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Goldman Sachs on Argentina Crisis Contagion and Wall Street Still in Public's 'Penalty Box'

Stock-Markets / Financial Markets 2014 Jan 25, 2014 - 10:40 AM GMT

By: Bloomberg


Goldman Sachs CEO Lloyd Blankfein spoke with Bloomberg Television's Erik Schatzker and Stephanie Ruhle from the World Economic Forum in Davos today about the outlook for financial markets, the firm's hiring practices and the banking industry.

On the reputation of the banking industry, Blankfein said, "A lot of work has been done, a lot of work still to do, and we will be in the penalty box of the American public. And why not? It was a very big trauma, there were a lot of causes, but one of them has to be poor risk judgments made by certain banks and to the extent that banks were getting a lot of benefits from their good risk management and it turned out to be flawed, you know, it is fair that you pay some price of reputation when it does not go well."

Blankfein on whether the emerging markets situation can be contained or whether there's a risk of contagion:

"Yes to both. It can be contained and there is a risk of contagion. I think right now, one of the macro themes in the market, is that emerging markets are under some pressure. Why not? They are higher yield, riskier, people know what they're getting into when they have them. At the same time, the growth potential is so high that they are attractive. They will go through fits and starts. This is an example of each of these countries has their own dynamic, but here in davos you hear Argentina lumped in with China lumped in with Turkey. And of course different dynamics, but there are moments in time where you do not distinguish among them. They are just emerging markets like it is a single macro event."

On whether investors truly know what they're getting involved in, specifically in regards to Argentina, South Africa and Turkey:

"They are different, but there are times when, just like in credit markets, where the dynamic of a specific company overrules. What does the CEO do, what has the business done, what is the strategy, what are the returns of a company by company, but sometimes the market is overwhelmed by macro concerns and you just go credit. And then every credit instrument moves together."

On whether we are ready if the market turns:

"The market could turn and it could turn radically, but we are at a very high place. People expect consolidation anyway. I would wait a while before i say there is a complete reversal. In fact, I would say that people are looking at their watches, waiting for a consolidating kind of move. I'm not suggesting that is the specifics of Argentina are going to be the same as others. Those have separate dynamics, but on the whole, the markets have gone up very far in a kind of a single direction without much of an interruption or a turnaround. This feels normal. Does it have to stay that way? No it doesn't, but I wouldn't be expressing a lot of anxiety."

On whether this could be the event that starts to trigger the testing of the fragile five and some other emerging markets:

"It could be, but we are at a very, very high level."

On whether he expects it:

"No. It might. I'm in the risk management business. I spend 98% of my time wallowing in anxiety over the 2% worst possible events. Of course we spend time thinking about this. Of course these things might happen. If you are asking me what is going to happen, it would be very abnormal if we had consolidating moves in the assets that have gone up so much."

On whether he would have said he's in the risk management business seven years ago:

"We are always in the risk management business. Sure it has changed. There is more scrutiny, more second-guessing, more adverse consequence to making a mistake, which you inevitably do. More oversight, more wanted to record your state of mind, your present state of mind every time you do something because life has made us a little bit more aware, but the value of a contemporaneous record as to what you are thinking, what you are doing. But basically then and now, we are the other side of what people want to do, and that is not always easy. People who plan to do transactions and make investments, they have maybe been thinking about it for six months or a year. They'll call us on the phone and they will say what price would you show me to be on the other side of this transaction and can you tell me in 20 minutes? That is our business. People unload their risk on us."

On whether his quality of life is worse now than when he started at Goldman Sachs:

"Quality-of-life...I measure things on a lot of different dimensions. Quality of life has not been in front of mind...I like a lot of aspects of the job, I like the problems, I like the challenges, i like dealing with people who are ambitious and want to handle difficult new things, the ability to deal, like we do here at Davos, deal with innovators, but guess what? We had big problems how to deal with that. To this day, I am spending a lot of my mind dealing with legacy issues, as i need to. Resolving the legacy issues for the sake of the past, but also resolving the legacy issues for the sake of doing things better in the future. I would rather be doing all those other things. Pricing, listening to people pitch their companies, asking me whether we can raise capital for them or not, trying to decide whether they're winners or losers, talking to our investors -- that is what I find on for, but you do not always get...It is like the president, you know, so much ambitions to be a peacetime president, guess what, there is a war. You do not always get the period of time that you want."

On what mistake he's most worried about Goldman Sachs making now:

"All mistakes have leverage, and leverage, I mean consequences. I would say one of the biggest sources of anxiety now has to do with technology and the leverage that comes from doing things quickly, instantly, in huge side and in a way that cannot be intuitive. Your reliance on technology -- just think of what happened to target. Somebody enters a system that could have been entered from any one of tens of thousands of places, and from that had the leverage to steal over 100 million identities or something like that. People have exposure to that. You could make, you know, you can have an arms race of defensive measures and other people get attacked -- that is a very hard thing to have perfect assurance. I worry about the things that the world and we assume we have control over. There are some aspects of things that could go wrong that you not feel like you have as much control over. By the way, when i say technology, I am thinking of mistakes as well as thinking of intentional misbehavior or terrorism. One of the consequences of technology is the leverage which has good effects a lot of times, because it lets you do a lot of stuff, but leverage goes the other way too. Prior to 50 years ago, could anyone have made a mistake really that would have cost $100 million or a billion dollars? Can a mistake today cost $1 billion? It is not just in our business, just think of industries. Could you have had an industrial accident 50 years ago that could have killed over 100,000 people? But today, could you imagine an industrial accident? Look at Fukushima."

On whether it makes him pause when thinking about making Goldman's fixed income business more electronic or the degree to which the firm is using technology to reduce costs:

"We think about that, and every time we do, we build in another redundancy. When you say equitization, I think all of these changes are good, but let me put it this way, take clearing, a good thing, one which we propounded independently of rules that require it. In some ways, if you think of risk as a 20 year storm or a 50 year storm, there are some things that have the effect of making the world safer from the 20 year storm but more dangerous from the 50-year storm. At some point, in the 20 year storm, having that clearinghouse is a source of safety as opposed to relying on individual bilateral trades where someone can easily go under, so let's have everything go through the clearinghouse. But what happens in the storm that is so big that maybe only happens once every 50 years, but it threatens the clearinghouse itself? Wow. Then everybody now has an exposure to the clearinghouse. So i think in a way there is a law of conservation of risk. You can kind of move it around, but you cannot make it go away."

On what Goldman Sachs does as a result:

"We reevaluate, we do it, we build in more redundancies on it. we check certain things...Let me say, there are some things that we could be doing in our business that could make a lot of revenue, but there is a lot of operational risk. For example, if you do certain kinds of transactions that involve a lot of volume, very, very low margin, you might have -- it might be a profitable business, but we think to a greater extent than we would have previously the operational risk embedded in that than that because the risk of something going wrong, guess what, compounds with the volume that you do."

On balancing goals for innovation when investors are wanting to look at things like utilities:

"I think investors want banks that maximize their safety and their revenue, their returns...there are trade-offs on certain things. You know, are we in returns what utilities are? At that cost of that return, you might not meet your cost of capital, but let's face it, I think the benefits -- and I think it is more nuanced than that. People want a heightened degree of attention paid to the risk and reward of things that you do. And they are very focused on requiring a specific return for a specific level of risk, and the improving the value of your company is to increase your returns and decrease the risk you that you take. For example, banks today are not going to make the ROE that they did at a time when they had less capital, but guess what? The cost of capital for those institutions are lower because they're so well capitalized that they are safer."

On remaining public enemy number one right now:

"Really? Of all the people in the world?...There are legacy issues we have to deal with. Those are going to be hard and tough. Until the economy starts doing better, the banks themselves prove that they are better run and have made adaptations, and the best way to prove that would be to go for a few days, a few weeks, a few months, a without opening the paper and finding a bad story. And a lot of work has been done, a lot of work still to do, and we will be in the penalty box of the American public. And why not? It was a very big trauma, there were a lot of causes, but one of them has to be poor risk judgments made by certain banks and to the extent that banks were getting a lot of benefits from their good risk management and it turned out to be flawed, you know, it is fair that you pay some price of reputation when it does not go well."

On whether there is a risk of erosion of the social compact that exists between governments, regulators and banks:

"You can express it in those terms, but the fact of the matter is capital needs to be allocated. There are professionals who do that well and others who do it poorly, the ones who do it well get rewarded and stay in business. The ones who do it poorly get out of business. It is a necessary function that has to be done, but the benefits when it does well and the cost when it goes badly does not only fall on the institution. It falls on the wider society because the misallocation of capital affects the banking institution, but it affects the general public as well, so everybody deserves to have input. If you did not think that way before, everybody thinks about it after the last crash, and so the banks themselves are trying hard, but guess what? Whether they are trying harder not, we have people standing over us, looking over our shoulder making sure not only that we try hard but to punish us if we deviate."

On Google and other tech companies bringing young employees to Davos and whether Goldman Sachs has to change its business model to capture a younger generation:

"As you know, we recruit every year. It is almost an industry, our recruiting of new people to join our firm and to be trained into our firm, but -- and we have them, but guess what? It is not cost you, but do you know what it cost us for a ticket to Davos? They can wait."

On whether he's had to make changes to how Goldman treats employees to make it more attractive a place to work:

"Well, we have had no problems attracting people. People want to go here. Kids the age--my kids are getting out of school, both graduate school and undergraduate, and Goldman is still a place where people want to go. I think -- and we watch this closely -- if people are competing for kids and somebody coming out of school gets a job offer from multiple sources, more than 80% accept the Goldman offer. We hire kids, we get the top of the class, we survey our population. Independent people survey the population, one of the big business magazines just validated us for the umpteenth year in a row as one of the best places to work, a destination of the people at the top of their classes in schools. So listen, a lot of people want to come to us because they want careers in finance, and I am also aware of the fact that a lot of people come to us not because they want a career in finance, but because they think it is great training for whatever they go into afterwards, so they will come here for three years."

Copyright © 2013 Bloomberg - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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