Hyderabad: The global credit crunch and its own shrinking balance sheet have not spoilt The Goldman Sachs Group Inc.’s appetite for India. Indeed, the company’s match making role for the fraud-hit Satyam Computer Services Ltd — along with Avendus Capital — doesn’t seem to be a one-off deal. It would appear that the Wall Street firm has several plans up its sleeve although its chief executive officer and chairman Lloyd Craig Blankfein is unwilling to talk specifics. According to him, Goldman Sachs is trying to “disproportionately” grow its footprint in emerging markets, including India.
Blankfein, 54, still swears by the Bric (Brazil, Russia, India and China, and the term was coined by Goldman Sachs economists) economies and said he does not want to miss the next 92 years of the 21st century because of the 2008 crisis. Where does India figure in Goldman Sach’s scheme of things? “It’s a great place. I drove down on a road from the airport that was not there two years ago, when I was last in Hyderabad. I see a lot of progress both in terms of the economy as well as entrepreneurial culture,” he told Mint in an exclusive interview.
Bullish: Goldman Sachs’ Blankfein says if a PE opportunity arises in India, the firm would take it. It currently has $2 billion invested here. Bharath Sai / Mint
Blankfein was in India on a two-day visit to Mumbai, Bangalore and Hyderabad, meeting the firm’s India team, interacting with Goldman Sachs clients, and speaking to and graduates of the firm’s 10,000 Women philanthropic initiative at the Indian School of Business in Hyderabad
This is Blankfein’s second visit to India since he took over as the head of Goldman Sachs in 2006 and his first interaction with an Indian newspaper since the collapse of Lehman Brothers Holdings Inc changed the investment banking business as the world knew it.
In a free-wheeling interview, Blankfein spoke about the issues before Wall Street and the group’s plan for emerging markets, including India.
You have made $1.8 billion in profit in the first quarter, more than double analysts’ estimates. Is the worst over for Wall Street?
Is the worst over? I am stating the obvious: Nobody knows. But I feel that one thing is off the table -- panic, chaos and fear of a dramatic collapse. The US government took prompt action and the real doom scenario that people were worried about is not there anymore. We still have a lot of work to do but now we are in a conversation about when will the recovery start. Will it be in 2009 or 2010? The fear of a collapse — that statistical possibility — seems much more remote now than what it was six months ago.
When do you think fund flows to the emerging markets will revive?
I think they will come back as the world comes back. Look, some people say that the world has changed forever and the good times will never come back. I think saying that something will never come back is just as arrogant as saying things will never change. It’s as funny as when somebody says things are going great and it will remain that way.
The markets have cycles and they will recover. Now, even in this part of the cycle, the difference in growth rates between the emerging markets and the developed markets is very much there. In good times, when the developed markets were growing at 3%, the emerging markets were growing 7-9%. And, at times when developed markets are not growing at all, the emerging markets are growing at about 7%. The spread is very much there. So, it’s in our interest to stick to our commitment to the emerging markets because we pursue GDP (gross domestic products) growth. Even in a time of lower growth, emerging markets are showing higher growth than developed markets. We are trying to disproportionately grow our footprints in emerging markets and, of course, that includes India.
So, your perception about Bric economies has not changed?
Not, not at all. I think the 21st century is the century of Brics (Brazil, Russia, India & China) like the 20th century was the century of America. People used to say that 20th century was the American century. But there was a tremendous financial cataclysm in the early part of that century. There was panic in 1907; during the 1930s and there were also two world wars. There were crises and the growth was never a straight line.
Our Brics report did not contemplate that there will be growth, growth and growth every year without any interruption. Indeed, we are surprised by the magnitude of events in 2008 and 2009 but we are not surprised that something has happened. We did not know what it was going to be and what direction it would come from but just because there is an economic crisis in 2008, we are not getting out of BRICs and miss out on the next 92 years.
Where does India figure in your scheme of things?
It’s a great place. I drove down on a road from the airport that was not there two years ago, when I was last in Hyderabad. I see a lot of progress both in terms of the economy as well as entrepreneurial culture. We are very enthusiastic about increasing our position here. That of course doesn’t mean a straight line. Financial institutions have contracted their growth plans but that should be no surprise. There is always an expectation that given market conditions, growth will be uneven. But, our overall strategy firmly remains in place.
But haven’t you shelved your plans to float an asset management firm? You are also going slow in the private equity space and shrinking your Indian team...
We have our local asset management business licence but we have not yet started the business. We will do that when market conditions improve. We have bought an NBFC (non banking finance company). Our plan to apply to the banking regulator for the licence of government bond business is still there and we are looking at that opportunity. Meanwhile, we are growing our securities business. For example, this year our investment research team will grow to 100 the number of India stocks they cover.
We have also just done the Satyam (Computer Services Ltd) transaction. The Indian government has handled the Satyam issue extremely well. Yes, there were problems but you get judged by how you handle those problems. We were very proud to have been asked to play a role in finding a solution.
We remain focused on private equity, even though there is a slowdown in our private equity investments because there is a slow down in opportunities. But if an opportunity comes on our way right now in India, we will do it. We have about $2 billion invested in India and I’m sure that will grow over time.
Post crisis, should we see India playing a larger role?
The world has slowed down and India too has slowed down. But India has not slowed down relative to the world. We have not withdrawn from the world and we will not withdraw from India. We are very enthusiastic about India.
As prices and values get reset it probably means that in the short term opportunities will be fewer but at the same time the chances of the flow being greater in future has increased. It will be a more interesting time for investment in India.
What kind of a future financial system is likely to emerge out of the crisis? Even though you have become a commercial bank, nothing else seems to have changed.
We are staying true to the set of businesses that existed before. There is no dramatic addition of business lines and no subtraction. We are a relationship banker; we are a market maker and a liquidity provider; we are a private equity investor and an asset manager.
Aren’t you buying distressed assets aggressively?
In this current down cycle, we are inevitably going to see more focus on acquiring distressed assets than private equity transactions. The activity will now be in favour of providing liquidity for distressed assets.
Do you think that because of the moral hazard involved, big banks should be broken up into smaller pieces so that they don’t become too-big-to-fail?
I am not sure how practical this idea is. On the one hand, scale, size and diversity of activities have been a safety feature for financial institutions. For example, banks that are only consumer lenders in a bad environment are much more likely to face problems than those that have diversified activities. In some cases, being big and diverse may be safer and in some other cases that may be more risky because being big means you are exposed to more businesses.
I think rather than focusing on splitting banks — that’s always a possibility — what we need to do is to have a mechanism that ensure that banks of any size can be wound down in an orderly way. We can have very big banks and if they are in trouble the government could come in, run it for a while and cut the institution into pieces and distribute among other healthy banks. The entire thing should be done in an orderly way so that the depositors do not lose anything and there is no disruption to the system.
Your assets are down from about $1.2 trillion to about $9100 billion and capital up from $32 billion to about $65 billion. Is the de-leveraging over?
We are not consciously focusing on deleveraging. Our leverage ratios were very acceptable even before the recent capital raising. I think it boils down to available opportunities. We are not consciously trying to deleverage.
We would be content to have a much larger balance sheet on the capital that we have. In this recession, there is no flood of opportunities to grow. We are not a consumer lender; we are an investment bank. So our activities require that corporations and institutions are active. Since they are not active, our business is down and our balance sheet is down but we expect it to grow as the market grows.
Should mark-to-market rules be suspended in a crisis?
I have come to the conclusion that mark to market is the best practice though I see some sort of adverse consequences to that. The way I look at it is the discipline of mark to market probably diminishes the possibility of getting into a difficult position in the first place because mark to market makes you see the erosion of value in possession and take losses and put the stress on managing the loss. So you are more likely to take action before things get worse. At the first sign of losses occurring gives you a big incentive to clean up the position before it turns very big losses.
Do you think the (Timothy) Geithner (the US treasury secretary) plan will work? Skeptics have said that the weak link is the price at which the toxic assets will be taken off bank books.
I think it is important for the system that banks that are holding large illiquid assets have opportunities to get those assets off their balance sheets and into the hands of investors that want to hold those assets. That would free up banks’ capital for other things while the investors who want to take those assets will hold them. It’s very hard to match the price expectations of the holders of those assets with those who want to purchase them as investments. So we need the government help to make those price expectations converge. Even if people are finding fault with this, I am sure the balance sheets of the holders of those assets are being cleaned up a bit. Even though the plan has not been a success very quickly, and more things need to be done, there has been progress. And with the passage of time things will get better.
You have been talking about bringing down compensation packages for executives.
I think the compensation should be really correlated to performance. Compensation should encourage good behaviour, good risk management and if you do well on these accounts then you should be paid well. If you do poorly then compensation should be lower than what you are getting now. A large part of the compensation should be in the form of equity and that equity should be held for a long time. The more senior you are the larger part of your compensation should be through equity and the longer you will have to hold it. We follow this practice. As a result of this, our compensation was good in good times but in bad times not only does the compensation come down, but so does the value of equity previously awarded.