Goldman Sachs CEO Lloyd Blankfein Weighs in on Market Volatility, Crypto, and Trump
February 14, 2018
Kristen Scholer sat down with Lloyd Blankfein, the CEO and Chairman of Goldman Sachs, to discuss the economy, his relationship with President Trump, and where the company stands on cryptocurrencies.
Blankfein most recently saw President Trump in Davos and admitted that, even though he wasn't a supporter during the election, he agrees with Trump's message that promoting America's interests doesn't mean withdrawing from the world. Blankfein knows it may not be a popular opinion, but he says President Trump is good for small businesses and America's economy.
Plus, Blankfein comments on Gary Cohn's place in The White House. He believes that Cohn, who previously served as Goldman's Chief Operating Officer, has accomplished everything he set out to do under the Trump administration.
And don't expect Goldman to jump into the crypto craze anytime soon. Blankfein shot down rumors that the company will open a trading desk, saying that it will clear futures contracts for customers. He says there's a lot of "hype" over the digital assets and that he doesn't "love" the concept.
Goldman is also focused more on digital distribution and turning around revenue numbers for its trading division. Blankfein discusses the company's "Marcus" division, which has issued $2 billion in consumer loans in the year after its launch in October 2016.
Kristen Scholer: What is your pulse on the economy right now, and what it means for small businesses here?
Lloyd Blankein: Well, I think right now, and this is a consensus point of view, the economy is going pretty well. It seems to be a good runway ahead of it. No interest rates are fairly low, even though they've gone up a bit, they're fairly low for where growth is. Growth seems to be going well, commodity prices are low, full employment, uh, and on top of this, a little bit more stimulus has been added to the economy, a tax cut of about a trillion and a half dollars over a period of time, a budget that's gonna have increased spending. I would say, the economy which was already going pretty well is getting a boost.
Kristen Scholer: Certainly is the general consensus. However, we did see that recent bout of volatility that just ended last week. A five-day stretch where the Dow lost some 8 percent. And so do you think that the volatility is behind us, or should we expect more of that this year.
Lloyd Blankein: No, I think the volatility is not behind us. I think prices have to adjust. There's a number of, there are number of changes that are occurring. Rates are starting to rise, you can see, I mentioned energy before, the price of oil is starting to get a little bit high. The long term interest rate is going up. We're going through a bit of a transition now and prices have to adjust. The relationships of things are gonna have to adjust for each other. And also, there's a bit of it too, in some cases maybe too much of a good thing. Because if we're gonna have, had this much growth, and we're adding stimulus to, everyone starting to worry, is it gonna get a little overheated? And if it starts to get a little overheated, maybe ra- interest rates get raised more quickly. And that has the potential of being jarring and upset the economy.
Kristen Scholer: Recently, you mentioned that more capital is going to be deployed to the commodities, currencies, and fixed income trading unit at your particular firm. Given all of these factors that we should be expecting here, in the new year, what are the resources being put toward that unit?
Lloyd Blankein: Well we have to a little bit try to guess the future a little bit, because we have to, just like any business has to figure out, if you're an auto manufacturer, people are going to a buy SUV or convertibles, we also have to figure out what our inventory is going to be, what are people going to want to do. Our best and we're not locked into these positions, but we look at the changes that are happening, and the adjustments that have to be made, we think more capital applied to trading. And for us, trading means, to be able to take the other side of what you want to do, to be able to hedge your risk, to be able to sell you things that may or not be available anywhere else in the market, to take risk on your behalf, we think that that that more is needed, and we think we'll get a good return for doing that, and we think our clients require it.
Kristen Scholer: And more meaning how much?
Lloyd Blankein: More we can adjust this, we can adjust this day by day.
Kristen Scholer: As it goes.
Lloyd Blankein: But earlier I was asked, would you have more? And by the way, the significance of that statement was, that over the last several years, we've been reducing the amount of capital we've put into our market making activity, because activity was low, it's just like, you know, if this were, if this, if we were an insurance company, and there was no hurricanes for years, people would stop buying insurance and those that bought insurance wouldn't pay very much, but the year after Katrina, everybody would want to buy insurance, and they pay a lot for it, because the sentiment would have shifted. Same thing in the market, the markets haven't moved for a long time, so nobody was asking us to sell them insurance of a kind, hedges, and now that there's been a little bit of a turmoil, people are getting a little agitated and want more from us, and so we have to have capital to provide it.
Kristen Scholer: Some more of a flexible approach.
Lloyd Blankein: Yes.
Kristen Scholer: Of course we here in Washington D.C. President Trump has been in office now for more than a year.
Lloyd Blankein: I've heard that.
Kristen Scholer: Have you been in communication with the president. Have you had any conversations with him Since he joined the White House?
Lloyd Blankein: I've engaged a couple of times, most recently, I I met the uh, I met the president and his team on their trade mission to China. So we were in Beijing. We were one of the businesses that signed an agreement with China, in our case, to co-invest with China. They put up some money to a half billion dollars, we're going to put up two and a half billion dollars, to invest in U.S. businesses that do business in China. So that was my most recent engagement with the president. Well, after that I guess I saw him at Davos too.
Kristen Scholer: Right. Right.
Lloyd Blankein: So, yeah, so a few times I've engaged.
Kristen Scholer: And tweeting of course in and around the time of Davos that you were happy that he showed up and he went to Davos, and his message there. Do you think it's a case that President Trump has been significantly better for business? For American business.
Lloyd Blankein: Yes. And I'm saying, there's people on every side of this, and I find myself at times on both sides of this, because you like some things, you don't like other things. But from a business point of view, which I think is very important, because I think the key to the success of America, has to be the strength of the economy. I think he's been very good, he's repealed, or, not yet, but he certainly has conditioned us to expect some relief from redundant, and cumulative regulation, he cut back taxes which frees some money to be done, and I think he's provided general positive for business. And I think, you know, by the way, business pe- businesses don't vote, and businesses aren't real, businesses are people. They're employees, they're investors, they're pension funds who invest in them, so at the end of the day, you know, I know people won't find this fascinating or believe it, but what's good for business, really is good for the country.
Kristen Scholer: Sure. Now we- we've watched the headlines everyday of course, Michael Wolff wrote a whole book about the chaos that is in the West Wing, of course, Gary Cohn was second in command at Goldman Sachs for years and worked with you. Do you think that he is a stabilizing force there in the West Wing?
Lloyd Blankein: Oh, I can't tell you what goes on in the West Wing, I could tell you that Gary was terrific at Goldman Sachs, and he's been successful in every facet of his life. And as an observer, I would say he's accomplished in the, in the administration, what I know he has been charged with and what he set out to do. So, I can't tell you what the dynamic is within the White House, or the West Wing, but I can tell you from where I'm sitting, it looks like he's doing a good job.
Kristen Scholer: Let's talk more about Goldman's business now as well, of course that story coming out in December that Goldman Sachs is looking to open a cryptocurrency trading desk by the time we get to June. Is that on the jockeying?
Lloyd Blankein: Well, I read that when you did. [LAUGHTER] What we did say, not that the media is ever wrong, but we did say, was that, you know, they were coming out with futures, and we are clear of our clients futures business, that's exchange traded, so futures on currencies. And, we agree that for certain clients we'd clear those futures. But to be a trader, in cryptocurrencies means that we would buy and sell, and hold their explicit positions in cryptocurrencies, that we're not doing, we're engaged in the futures market. Could we at some point do it? I wouldn't rule it out, but we- I don't have a pra- we don't have a present intention of doing it. And I would say, I'm doubtful, but I wouldn't, I wouldn't dismiss anything out of hand.
Kristen Scholer: For now. Do you think the hype around Bitcoin is justified?
Lloyd Blankein: Again, I think a lot of it is hype, but I realize that I'm stuck in a kind of a worldview. There's a lot of things in the world that worked out pretty well that I didn't know. I remember when cell phones came out, and I'm thinking to myself, who the hell would lug around this thing? You could pull up, there's a million phone booths everywhere, and if I'm in my car, I'll just pull up to one, why would I carry.
Kristen Scholer: The flip phone [OVERLAPPING] .
Lloyd Blankein: A cell phone. Guess what? They seem to have worked out. So a lot of things have worked out that I didn't love, I don't love the cryptocurrency concept, I don't get how something that moves 30 percent in a day, or 20 percent, can be a store of value. Something that it's very hard to clear or retain, that gets stolen a lot, I don't see how that could be a medium of exchange, there's certain things I don't get, there are aspects of it which I think are quite elegant, which I do get. But there's a lot of things under heaven that, uh, that I don't get immediately that seem to work out all right. I- I've learned in my life in the financial markets, sponsoring companies and investing in things to keep an open mind for as long as you can.
Kristen Scholer: Okay, let's talk more broadly now about the trading business, as well of course, we saw the results come out in January, Goldman Sachs actually did have a quarterly loss for the first time in six years, trading was down. Revenue.
Lloyd Blankein: A quarterly loss in?
Kristen Scholer: In in profit, for the, for the company. Of course with the massive [OVERLAPPING] one time charge with the.
Lloyd Blankein: Oh I'm sorry, yes.
Kristen Scholer: With the ta-.
Lloyd Blankein: Because there was a, right, generally people look through that. We had, that's actually a good thing, not a bad thing. But because you have, you know, because we had to repatriate overseas earnings.
Kristen Scholer: Yes.
Lloyd Blankein: At one time we got charged with a big tax. And also, we have deferred tax assets, so in other words, if we know we could take deductions in the future, that's a valuable thing for Goldman, to be able to duck future income. If taxes are going to go down, the value of the tax deduction goes down, and we have to write that off. But the fact that taxes are lower, is.
Kristen Scholer: Long term.
Lloyd Blankein: Is long term, very good, and we're very happy about it. But in the near term, you have to take a one time write off and that's what happened.
Kristen Scholer: Happened to other banks?
Lloyd Blankein: I don't know whole our income went up, away from that.
Kristen Scholer: Happened other banks as well with that charge.
Lloyd Blankein: Yes, of course.
Kristen Scholer: Trading though, trading though revenue we did see trading revenue fall, 34 percent, and so in the coming months, in the year, what are some of the changes, we talked about it a little bit earlier, but are there, significant, concrete changes that we should expect to get the business back on track?
Lloyd Blankein: Well, there are somethings that we look at. Look, there are two things, one, that always get, that get asked for us in trading. What is our commitment to the business? Are we committing too many resources? I didn't think so then, and I don't think so now in light of the rise in volatility that you've asked me about. And we have reduced, so we could always adjust. You know, this isn't a 10-year commitment that we promise to have these many people, and this much capital, we could adjust this all the time. A separate question apart from our commitment is, given our commitment, in that context, did we do a good job or not? Did we zig, when other people zagged? Did we get it wrong? And I'd say in the last quarter of last year, we didn't do great, we should have done better with the opportunity we had, and with the commitment we had, but it's a trading, it's a risky business, and over a cycle, we've done very well, and people have generally recognized we've done well over a cycle. But in any given year, sometimes we underperform, often we outperform.
Kristen Scholer: Consumer banking, another strong and growing unit of Goldman Sachs. Of course we know markets by Goldman Sachs churning out two billion dollars in fresh loans, just last year. And so, where does that unit stand right now?
Lloyd Blankein: Well, we- this was a new concept for us, nobody thinks of Goldman Sachs, in the consumer business, but the world has changed, it's becoming more digit- look at yourselves, and the, and the, and the, and what you accomplish with Cheddar. It's changed, and I will tell you, the way digital distribution happens. Look, if you're lending money to 500 people, it's a very labor intensive consumer orie- you know, people know your client kind of business. If you're lending money to five million people, it's a little bit more mathy, it's a little bit more algorithmic, a little bit more about digital delivery. And, in this current, in this new world that we've entered into, to be a good consumer lender, it's advantageous not to have, legacy assets, like branches, to have lower costs, and to be able to engage with your client and offer them flexible products, digitally, and then to manage that, with skills that everybody recognizes we have, which is good algorithmic trading, good risk management, and actually, quite an expertise in engineering, because we've always had good platforms and systems. And so we've moved into this digital space, thinking and, and it's been confirmed to us, that some of the things that we didn't have that would have made us timid in an earlier age, like not a long culture or history with direct consumer dealing, are not impediments. Some of the things that we've been good at for generations, risk management again, um, the mathy parts of what we do, engineering are really very, very important, and we're we're using that stuff to go out and have various, various consumer businesses. We already have deposit taking, where we give a very high interest rate, because we don't have to pay for branches, and a consumer business, where we're certainly charging people a lot less than what they're paying on their credit card balances. So it's good for the consumer, good for Goldman Sachs, and probably good for the, good for the country.
Kristen Scholer: And so it sounds like an increasing focal point for the company.
Lloyd Blankein: It is. And I started out, I thought it was a little bit of a niche, and as things move forward, and as we get confirm that it's appreciated by the custom- the new customers and the new people were getting to know, I think this is really going to move the needle for Goldman Sachs.
Kristen Scholer: All right. Well, Lloyd Blankfein, so happy to have you with us. Thank you again for hosting us as well.
Lloyd Blankein: Kristen, thank you for co- thank you for being here.