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00:00Lloyd Blankfein lived through several geopolitical upheavals during his time at Goldman Sachs,
00:04including as its chair and CEO. He's written of his experiences in his new book,
00:10Streetwise, Getting to and Through Goldman Sachs. And we welcome him now to Wall Street Week.
00:16Congratulations on your new book, Just Out. It is a book at least largely about risk management.
00:22You have been a risk manager. Goldman Sachs has been risk management. We now have new risk
00:28in the war in Iran. If you were managing for that risk, how would you manage it?
00:34Well, actually, the war itself is usually those things tend to come and they tend to go, look,
00:42it could be it could fall off the rails. It could close the Strait of Hormuz for a long time.
00:46I don't
00:46think that's going to happen. I don't think they have the capacity. The Iranians have the capacity
00:49to do that. But a lot of bad things happen. My base case is that it should it will reflect
00:56the
00:56markets for a while, but not forever and maybe not even that long a while. The price of oil will
01:03clearly be affected. The oil is part of the supply chain, knock on effects for other things. But I
01:09think we'll revert back to all the anxieties that we had even before the war started. And they were,
01:14you know, it was an anxious market. And there were some fragility in the market even before that.
01:19But I'm not. The war is, you know, the war is, you know, is very, very important. It just may
01:28not
01:28be that that enduring a problem for the markets. So in Streetwise, your book, you don't just emphasize
01:35the importance of risk management. You take us sort of behind the scenes of how you manage risk,
01:38how Goldman Sachs managed risk. You know, the book, look, the book is a lot about it's a memoir.
01:43So I do start in my childhood in public housing, in the projects and going through, you know,
01:52the culture shock of going from there to the Ivy League and, you know, getting a bit of a torture
01:57from my roommates at the time and those things. It ultimately is, you know, my appreciation,
02:04my affection for what I think is a fantastic institution, namely Goldman Sachs, which I know
02:09has a mystique in the world. Some people might say famous, some might say notorious, but always,
02:14always involved in anything that that's happening in the world and especially involved in anything
02:19that's going wrong at any time in the world where people tend to focus on it. And in the course
02:24of
02:24in the course of that, obviously, go through the, you know, once every four or five years crisis of
02:31the century. And so focus on risk and, you know, the moderation of risk, you know, becomes very
02:37important. And in that, you know, talk about, you know, we're big, Goldman Sachs is known to be big
02:43risk takers. Of course we were, but also the fact of the matter is we were also very good risk
02:50managers,
02:50which is a whole different exercise than going out and taking risk for funding profit. There was also
02:56risk management whereby we tried to insulate ourselves as best as possible for the things
03:01that could go, the unexpected things that would go wrong. If you were managing the risk right now,
03:05as you say, you want to say, what's the best thing that might come out of this? What's the
03:08worst thing? As you think about it, what do those things look like? We could have a reformed democracy
03:13in Iran and being our ally, I guess, on an upside, but there's also a downside.
03:17Look, from a geopolitical point of view, very, very important. From a market point of view,
03:21it might be less, you know, it might be, it might be less important. Don't forget, we had a bit
03:26of a
03:27fragile market going into this. So, you know, there was a lot of anxiety about credit in the market.
03:31It is always anxious about something, but it was anxious about credit. Having said that,
03:36I, you know, we also don't want to miss opportunities. And my base case, which I'm
03:41willing to sacrifice our best case on a dime. And, you know, when things come up, my best case is
03:46generally positive. You know, the GDB is going well, we're filled with anxiety that it might be
03:51getting soft because unemployment ticked up a bit. But at the same time, growth is going well,
03:56could go badly. Inflation is going in the right direction, although we got a, you know,
04:02slightly bad reaction, but it's, you know, pretty close to where we want to be.
04:06I'm willing to change my mind in response to other things. And into this market, we know we're going
04:13to lower rates. We know a lot of fiscal stimulus is coming from the government. Hyperscalers are
04:18spending, you know, 600, you know, the top ones are sending by themselves $650 billion. That's another
04:23kind of stimulus coming into the market. And so into a market that's not doing so, you know,
04:29an economy that's not doing so badly, we're adding stimulus. So my base case is that things are going
04:33well. Now, before I get the poison letters and everything, of course, it's going well for a lot
04:40of people and not going well for others. You know, an economic system has to do two important things.
04:45It has to generate wealth, which our system is doing very, very well now. And it also has to
04:50allocate wealth, distribute it according to the values of society. And it's doing less well in
04:56that regard. So the current market is inflating, bringing up asset prices. And if you're lucky
05:02enough to have assets, you're getting richer. And if you're unlucky enough and you don't have assets,
05:07you're not getting richer. And the gap between the rich and the not rich is widening out. And so,
05:13you know, I have to acknowledge that. And, you know, we're seeing the evidence of that in terms of
05:17the polarization of the country, which is unfortunate, but kind of predictable from the
05:21way things are going in the country. And the political sector is going to have to deal with
05:25that. It looks like the economy overall is doing pretty well, as you say. The economy as a whole,
05:30the macro economy is doing very, very well in creating the wealth. But you have said we are
05:35probably late cycle. And that raises some questions about discipline. Do you manage risk
05:39differently when you think you're late in the cycle? Well, it's a funny concept of late in the cycle.
05:45I'm not sure how long the cycle has to go, but I can tell you every day we get closer
05:49to the end
05:50of it. That goes ahead. That's a joke goes without saying that we get every day we get closer to
05:54the
05:54end of it. But just think about this. We haven't had a reckoning in a long time. What do I
06:00mean?
06:01You know, what's a reckoning? We haven't had some disaster that forced people to sell things that
06:05they didn't want to sell, you know, accumulate cash capital, find out and have to discover what the
06:10value of the inventories that they're accumulating in their balance sheet. We haven't had that in a
06:16while. And the longer it takes, you know, really not since the global financial crisis. That was a long
06:21time. 2008 was a long time ago. Usually we had these things every four or five years. I could tick
06:26through them. But we had them and we haven't had it for a long time. And, you know, because we
06:30haven't, the sheer fact that we haven't had it for a long time means there's undoubtedly a lack of
06:37discipline. Interest rates were very low for a long time. So investments were made.
06:42You know, anytime the commodity is free, you're not husbanding it and you're not disciplined about it.
06:47And you know that there must be things out there that nobody's been forced to sell. Nobody's been
06:54forced to price discover. And at some point, the longer the reckoning takes, the worse it's going to
06:59be. Again, my base case is wind at our back. But eventually it will come to an end and people
07:06will
07:06have to take stock of what the assets that they've been accumulating and had the notion of what the
07:13value was. Those things are going to have to pour into the market probably at the least convenient
07:18time. One of the things you observed over the course of your career and you talk about in the book
07:23is the rise and at least retrenchment of globalization. You talk about the fact Thomas
07:28Freeman wrote The World is Flat book, which looks a little antiquated right now.
07:32It didn't age well. Yeah, exactly. And you saw China. Everybody thought China was going
07:36to surpass the United States. It's not working out. So what does that mean? Sort of a multipolar
07:42world. The gloss from this is that you can't take anything for granted. I mean, you shouldn't
07:46take anything for granted. Strange things happen. And by the way, when sentiment shifts, it affects
07:51your memory. You forgot what you used to think. But when I was starting out, you know, I went
07:57to Wall Street in the in the kind of mid 80s, early to mid 80s. And the idea of going
08:03to China
08:05or Russia, the middle of the Cold War was crazy. Then, of course, it opened up. And the idea that
08:12we'd ever be hostile to them, that they wouldn't be joining, you know, the Western oriented capitalistic
08:18market, you know, over time, that was crazy. Now, it's not crazy. I've seen these things
08:23shift. And with each shift, you kind of forget what you used to think. Because again, when
08:28sentiment shifts, it's sort of erases and reprograms your memory. You think you always
08:32thought this. It could yet change. It will yet change again. But it's, you know, it's very
08:38hard. People invested so much in their connections in Russia and in China. And, you know, something
08:45that turns out not to have been a very profitable enterprise. But I believe that we'll come back
08:52again. What does that mean for investors in terms of the risk that they take? Is a globalized
08:57world riskier or less risky than a multipolar world? Look, we found out that the world wasn't
09:03as integrated and global as we thought. We had a lot of data points. I'll give you a data
09:08point. The world was integrating. Central banks were cooperating. You know, we used to talk
09:15about coordinated intervention and coordinated rate decisions. In the global financial crisis,
09:22all of a sudden, when governments had to fund their banking industry in some way or had to
09:28deal with it, all of a sudden, it stopped being so global. It really mattered where an institution
09:35had its assets. Because the country in which those assets were located, and we're talking about assets
09:40that exist as electrons in some case. But where was it going? And people kept on. It wasn't so global
09:47anymore. And it was a little bit of beggar thy neighbor. COVID was another example. We're a big
09:52global market. But guess what? It really mattered who had the vaccines first and where they were
09:57manufactured. And people took care of their own populations. And then, if anything was left over,
10:02they went to their friends. And so, the world turns out not to have been as integrated, as global as
10:08we
10:08thought. And so, you know, now we're just, you know, kind of acknowledging in that. And of course, the rise
10:14of, you know, America first and other, you know, and other kind of nodes in the international, you know,
10:22organization. We're into that period where it turns out supply chains matter. Who has the rare earths
10:28matter? And you sort of, for a matter of national security, better make sure you're not relying on other
10:34countries and other parts of the world for things that are existential to your well-being.
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