international investments. As in, Gore provides entree to heads of state and other bigwigs in Asia, Europe, etc. How big can this whole MetWest shebang get? "I could see us having $100 billion five years from now," says Hollander.

The marriage of Gore and MetWest looks like a perfect fit to me. You have a deep-pocketed firm, without much of a name but with grand plans, willing to pay what must be a ton of money to one of the most famous people in the world (who happens to need a lot of money).

As one Wall Street wag posed: "So would you be writing about MetWest if Al Gore hadn't signed up?" Good question.