Transcription
So the harder question really though, Lloyd, is what didn't work? If you had to do it all over again and change something about not just the culture of Goldman, but the culture of Wall Street, what would it be?
>> Well, you know, I'm I'm a markets guy, so I'm more in the responder net to what happens. I take certain things, you know, I think things fall the way they are for a reason. What would I like? I'd like the birds to, you know, sun to shine every day and the birds to chirp every day. If I were in charge, I'd make sure that that happened.
Um, but I I do think that I think Wall Street does a very good job of responding in the uncertainties that exist at every moment about what is going to happen next and being good contingency planners and very resilient and great great responders and of course gets killed by the reviewers and the pundits who have after acquired information to look back and say, "Aha, if I oh god that's not what I would have done." Just like nobody voted nobody voted for Nixon except he won in a landslide. Everybody remembers everybody everybody always remembers being right because they're pundits and pundits don't have P&Ls. People with P&Ls can't walk away from their, you know, can't deny what they had thought in the past.
And so I think we have a system that that allows for animal spirits. And with that comes the inevitably, you ask me what I wish. I wish it would never go off the rails. But if you're going to have animal spirits and you're and that's going to produce a kind of cycle where you have a bad outcome and then everybody is nervous about risk, husbanding capital, afraid to take risk and over time the memory of the trauma of the of the reckoning of the crisis esb and people get a little bit more sporty which is what happening today and could talk about today. uh that's happening today and a little bit more and again dimmer memories. People retired, new people came in who only read about the financial crisis or the tech bubble and books so it doesn't quite register and get sportier and sportier and then sews the seed for the next crisis and the next reckoning in which case everybody tightens up. Bad assets get off of balance sheets. It gets ship shape again and it takes another couple of years for that to go. And that's what guess what that's why we have a business cycle and that's why we have historical cycles. It's because and that's you know can you imagine if we all live forever and we kept our memories intact forever. You know what would we what would we be afraid to do anything?
>> So it's no secret in this room you've been quite critical about the shift of activity since 2008 into private markets.
>> Um >> no no not I'm an observer of it. I'm not critical. Goldman by the way Goldman Sachs was a participant in private markets. Not everything we did was in the regulated part of the firm. We had funds that were unregulated private credit funds. Not everything was done off balance sheet. No. So I'm not I'm an observer of it and I was uh commented on what the you know what the risks of that are that people are underestimating.
>> So what do you think is the biggest risk and do you think it's a big enough risk to face another systemic issue as we did in 2008?
>> Look, let me be clear. Going back to what I just said about cycles in in this kind of cycle when you start feeling good and sprryier and get less disciplined about it and as you know when we separate ourselves from the trauma and we haven't had really one for more than 15 years since the great financial crisis things get a little more laxed. It's just again it's the nature of things and the real issue for me in the market today is that we we haven't had a reckoning in a long time. So, we haven't cleared those assets that are on balance sheets that probably are marked too high that really people thought they were worth X and they may not be worth X. Why do I say that? Because a lot of these private assets, they're required on the balance sheets of private equity firms, insurance companies buy them. And you know what? The pe the companies that do this activity are in business to recycle them and sell them as soon as they can. We've just had the highest equity markets ever and the best financing markets ever and assets are getting getting kind of aged on balance sheet. So that must mean for people who are highly motivated to sell them are not selling them because the price isn't being met because they're probably market.
So I'd say the metaphor that I would use is we've been accumulating a lot of dry tinder on the floor of the forest. You know, if you think of Californian when it gets dry and everything and and you know, they put out the fire alerts because it's dry outside. The real problem is the fuel on the floor of the forest, the tinder, the dried wood that fell down. And at some point, inevitably, someone will toss a cigarette butt. Someone will be careless with a campfire. There'll be a lightning strike. Do you blame the lightning? Do you blame the cigarette? It's inevitable. It's really the fact, it's the accumulation of the debris, the fuel that makes this inevitable at some point. I think because we have not had a reckoning. We've not had these preventive brush fires that they try to do in a controlled way to burn that stuff off. We are having one now a little bit in private credit, which is a good thing because you want these little things. Markets pay attention of little things. get them out of the way before they, you know, engulf and get out of control. That's a little bit like a kind of, you know, a burnoff. But because we haven't had that in a big sense in a long time, I'm nervous it'll be something. It could be a fat finger. It could be somebody says, "Oh my god, the price of oil is going to be sustained this high." It could be a lightning strike. It could be a meteor hitting the planet. Something will happen that at a different time would not have set anything off because there wouldn't have been a lot to set off. But because that kindling is there, something will happen like that. It could be a bad credit, you know, it could be the um a credit event like a bad, you know, some highly highly leveraged fund can't make a payment or something like that. It could be an insurance regulator that looks at the balance sheet and don't forget insurance is regulated by 50 state regulators, not necessarily all of the same caliber. They may look at the balance sheet of an insurance company and say, "Gee, we don't know if the you're going to be these assets are going to be sustained to make the we're going to make you sell some." And then they might find themselves selling into a market that doesn't want it and won't pay the price and that might make everybody crazy at the same time going for a door that trying to sell stuff that no one wants. So, I've lived through a lot of these. It could be almost anything and it could be something that at a different time wouldn't have registered. The problem is the accumulation of assets on balance sheets that may not be worth what they're