Goldman Sachs Inc. Chief Executive Officer Lloyd C. Blankfein sat down with Bloomberg Television’s John Dawson in Hong Kong earlier today and said emerging markets are in a better state today than in 1998, “There were a lot of things in ’98 that don’t exist now, better reserves, more flexibility in exchange rate, better policy orientation…There were tailwinds for emerging markets over the last several years. The risk returns to roost, not possibly, but inevitably. It has to. It’s part of a cycle.”
Blankfein also said China’s expansion to have huge consequences, “The China growth story is going to be the story of the next 30-40 years…We really need that growth in China to occur… This could very well be the century of China.'”
Selective quotes from the Bloomberg Television interview with Goldman Sachs Group Inc. Chief Executive Officer Lloyd C. Blankfein in Hong Kong on Feb. 11 are below.
“The sophisticated people in the market, the people who care, understand how much they have at stake with the success of China…[Whether China] `grows 2 percent above 7.5 percent over the next couple of years or 2.5 percent below it has huge consequence given it’s the second-largest economy in the world. That swing of percentages applied to the overall GDP of China is more consequential — adds more growth — than the difference in the U.S. growth…On the whole, the China growth story is going to be the story of the next 30, 40 years. There are going to be interruptions…The whole world really depends on China working out well because growth added anywhere in the world — of course it’s better for the country in which the growth is occurring — but that growth leads to creation of wealth in that country, that wealth means goods and services are bought from other countries. It’s added to the prosperity of the world if it occurs anywhere. We really need that growth in China to occur…This could very well be the century of China.”
ON HIRING RELATIVES OF CHINESE ELITES:
“Just looking at it as a general matter, one is not allowed to by law, and by common sense, not allowed to give people, especially government officials, benefits for the purpose of seeking advantage. And that applies to across a whole range of activity. I think it is possible that people weren’t focused on this being a kind of benefit that would be caught up in that, but as an intellectual matter, it is. We have a lot of processes and I think most institutions have a lot of processes and protocols and surveillance of our own activities that are supposed to prevent inappropriate behavior, like giving benefits in exchange for favors. That’s something that we try to surveil against in our own operation…You can’t avoid investigating.”
“[The regulator’s job is] “to surveil the markets, regulate, test and make sure that the institution’s own internal surveillance is working…They will investigate and investigate hard, and investigate firms that haven’t come into contact yet with this issue to make sure there is no issue.”
ON EMERGING MARKETS:
“Emerging markets are higher-growth and they’re riskier. And the risk returns to roost, not possibly, but inevitably. It has to. It’s part of a cycle. A lot of progress was made in emerging markets. I think that progress is for the most part directionally one way but I think it’s going to be like three steps forward, one step back because these gains have to be consolidated. Clearly there were tailwinds for the emerging markets over the last several years. Commodity prices, low interest rates” and people looking for yield.
“So much money poured into looking for yield, that that money was flowing very freely — in some cases maybe freer than it should have — into emerging markets and that’s going to have to consolidate…The basic story is that a lot of places in the world that had been burdens on the international financial system are now going to be contributors to that system [in the long term.]
“There’s going to be volatility along the way…Even if you look at ’98, a cataclysmic event, there were a lot of things in ’98 that don’t exist now. For example, the central banks of those countries were very underwhelming — the reserves of those countries. Also they were trying to preserve exchange rates that were not preservable in the context of valuation shifts. And so once barriers were defended, and then when they gave way, it was like a tsunami coming through a dike.”
“You don’t have that now. There’s better reserves, more flexibility in exchange rates, better policy orientation. Of course the experience of ’98 helps because people’s memories are back there. But if you look at it in context, ’98 wasn’t the end of the world. In other words, when you say `Bad in ’98, har, har,’ it was bad, people needed to be helped, but look at those economies. Ninety-eight was 15 years ago and those countries have been doing very well for the last 10 or 12 years. So it was an interruption but it wasn’t that dramatic an interruption for that long.”
ON RISING INTEREST RATES:
“Any time there’s a sea change in markets people build their portfolios based on a certain set of assumptions. If those assumptions change radically, you can bet that there are going to be losses that emerge from their prior activity. For example, interest rates have been very low for a very long time. Every company in the world that needed funding went out and funded itself for as long as it could. Every one of those debt instruments that created funding for companies was purchased by an asset manager somewhere who put it in. And if the corporations are better off for having borrowed at a low rate, what does it mean for the people who own that debt? It can’t be good for them. It may be good for them prospectively, for pension funds and insurance companies, because they’ll get a higher yield on their future purchases, but certainly on their inventory to this far, those might go under water.”
“What’s being suggested is that an adjustment will have to be taken, some losses will have to be acknowledged, but again, it’s a normalization. Interest rates can’t stay that low and ultimately it’s good for savers and investors in long-term liabilities that rates go up and in the short term it might cause a disruption. A steeper yield curve is generally good for banking businesses. It’s very hard to make money on a spread on interest rates when interest rates are near zero. Actually it probably would be better for the financial industry players to have interest rates higher in general, and to have it be a steeper yield curve.”
ON RETURN ON EQUITY:
“It was hardly aspirational to get to 11 percent but it was hard. It’s not easy, because the markets are, frankly, we’re really close to the trauma that affected everyone. It’s a time of great uncertainty, a lack of confidence, and frankly, very adverse consequences for business people to make wrong decisions. The level of activity is generally low, in fact measurably low relative to normal times, let alone where we should be in a recovery period…Some people think it’ll be like that forever. I happen to think it’s part of a cycle.
“What we are trying to do is try to get for our investors, and work very hard to get an acceptable return that at least in their mind covers our cost of capital and then some, while retaining the optionality to earn a lot, lot more when the opportunity set comes back. [In the absence of that opportunity set] “we’ll keep scaling our business so we get a very good return in whatever opportunity is evident.”
“We have to keep talent. I would say compensation for the industry has gone down a lot due to pressure on people, that’s unavoidable, but for the most part because the firms haven’t been earning money and had to keep more capital. And don’t forget the earnings of an institution have to go to compensate labor for their services but also have to compensate the investors and give them a return on capital and to the extent that you have a higher capital requirement you’re going to have to allocate more of your earnings to paying them. So that’s resulted in lower compensation but you still have to compensate your people. It’s still a market, we still have to compete in the marketplace for our talent and that’s what we do. I’m a shareholder of Goldman Sachs, I talk to my shareholders. We don’t try to overcompensate our people more than what we are required to do to maintain our franchise.”
Video for viewing here.
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