Devil's Bargain: Steve Bannon, Donald Trump, and the Storming of the Presidency

by Joshua Green

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  Two big things were going on at Goldman Sachs in the late 1980s. The globalization of world capital markets meant that size suddenly mattered. Everyone realized that the firm, a private partnership, would eventually have to go public to keep pace with its competitors. Bankers also could see that the Glass-Steagall Act separating commercial and investment banking was going to fall, setting off a flurry of acquisitions. Young bankers like Bannon were trained to be generalists. In the world to come, specialists would command a premium. After spending a year in Goldman’s London office, Bannon shipped out to Los Angeles to learn the media and entertainment businesses.

  Throughout the 1980s, big media companies were expanding and becoming more valuable. Some of this was due to the growing audience for TV shows and movies. But it was also because the federal government under Reagan had relaxed antitrust restrictions, which meant that the media and entertainment industries—like the oil-and-gas, retail-clothing, and pharmaceutical industries—were taking a page from Wall Street and embarking on an orgy of mergers and acquisitions. Some of these media mergers, such as Time Inc.’s $14 billion merger with Warner Communications in 1989 to create the world’s largest entertainment conglomerate, were defensive in nature, intended to make companies large enough that they wouldn’t fall prey to corporate raiders. Others were strategic acquisitions, like General Electric’s 1985 takeover of RCA and its NBC division for $6.3 billion, a deal Bannon worked on for Goldman in its capacity as an adviser to GE. “A lot of people were coming from outside buying media companies,” he said. “There was just huge consolidation going on.”

  The frenzy to acquire TV and film companies posed a particular challenge for investment banks like Goldman Sachs that profited by facilitating these deals. Hollywood movie studios were notoriously fickle, boom-and-bust affairs whose value was often tethered to whether or not they had recently churned out blockbuster hits. A steadier source of value—at least, in theory—was contained in the vast libraries of movie titles many studios controlled, because there would always be an audience for classics such as Gone with the Wind and The Godfather and therefore television channels willing to pony up to broadcast them. The trouble was how to value these films: they were closer to intellectual property than to tangible assets such as broadcast networks. Most investors preferred hard assets that could be easily measured—factories, airplanes, real estate—and avoided things like movie studios and film libraries, which were much harder to price with precision.

  Bannon and some colleagues figured out how to do it. By drawing on hard data such as VHS cassette sales and television ratings, they came up with a model to value intellectual property in the same way as physical assets. Removing this obstacle made it as easy to value Columbia Pictures as it was to value American Airlines or Chrysler Motors—which only added to the Hollywood merger stampede. Bannon possessed a gift, a kind of x-ray vision, that let him walk into a studio and quickly suss out not just top-line numbers but the whole schema—how the interlocking pieces fit together, and what they were really worth. “He understood the math completely,” said a colleague. “He could walk in, take one look, and say, ‘You’re fucked. You’re going bankrupt.’”

  Rather than keep working for a salary, Bannon and a fellow Goldman vice president quit in 1990 to form their own boutique investment bank in Beverly Hills that became Bannon & Co. Staked to $100 million in financing from a Japanese trading house, Bannon started a production company, installed the ousted former head of Universal Pictures Thom Mount as president, and executive-produced Sean Penn’s 1991 directorial debut, The Indian Runner. Although the film’s cast included Dennis Hopper, Benicio Del Toro, and Viggo Mortensen, it was a box-office flop, grossing just $191,125 in the United States and Canada. Mount, who worked closely with Bannon and generally liked him, recalled a figure of swashbuckling grandiosity who would be entirely recognizable to someone who knew him today. “He was constantly telling stories about great warriors of the past, like Attila the Hun, people who had slain empires,” Mount said. “It’s one thing to be interested in the triumphs of military history; it’s another thing to obsess over them. Victory at all costs is a dangerous way to look at the world.”

  The Wild West atmosphere of Wall Street in the eighties produced no small amount of chaos and financial carnage. The prestige of owning blue-chip companies, the clashing egos of big-time financiers, and the enormous fortunes to be made attracted a rogue’s gallery of ambitious frauds and hucksters who managed to blow up or bankrupt a whole roster of brand-name companies. Hollywood, with its star power and show-biz glamour, proved to be, if anything, an even greater lure for ambitious charlatans longing for fame and riches. The debt-fueled takeover of Metro-Goldwyn-Mayer Studios in 1990 followed soon after by its spectacular collapse still stands as the era-defining example of reckless stupidity—and the one that made Bannon rich.

  In 1990, after bids from Ted Turner and Rupert Murdoch fell through, MGM’s owner, Kirk Kerkorian, sold the historic studio to a shady, little-known Italian financier named Giancarlo Parretti, for $1.3 billion. Parretti, a producer of low-budget foreign movies, had started out in life as a petty crook in Sicily, where he earned a rap sheet for securities fraud, check kiting, and conspiring to commit bodily harm. Yet by the mid-eighties, he had gained control of an Italian insurance company and hotel and real estate firms, at which point a Roman Catholic organization asked him to supervise the production of Bernadette, a biographical film about a French peasant girl in the 1850s who saw visions of the Virgin Mary and became a saint. Parretti, enthralled by the movie business, arranged to buy the film’s nearly bankrupt distributor, Cannon Group, with a $250 million loan from the French bank Crédit Lyonnais. Upon arriving in Hollywood, Parretti promptly reinvented himself as a Rolls-Royce–driving movie mogul, all the while cooking up a blizzard of bribes, shell companies, and fraudulent loans. He bought a yacht. He flew to the Vatican to screen Bernadette for Pope John Paul II. Finally, after bribing assorted high-level Crédit Lyonnais officials, Parretti persuaded the bank to lend him more than $1 billion to buy MGM from Kerkorian, pledging the studio’s film library as collateral (and hiding some of the loans behind shell companies). On the day the deal closed, Parretti threw a champagne party in MGM’s offices that featured a live four-hundred-pound lion. Then he set about looting the place, firing top financial executives, installing his twenty-one-year-old daughter in their place, and, as court records would later reveal, placing a harem of his mistresses on the MGM payroll.

  By then, Crédit Lyonnais had quietly become the largest lender in Hollywood, funding not only Parretti’s MGM gambit but dozens of independent production studios as well. Within eight months, all of it came crashing down. MGM defaulted on its payments to several creditors, who attempted to force the studio into bankruptcy. Alerted to Parretti’s criminal history, the SEC and FBI started snooping around. Crédit Lyonnais’s fraudulent loans were exposed. Parretti was arrested in Los Angeles on a French warrant charging him with embezzlement and defrauding the French bank, indicted by a Delaware grand jury on perjury and evidence-tampering charges, and slapped with civil fraud charges by the SEC for misrepresenting Crédit Lyonnais loans as equity investments in the purchase of MGM. (Parretti and two associates eventually settled the charges.) The French government, humiliated, fired Crédit Lyonnais’s chief executive, and the bank foreclosed on MGM, having lost somewhere in the neighborhood of $1 billion.

  Even as it teetered on the brink of its own bankruptcy, Crédit Lyonnais suddenly found itself in possession of MGM and thirty-odd independent production houses that it had no earthly idea how to value or sell. Bannon and his partners were brought in to clean up the wreckage. “It was a disaster,” said Scot Vorse, Bannon’s HBS classmate who became a partner in his new firm. “Every one of these companies was flailing.” As Bannon and Vorse pored over the books, it soon became clear that the production houses were all going to go bust, a state of affairs that earned them the ignominious
industry nickname “the Dirty Thirty.”

  Seduced by the glamour of the Hollywood lifestyle, corrupt French bankers had showered producers and distributors with more money than they knew what to do with. But the bankers never grasped the economics of the movie business. The industry’s focus was on getting films made and collecting producers’ fees—the glitzy stuff of stars, directors, red-carpet premieres, and Variety headlines. For investors, however, the real money was made on the back end, in licensing the rights to broadcast and distribute those films in the United States and abroad. In the same way that a collateralized-debt obligation is the sum of hundreds of individual mortgages, the real value of a film is the outstanding sum of its individual licensing deals: both products can quickly ruin investors who don’t understand them. When Bannon dug into the financials, he discovered that many of the assets owned by MGM and the Dirty Thirty were toxic and had little value.

  “Hollywood is a terrible, tough business to make money in,” said Vorse. “Because of Crédit Lyonnais, huge amounts of money were lent to outfits with terrible business plans. All these producers and distributors were running around, and the bankers were all hanging out with them in swanky Hollywood hotels—it was a complete disaster.”

  Bannon loved it. “We got a ton of business,” he said. “We were the only sane ones who knew what was going on.” His firm represented the post-Parretti MGM management as it belatedly took stock of its assets, while providing the same services to the Dirty Thirty. Fortunately for Crédit Lyonnais, plenty of global media conglomerates still wanted to get into the film business. Now, however, with MGM’s implosion having underscored the value of understanding precisely what it was that they were acquiring, they had the good sense to seek out expert advisers who could tell them. When PolyGram decided to get into the film business, it hired Bannon & Co. to advise it on the purchase of the Dirty Thirty from Crédit Lyonnais. Then Seagram wanted into the business and bought PolyGram. Bannon & Co. advised PolyGram on the sale. When Seagram turned around and decided to sell those same assets, the company brought in the investment bankers who understood their value best: Bannon & Co. “We used to joke that we were like pilot fish,” said Vorse. “We spent our lives at MGM, learned the microeconomics of the business, and sold the same properties again and again and again.” In 1996, the story came full circle when Crédit Lyonnais sold MGM back to Kirk Kerkorian.

  Bannon & Co. handled several other high-profile deals. They flew to Italy to advise Silvio Berlusconi, the founder of Fininvest and future prime minister, on the value of his firm’s film library. They represented the Saudi businessman Prince Alwaleed bin Talal. They worked on the takeover of Orion Pictures by MGM. And, in 1993, they represented Westinghouse Electric in selling its ownership stake of Castle Rock Entertainment, the film and TV production company behind Billy Crystal’s films, to Turner Broadcasting—a deal that unexpectedly pulled Bannon into the entertainment industry and handed him a winning lottery ticket.

  Having failed in his quest to buy MGM three years earlier, Ted Turner was still itching to create an empire. “Turner was going to build this huge studio,” Bannon said, “so we were negotiating the deal at the St. Regis Hotel in New York. As often happened with Turner, when it came time to actually close the deal, Ted was short of cash.” Westinghouse wanted out. Bannon pleaded with them not to walk away from the bargaining table. “We told them, ‘You ought to take this deal. It’s a great deal,’” he said. “And they go, ‘If this is such a great deal, why don’t you defer some of your cash fee and keep an ownership stake in a package of TV rights?’”

  Bannon had no interest in getting into the residuals business. But neither did Westinghouse. The company made clear that unless Bannon & Co. swapped its cash fee for residuals the deal was off. “So we took a residual,” he said.

  In lieu of a full adviser’s fee, the firm accepted a stake in five Castle Rock television shows, including one in its third season that was regarded as the runt of the litter: Seinfeld. At the time, the show hadn’t cracked the Nielsen Top Thirty. A year later, it became a hit. “We calculated what it would get us if it made it to syndication,” said Bannon. “We were wrong by a factor of five.”

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  The desire of large foreign banks to plunge into Hollywood did not abate—not even among French banks, who might’ve known better. But Société Générale was confident it wouldn’t repeat the mistakes of Crédit Lyonnais because, in 1996, as part of a plan to move into the independent distribution business, it had struck a deal to acquire Bannon & Co. By the time the deal paid out, in 1998, Bannon was sitting pretty. (Société Générale . . . not so much—the independent distribution business had dried up by then.)

  No longer needing a day job, Bannon dabbled in minor Hollywood moguldom. He became an executive producer of movies, including Anthony Hopkins’s 1999 Oscar-nominated Titus. He rolled up a succession of small media properties from, among others, Michael Milken, Terry Semel, and Doug Liman (the latter carrying residuals to Fox’s prime-time teen soap opera The O.C.—“great intellectual property,” Bannon boasted to Variety). “He loved doing deals,” said Vorse. “He had his hands in everything.” He invested in, or served on the board of, companies that made products ranging from homeopathic nasal spray to branded video games for Burger King.

  He met a hard-partying talent manager named Jeff Kwatinetz, who had discovered the band Korn and managed the Backstreet Boys. Newly flush and eager for adventure, Bannon joined Kwatinetz’s new management outfit, The Firm, as a partner and helped orchestrate its great coup, the acquisition of former Disney chief Michael Ovitz’s company, Artist Management Group. Ovitz had spent $100 million building a behemoth he thought would conquer Hollywood. But AMG was hemorrhaging money. Selling to The Firm was a last-ditch bid to save face. Instead, Bannon showed up one day at Ovitz’s Beverly Hills mansion to deliver a final humiliating blow: an offer for AMG of just $5 million, less than the value of Ovitz’s home. “He didn’t understand the fundamental math of the business,” said Bannon. “We really ended up negotiating with his bankers, J. P. Morgan.”

  The acquisition gave The Firm a client roster that included Cameron Diaz, Leonardo DiCaprio, Ice Cube, and Limp Bizkit. “We were pirates, and Jeff was the King Pirate, shocking Hollywood,” said Bannon. Kwatinetz and Bannon had grand visions of a sprawling, vertically integrated business that would “brand” its A-List artist-clients across a dizzying array of platforms: not only recording and film but also concerts, clothing, animation, video games, and television. Bannon was as effusive about clients such as the rapper/actor Ice Cube as he would later be about TV star/politician Donald Trump. “It’s the beginning of a revolution,” Bannon declared with characteristic brio to an entertainment reporter for The Washington Post. “We’re in the Vin Diesel business, or the Fred Durst business.” (Amid charges of cocaine use from ex-employees, which Kwatinetz denied, and unexplained absences, Kwatinetz eventually left The Firm.)

  Bannon didn’t stick around for the revolution. By 2005, he had left Hollywood for the other side of the globe, Hong Kong, where he became involved in what was undoubtedly the strangest business of any in his kaleidoscopic career—one that introduced him to a hidden world, burrowed deep into his psyche, and provided a kind of conceptual framework that he would later draw on to build up the audience for Breitbart News, and then to help marshal the online armies of trolls and activists that overran national politics and helped give rise to Donald Trump.

  The business centered on a video game, World of Warcraft, a so-called “massively multiplayer online role-playing game” (MMO), whose 10 million subscribers competed against one another in the mythical realm of Azeroth, a fantasy world of elves, dwarfs, trolls, goblins, and dragons. Skilled players can win weapons, armor, and gold. These are, of course, virtual items acquired and used within the game. Yet ardent enthusiasts were willing to buy them for real money, in the real world, to help them conquer World of Warcraft and oth
er MMOs—a practice known as “real-money trading.” Soon, entrepreneurial gamers systematized the process of “gold farming,” earning tens or even hundreds of thousands of dollars a year by selling digital loot. The Hong Kong company Bannon joined, Internet Gaming Entertainment, sought to take gold farming to industrial scale by building out a supply chain of low-wage Chinese workers who played World of Warcraft in continuous, rotating shifts, battling monsters and dragons to produce a steady stream of virtual goods that IGE sold to gold-hungry gamers in the West.

  Founded by a former child actor, Brock Pierce, who starred in Disney’s Mighty Ducks movies, IGE proved that real-money trading was a sizable market, one the company claimed was worth nearly $1 billion. Whether it was a legal market was less clear. World of Warcraft’s publisher, Blizzard Entertainment, frowned on real-money trading. Many gamers hated the practice and considered it a form of cheating. They flooded gaming boards with anti-Chinese vitriol to protest farmers and their sponsors. Pierce knew IGE needed legitimacy. So he enlisted Bannon to raise capital, hoping game publishers would eventually agree to license the practice. Bannon pitched the idea that the currency market for virtual gold wasn’t all that different from its real-world counterpart—and landed $60 million from Goldman Sachs and other investors.

  Their timing turned out to be terrible. Rather than agree to a licensing deal, Blizzard, under pressure from its customers, started shutting down the accounts of suspected gold farmers and sellers. Beset by competitors, IGE’s profits turned to losses. Then the company was hit by a class-action lawsuit filed in U.S. district court in Florida by an irate World of Warcraft fanatic who claimed that IGE’s gold-farming practices were “substantially impairing” the collective enjoyment of the game. In a bid to survive, IGE shed its toxic name, Pierce was forced out, and Bannon was installed as CEO of the newly christened Affinity Media.