Transcription
I'm Becky Quick of CNBC and your host of the forum. I'll be guiding you through exclusive conversations among some of the world's global leaders. Conversations previously held behind closed doors, but today we invite you in.
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>> 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 of a 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, 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 after acquired information to look back and say, "Aha, I thought 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 the 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 allows for animal spirits and with that comes the inevitability. She asked 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 going to 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 then over time the memory of the trauma of the reckoning of the crisis ebbs and people get a little bit more sporty, which is what happened today and we could talk about today. And again, dimmer memories, people retired, new people came in who only read about the financial crisis or the tech bubble [music] in books, so it doesn't quite register and get sportier and sportier and then sows 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 shipshape 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 lived forever and we kept our memories intact forever? You know, what would we what would we have We'd be afraid to do anything.
>> So, it's no secret and you've been quite critical about the shift of activity since 2008 into private markets.
>> No, no, no. I'm an observer of it. I'm not critical. 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 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 this kind of cycle, when you start feeling good and sprightlier 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 big great financial crisis, things get a little more lax. 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 who 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 acquired on the balance sheets of private equity firms, insurance companies buy them. And you know what? 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 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 marked as a little 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 California and when it gets dry and everything 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 burn-off. 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 cuz 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 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 and don't forget, insurance is regulated by 50 state regulators, not necessarily all 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 worth.
>> So, I have some specific questions about this because I think the post-2008 financial industry is really misunderstood. If you were a betting man, would you think
>> a betting man.
>> You know, would you believe that the private credit system coming out of this moment, if you do see the tenders starting to erase some of the froth, do you think it becomes a much bigger system coming out of this or does it plateau?
>> Well, Goldman Sachs, to you know, prior to 2008 was not regulated as a bank holding company. There's always you know, regulatory arbitrage just like there's any other arbitrage. The market will find places where capital is cheapest. Capital is going to be cheap where there are less regulatory requirements that you hold capital against leverage. And so, there'll always be you know, there'll always be stuff like this. As I said, even Goldman Sachs in its regulated form has funds that are private credit funds because it's other people's money in an account not subject to regulation, not on the balance sheet of the firm. In fact, ours were very big very early. So, I think that that's, you know, a part of the market. It creates a problem in the system. Again, it might not be the spark, but it's part of the tension. In the financial crisis, the Fed could get probably 90% of all the outstanding loans around its conference room at the Federal Reserve building if they just had, you know, 16 banks represented. And by the way, if they had five represented, they could have had 75% of all the loans that were outstanding get together and say, "Okay, show of hands. Who has this? Who has that? What are we going to do about it?" And blah blah blah. Today, because of the distribution and the wider net that they'd have to have, they'd have to take out Citi Field and have a meeting there and stand on second base and say, "Show of hands. Who has this?" And they don't have the visibility on it and they don't have the influence on it. And so, I think they've set up the conditions are such that I think it would be hard to work out those problems. That said, I think under normal times, I don't think private credit is by itself necessarily such a systemic overwhelming thing. It could be the last straw on a market that's already waiting for something to set it off. And so, it could have that effect. But I don't think private credit by itself is that substantial or that bad. So, I wouldn't be worried about that. Again, I'm more worried about the kindling than I am about the cigarette, you know, the loose cigarette butt at this point. That's what I would work on if I were, you know, regulator today. I'd be worried about getting rid of all the mismarked assets here. I'd be pressing Look what's happening now in the market. You have some of the sponsors aren't selling their investments. The limited partners are spending are selling their interests in their limited partnership interests at a discount because they need to raise the money. Endowments are going to the market. That's why the rise of all these secondary funds that are buying limited partnership interests is because they're not getting distributions. They have to sell their limited partnership interests. I don't want to like be picking on that. There are other things also. And again, I don't think that that's hypercritical in and of itself. I think the general background is critical. Ironically, in part because we haven't had a crisis in a long time. You know, this you know every guy quotes from The Godfather, so forgive me. Remember that scene in The Godfather where they where they go and that they're talking about there's about to be another mob war and he, you know, one of the old capos puts his arm on like said he said, "Don't worry about it. We have to have these wars every 10 years ago to get rid of all the grudges and bad feelings that build up over 10 years." I think we have to have a cry, you know, unfortunately, it's the crisis that pops up every so often that gets that's a reckoning for all the assets that where there's no imposed discipline on getting them properly marked and and distributed away from balance sheets.
>> To that end, do you ever worry that the hedge fund industry could face another LTCM style event given how big a lot of these multi-strat firms have gotten given how big they are in critical market sectors?
>> will ever happen. Of course it's you know, these things are going to recur. It won't be it you know, it won't repeat, but it will rhyme. You know, things will always it's the nature of things to keep going and possibly go to excess and you try to do it. Look, Dodd-Frank for example, said, you know, it was done when it was implemented and then it's been steadily relaxed since then because what you don't want to do is you don't want to turn the country into a Treasury bill. You don't want to You can't if you want to get rid of risk, you're going to get rid of growth. And you don't want to say, "Gosh, we're going to get rid of the crisis of the of every you know, the 80-year crisis." We want to make sure that doesn't happen and you won't necessarily make sure you don't have the 80-year crisis, but you'll make sure you won't have the 79 growth years in between. You have to manifest the intention to regulate it so that you'll never have that crisis and then you have to wink to each other, you know that's not possible, but you you can't relax. You have to impose that discipline cuz if you say you know, if you act too cavalier about it, you're going to guarantee the 80-year crisis going to happen every 8 months. So, you're going to have to make that effort supervise, but you have to know that these things are going to happen again. So, the regulators have to do really two things. Take a lot of pains to make sure to avoid the crisis and then to take a lot of pains to create an infrastructure and a system so that when we have the inevitable kind of thing happening again, we have the mechanisms to sort it out. That latter thing we've kind of hurt. Part of the resentment that came out of the Glass-Steagall was we didn't want the Treasury on its own to have certain powers to intervene in the market and save a Bear Stearns and elect not to do Lehman. And so, the Congress has put a lot of limitations and restrictions. That's kind of bad because they're not they're imagining that they're going to put in an they're going to implement a system that'll make sure there's never another crisis again, but that's not possible. It'll come out of left field, something we're not thinking about. Might even be just a fact finger that makes, you know, some software glitch that means nobody knows the solvency of anybody else and nobody wants to make a payment. And then the only way that people trust anybody to hit send on a payments for the government to say I'll come in and make sure those payments occur. But one way but something like that, you know, will happen. And that's by the way the brilliance of the economy. It's like again, regulated, supervised, worrying about the extremes of it, punishing miscreants who get too close to the line or go over it as a you know, as a specific deterrent to them, but deterrent to anybody else not to go too far, blah blah blah. And and you know, manage it that way. But not to think to have the hubris to think you can manage it and still have a successful economy that could avoid unforeseen risks that spiral out of control.
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>> So, moving on to kind of another echo of 2008. You know, some would argue that when you look at the Fed's balance sheet, the expansion really took off in the wake of 2008 and then really compounded in the wake of COVID as well. Uh there was a really famous op-ed in 2014, The Asset Rich, Income Poor Economy. This was written by Kevin Warsh and Stanley Druckenmiller. Do you agree that that crisis-era tool has compounded inequality?
>> to read that op-ed now.
>> The idea stands, right?
>> What's the question? Sorry.
>> The idea here is that by using these tools to expand the Fed's balance sheet, that we've helped asset owners in terms of people who own stocks rather than the small business owner who is
>> Fed balance You're talking about the Fed balance sheet. The Fed balance sheet expanded to get long rates down. The Fed, you know, has monetary policy that affects short-term rates, but they long-term rates do what they want. You can affect short-term rates and it not necessarily have the same effect on long rates. Some Sometimes the people who buy our bonds think that what the Fed is doing in the short term to lower rates will be inflationary and so our long-term lenders demand higher interest rates, not lower interest rates even as short rates come down. So, you know, and so I know how why the Fed balance sheet the Fed balance sheet was one of the tools that were made to stimulate the economy. By the way, one of the good things cuz I said all the things I'm worried about, one of the good things today if we had a problem is that we probably, you know, famous last words touch wood, it's not necessarily that it would be accompanied by a banking crisis. In the '08 situation we had a recession, but we also had a banking crisis. That was really bad because at the end of the day the Fed doesn't, you know, government doesn't lend money to people, the Fed doesn't lend, it's the banking system that does and if the banks are in distress, money they get gets husbanded and goes to refilling the coffers in their reserves and it doesn't do anything for the economy for a long time as they replenish their own reserves. Today, banks are pretty much flush. There's not a bad situation. So, and the other things that's going on, interest rates are close, you know, three to course 4% and they're not zero, so rates can be taken down and the Fed's balance sheet, while high, is lower than it has been. It's been taken down. That's another thing that could be done. The Fed could also stimulate part of the curve where people actually really do do the borrowing, the longer end, and so the tools for sorting out a problem are much more available today than they were and you know, that they have been for a long time. So, that's the other again, two things you have to worry about. How to avoid the problem and having the instruments and the and the awareness to deal with the problem when it arises. I think the latter we're in good we're in better shape for.
>> reason I asked this too is because we're ready a new Fed chair come to office and take a lot of potentially large changes. You think about the effort to potentially reduce the balance sheet over time, do you think that he could do so without creating a taper tantrum?
>> Well, you're talking about the Fed balance sheet. You're not talking about the balance sheet of the United States.
>> We can talk about that
>> Yeah, no, he'll he'll Yes, he'll you know, by the way, he's new, but he's not that new. He's been writing for a long time. He was on the you know, he was on the on the board before. So, it's not like you know, it's it's not a pig in the poke. He's been around. I think the Fed's you know, balance sheet is just a matter of the Fed's balance sheet is just a matter of you know, tampering with the yield curve. And by the way, right now people are financing the United States. You know, everybody's concerned appropriately with the size of you know, our our debt, national debt, which keeps getting increased by our growing you know, not our contracting, but our growing deficit, which is adding to that and that's creating a lot of anxiety. And that situation I'd best describe by you know, I think it was was Hemingway who said, you know, how does someone go bank you know, how did so-and-so go bankrupt? It was the answer was slowly and then all at once. Right now, we're in the slowly part of it because in fact, slowly not even happening. The you know, the we're getting financed easily. There's no you know, dollar is a reserve currency. You worry about the all at once part where people stop financing it because I think our creditors can legitimately worry that the US can't default on its debt. And how does the US default on its debt? We borrow in dollars and we print dollars. So, how can you default? You're always going to have dollars to pay back. But, what will those dollars be worth? So, the way the US defaults on its debt is it borrows dollars now and after 10 years we return dollars that aren't that don't have the purchasing power that they had at the beginning of the time. And that's how the US that's how a country defaults when it borrows money in its own currency. The safety of that, the creditor the the instrumentality, the institution that our creditors look to to defend the purchasing power of the dollar is the Fed. And so, this kind of assault on the independence of the Fed, that just makes our creditors think that they're going to get defaulted to. And so, therefore, you know, it's like, you know, you're going to lend to your brother-in-law and you wonder if he's ever going to pay you back. You're either not going to lend him or you're going to have a very high interest rate if you do. And so, that's what everybody should be, you know, should be afraid of. And you really want the Fed standing there as a bulwark and no nothing that undermines the idea in the minds of our creditors that the Fed won't protect the purchasing power of the dollar. And
>> surprised at all by how resilient the markets have been in the face of Brent's roughly $115 a barrel heading into now nearly the 10th week of this
>> I am uh Yes. You know, full yes. And it's not just the price of oil. If you have, you know, you just think of all the stuff that's been thrown out. And you have to say, you know, you have to start with accepting the resilience and work backwards from that and say, what is it about the US? Because US has demonstrated its resilience over and over again. You don't have to look at the current environment. You can go in the aftermath of the financial crisis. Another time when the United States was ground zero for the problem. And yet the economy recovered more completely and faster. I would say the Europeans have never recovered from that crisis. Yet at ground zero, we have. And I I you can go back and say, in this country you can easily, you know, it's a different social contract. Here you can fire people if you want to reshape your business. So, if you get, you know, we have uh you know, labor is almost a commodity here. People can bring up their workforce. And today Meta, which is not doing so badly, contracts its workforce by 8%. Europe, you can't, you know, Europe you can't do it. It's a different social contract. And they they would in horror about what companies are allowed to hear. There they would protect the workforce. It sometimes it take years to be able to fire something, let alone the public relations disaster would be if a country's if a company suggested that it was going to go fire workers. As a result, they have more people on payrolls, less unemployment than they otherwise would, but over the long term more unemployment because their their companies are less resilient, more zombie companies, more assets on balance sheets that really should be sold, terminated, recycled into other more productive productive activities like we would do here, and they would look in Europe you'll look at America and say, "Look how they are willing to immiserate their workers. They'll fire these people without any regard for what they're going to do over the years." And here we're focused on the fact that 2 years later we hire those people back into a much better business that has a chance to grow a lot better than the zombie business that that they were laid off from or the opportunity set that they were laid off from.
>> Tell us how you really feel about Europe.
>> No, no, it's a different I'm trying to make it I'm trying to say that people can look at these things in different ways. I live there and they would reflect on the social contract in the US horrified that we would so easily lay off people and not put the burden on companies to keep them on payroll, like train them for jobs that they're not necessarily suited for rather than hire new people who could go to work the next day. They look at the way we do that and are just as legitimate in their, you know, in their in their in their environment, their culture, and they take that point of view. I do point out though that ours probably leads to more polarization, disunity, the kind of show trials you see in the hearings you see in Washington gets reflected in our national politics, but a much higher growth rate. Usually we're the biggest economy. Usually is you you associate size with sloth and inability to react and move quickly where the biggest economy moves the fastest, most resilient, most likely to foster innovation. And theirs is kind of stickier and have probably in the short term in any given moment had less unemployment they otherwise would except over time have less efficient,
>> [music]
>> worse performing businesses and therefore lower growth and lower unemployment over time. What what do you choose?
You've been listening to the forum by the Economic Club of New York, a non-profit 501c3 dedicated to connecting the world's brightest minds for critical non-partisan conversations. Be sure to subscribe now to be alerted to future new episodes. Would you like to be a part of the conversation at the Economic Club of New York? Learn more about membership, the New York City and national fellows programs, and other opportunities for engagement in the club at www.econclubny.org. I'm your host, Becky Quick. Thanks for listening.