Lloyd Blankfein: Regulation Is Like Background NoiseVW Staff
Lloyd Blankfein, CEO and Chairman of Goldman Sachs, spoke with Bloomberg TV’s Erik Schatzker and Stephanie Ruhle today at the World Economic Forum’s annual meeting in Davos, Switzerland. Blankfein discussed the performance of Goldman Sachs, the impact of regulation on the financial industry and the outlook for the industry.
On regulation, Blankfein said: “If you ask me how much time do I spend thinking about regulation, and rules and that kind of compliance, all the time. But it doesn’t push out other things. It’s like background noise. It’s like music.”
Blankfein said the world is “still highly affected by” the financial crisis. “China is an economy that is almost the size of the U.S. economy, soon will be bigger. And that’s going through a slump. Europe is, which is a bigger population than the United States is coming out of a slump and still grinding.”
Lloyd Blankfein More Optimistic About 2015 Than 2014
STEPHANIE RUHLE: Lloyd, in 2009 Goldman Sachs set the record for trading revenue. Last week we looked at the numbers and they are worse than they have been in a decade. What is happening in trading? Have you lost your groove?
Lloyd Blankfein: Oh my goodness. It’s — it was a — it was a real — you know it’s very funny because so much has changed in the month since the end — since the half of month since last year ended. We did fine in trading. Our ROE was pretty good in an — in a market which was otherwise marked by low volatility and low volumes.
And if you recall the headlines from just a month ago were the markets, you know people withdrawing from the trading businesses, the markets would never move again. They had an intellectual underpinning (INAUDIBLE) because the central banks had put so much liquidity it acted like a blanket on markets. And you roll the clock forward to today and it’s a massive amount of volatility, a massive amount of volumes going through, people needing to adjust the portfolio.
And all of a sudden there we are again acting as an intermediary in difficult markets, helping our clients do things. So the fact of the matter is, is we did very well in trading each of the last several years. Obviously ’09 was a record, but by the way, just to remind you, in ’08, which was a horrible year, I was being asked are we getting out of investment banking, are we getting out of trading because there was no more need for intermediation or investment banking services.
Five minutes later ’09 was the record year. So here we were writing off the sales and trading businesses in ’13 and here we are in ’14 where we were able to help our clients navigate very difficult, complex and quite active markets.
ERIK SCHATZKER: Lloyd, what does it say about the environment in which Goldman Sachs is operating and your industry that 11 percent ROE is, I think in your words, pretty good?
Lloyd Blankfein: I think you meant 11.2 percent ROE.
SCHATZKER: We should be precise.
Lloyd Blankfein: Well I’m telling you I’m in a precision business and those last 0.2 were very hard, well took a lot of work.
RUHLE: Hard to earn.
SCHATZKER: I’m sure they were.
Lloyd Blankfein: Thank you.
SCHATZKER: So what does it say?
Lloyd Blankfein: I’d say that we’re still in a period, apropos the last question, we’re still reeling. And I think we, I mean the world, from the effects of the very big trauma growth is still slow around the world, accelerating in the United States, hardly, you know hardly robust in Europe, in other words very calm, very low growth in Europe, very ambiguous where China is coming out now.
And all the — everything that we do, our role, our social role, our economic role and in fact the ability to earn money comes from with us confidence and correlation with growth. And so a low growth or a slow growth environment is not going to be the optimal set for us. As markets growth people do engage in activity. We advise them. We manage their risky assets and we finance them.
RUHLE: What does your social role actually mean, because I hear social role from you, the CEO of Goldman. When I speak to traders, salespeople, bankers I never hear about the social role. And when I’m on analyst calls no one talks about it.
Lloyd Blankfein: Well you don’t talk — the nature of an economic system is everybody pursues their interests, and the collective pursues the interests of the whole. We finance growth. We — people come to us, need, ask us how to invest their money. Other people come to us with ideas who want to finance their activities.
We are — we’re early investors in Uber and Alibaba, clean tech companies, all sorts of companies that today provide a lot of important services and employ a lot of people. And — and we by putting our money to work we also bring in other people’s money who look to us to manage their money. And so we are that nexus between those who need capital and those who provide capital.
RUHLE: Do you still believe in Uber even though it’s in such a beat down right now?
Lloyd Blankfein: Do I believe in Uber, like I mean when I take out the — when I take out my phone, press it and a cab shows up in a few minutes, do I believe that cab is real and do I get in? Yes.
RUHLE: But do you….
SCHATZKER: Do you believe in — do you believe in tech valuations at these levels?
Lloyd Blankfein: Uber is a private company. It does financings at (INAUDIBLE).
SCHATZKER: Not just Uber, everywhere.
Lloyd Blankfein: I think they do financing. I’m not sure it’s a (INAUDIBLE). We’ll see about these things. And things don’t have a value because I designate it. There’s a market for these things.
SCHATZKER: Sure. But you’ve seen price go up and down.
Lloyd Blankfein: The answer is I think it is a very big disruptive force. It does a great job. Do I (INAUDIBLE)?
SCHATZKER: No, no. I’m not just talking about Uber in general, technology valuations.
Lloyd Blankfein: It’s….
SCHATZKER: Particularly in the startups.
Lloyd Blankfein: I will have a very clear answer in hindsight.
RUHLE: Good answer. Listen, when we talk Uber it makes me think regulation. And regulation makes me think banking. When we talk to — when we hear from guys like Jamie Dimon it makes it sound like the supervisory pressure….
Lloyd Blankfein: And I’m not Jamie Dimon, I mean Jamie Dimon.
RUHLE: Correct. The pressure banks are under from the regulators just seems oppressive at this point. Would you agree?
Lloyd Blankfein: Well I don’t know. I feel pretty — you know I feel pretty sunny.
RUHLE: You do?
Lloyd Blankfein: Yes. I mean it’s a fact of life. We’re dealing with the regulation, regulatory….
RUHLE: When you think regulation you feel sunny?
Lloyd Blankfein: No. I’m saying you don’t say oppressed. I mean I’m not — I’m not bowled over by it. It’s part of the background we’re dealing with now. It’s the background noise. It affects almost everything we do. I can’t think about our technology spend without thinking of the number of heads I have to hire to build the systems to comply with the new regulatory reporting functions. So it is a fact of life, but no choice, no problem. It’s something that we have to deal with.
If you ask me how much time do I spend thinking about regulation, and rules and that kind of compliance, all the time. But it doesn’t push out other things. It’s like background noise. It’s like music. You ask me how much time do I spend with music, a lot of time, but I’m doing other things at the same time. So I’m thinking about regulation and I’m also thinking about how to finance our clients.
SCHATZKER: What about bond market liquidity? Is that an unintended consequence of regulation, the lack of liquidity that some people perceive in the bond market?
Lloyd Blankfein: No. I personally think that as the markets get active liquidity will follow the demand and people paying for liquidity, but all other things being equal in an environment where more capital is charged for holding inventories, and there are more expenses and burdens, burdens attached to trading I think it will be more expensive, and therefore for the same price there will be less liquidity. But as the demand for liquidity comes up and as people pay for more liquidity you’ll see people unfortunately, because we’re a big liquidity provider and I’d like it to be a seller’s market, you’ll see liquidity providers will again come out of the woodwork.
Take for example you referred at the beginning of the conversation to 2009. 2008 everybody was frustrated. Nobody could — nobody wanted to trade. Nobody wanted to take risk. We did very well in 2009 because we were one of the only people left providing a lot of liquidity to clients who really needed it.
RUHLE: But you were allowed to back then.
Lloyd Blankfein: We were allowed to then, but we had, it was a seller’s market. And guess what? We did very well in 2009. Competition came. A tsunami of competition came back into the market. And it will come back in again.
RUHLE: And do you think if we continue to see this kind of volatility Goldman is going to have a huge year?
Lloyd Blankfein: I think that our — our success will correlate with growth. Growth will turn into confidence. As people do more transacting they’ll have to rearrange their portfolios, buy things, hedge things. And that’s generally positive for our P&L.
SCHATZKER: Liquidity will be more expensive. Who pays for that?
Lloyd Blankfein: (INAUDIBLE). Well the consumers in the market. And at the end of the day, look….
RUHLE: What does that mean, the buy side?
Lloyd Blankfein: Of course. You can — you could buy safety, but safety comes at a price, and incrementally a higher price the more you want it. Now we’ve just come off a big trauma and one would say I want to make sure this or that bad thing never, ever happens again, even in a 10,000-year storm. Well the price for that is going to be much less leverage, so much less leverage, and so much cost and so much accumulated capital to back every transaction that it will make transacting more expensive.
That won’t change because the intermediaries like ourselves complain about it. It might change if the users of the market aren’t able to access the market of what they think is in a reasonable rate. And at the end of the day nobody wants to go out to excessive risk, but nobody else — but nobody wants excessive caution that results in too high a price and too expensive to accomplish people’s growth objectives.
SCHATZKER: If we go back to the point that you made about the world still reeling from the financial crisis, —
Lloyd Blankfein: Yes.
SCHATZKER: — even though we see pockets of improvement….
Lloyd Blankfein: And reeling I mean I think it’s improving. So reeling may have been — it may be diminishing, but we’re still highly affected by it.
SCHATZKER: So once we get back to normal, and I don’t even know what normal looks like, what does that mean for your firm? What’s — what’s Goldman’s ROE in a normal environment?
Lloyd Blankfein: There’s never, and to say everyone is saying don’t you know everything has changed radically. And I say this. Things never stay the same and they never change that much. And so everybody who is saying get — and so in our plan we said we’re still in — we’re still a liquidity provider to the market and we’re still in investment banking. We haven’t gone out of a lot of things.
We’ve gone out of some things that are very capital intensive, but we haven’t gone out of our basic businesses, nor have we added really new basic businesses. We think that we’re an institutional — and I think the returns of that business have always been very good. And I mean so by always I mean forever because we’re in the intermediation business. There are people….
SCHATZKER: Well once upon a time they were 40.
Lloyd Blankfein: I don’t remember that time.
SCHATZKER: Or 20 plus. I mean certainly it’s got to be better than 11, right?
Lloyd Blankfein: (INAUDIBLE). I remember that, 11.2.
SCHATZKER: And so? 11.2, it’s got to better than 11.2.
Lloyd Blankfein: I think it can be. They — there’s no reason to think they wouldn’t be better again. What do you think about the environment? Are we — are we living the golden age of investment banking opportunity right now?
RUHLE: Are we?
Lloyd Blankfein: I don’t think so.
RUHLE: I don’t think so.
Lloyd Blankfein: I don’t think so either. You have — China is an economy that is almost the size of the U.S. economy, soon will be bigger. And that’s going through a slump. Europe is, which is a bigger population than the United States is coming out of a slump and still grinding. Could those opportunity sets be better than they are now? Absolutely. I don’t know whether this is a third quartile opportunity set or a lower second quartile, but it’s not the top decile opportunity for our business.
RUHLE: All right. We have to leave it then, but are you more positive in 2015 than you were in 2014?
Lloyd Blankfein: Yes, I am.
RUHLE: Yes. Lloyd Blankfein, thank you so much —
Lloyd Blankfein: Thank you very much, Stephanie.
SCHATZKER: Thank you, Lloyd.
RUHLE: — for joining us, Chairman and CEO of Goldman Sachs, Lloyd Blankfein.