The secret to a firm's success is socializing decisions, says Goldman Sachs ex-CEO Lloyd Blankfein

For those well versed with the world of high finance, very few firms come close to matching the mystique of Goldman Sachs. The investment banking giant is not only a Wall Street icon, but also a prolific talent factory for boardrooms and the corridors of power alike. Inevitably, it also draws fervent critics, who view the firm as emblematic of the financial shenanigans that underpin the recurring boom-and-bust cycles of our hyper-capitalist world.

Needless to say, the chief executive’s role at Goldman Sachs is among the most coveted, and scrutinised, in finance. Now imagine occupying the hot seat during the 2008 global financial crisis.

In his newly published memoir, ‘Streetwise: Getting to and Through Goldman Sachs’, Lloyd Blankfein, who led the firm as chairman and CEO from 2006 to 2018, recounts the stormy days of the crisis, and how it emerged with relatively little damage even as its most prestigious peers tumbled like bowling pins.

Blankfein’s life traces the classic rags-to-riches arc. His father was a clerk at the US Postal Service, while his mother was a receptionist at a burglar alarm company. Blankfein grew up in public housing projects in the poorer parts of New York, where his overriding ambition was simply to escape the rough neighbourhoods. What followed was admission at Harvard University, stints at law firms, rejections from Wall Street, and, eventually, a foothold at a commodities trading firm that was later acquired by Goldman Sachs. In this exclusive interview with Mint Lounge, Blankfein reflects on his life, the lessons he has learnt, and why he remains bullish on India. Edited excerpts:

A sense of being an outsider pervades your book. Even after climbing the pinnacle of corporate and social hierarchy, it still seems hard to shake off the feeling of being an underdog, isn’t it?

Blankfein: I don't know that anybody ever shakes off the imprint that you get in the earliest stages of your life. You can adjust yourself, you can lean away from it, but I don't think it ever deserts you. But I think if you burrow deep into people's consciousness, you'll find that strivers have an insecurity and impostor syndrome, which is what makes overachievers in the first place.

Apart from your rags-to-riches journey, you have witnessed many people overcome initial adversity and reach great heights. What are some of the common qualities of people who are able to do this?

One quality, which by the way is the most esteemed in my opinion, is resilience. And real resilience can only be established if you have dealt with adversity and overcome it. Unless you live a very short life, you're going to be dealt all kinds of cards. It's like in a game of poker. It's not like somebody over a lifetime is luckier than another person. It’s just that some people play the cards they are dealt with better than others. Some people recover from adversity, and some people don't.

The second quality is curiosity, a genuine interest in learning more about stuff, talking to people, asking what they do. Curiosity about the world, especially history, because things occur in cycles. As the saying goes, history doesn't repeat, but it rhymes. So when you see that things are terrible today, you know that they will get better.

You write with some pride and fondness about the culture at Goldman Sachs and how it has been the ‘secret sauce’ behind the firm’s success. What is so special about this culture and how can other companies emulate it?

If we had to distill it down, it's running the company like a partnership. It can’t perhaps apply to tens of thousands of staffers, but the senior people believed it was a partnership. There was ownership as opposed to people just being employees. They were grounded in the success of the whole company, and that success translated into important personal success for them.

You remind people that of course you love your family, and that has to be given priority, but let's face it - you spend more time during your day with your job than your family. Your job to some extent is the source of wealth for your family and so it is important to make people behave like owners. This means that you don't just care about the silo that you're in, that is your specific department, but you also care about what is happening in different areas of your enterprise, because your success and your fortune depends on the success of the whole enterprise.

Now the real issue is how do you achieve that culture? You do it when the people at the top of the firm socialize decisions, instead of just making decisions themselves and not including anybody. You socialize the process, you do more explaining to people as to why you're doing things. If people respond negatively, you slow up. You try to explain again, maybe alter your plans if required.

So sometimes you slow things down, you run things a little bit differently, but you get an organization that in the long run is more stable and more resilient because people are invested in the success of the operation.

While the Goldman culture has many admirers, there are also a fair number of critics, not only of the company but of the entire Wall Street. We saw during the 2008 financial crisis a tremendous anger at seeing Wall Street bankers cashing out with multi-million dollar paycheques while their companies were being bailed out from taxpayer funds and the average Joe was losing his home. Looking back almost two decades later, do you think the criticism was justified or do you believe that Wall Street gets unfairly demonised?

Like most things in life, the truth lies somewhere in between. I would say the poor performers in the Wall Street crisis went bankrupt and people lost their jobs on that side. Yes, some individuals did come out badly, but partly because they started in a worse place at the beginning of the crisis.

There's some justification for the resentment because in order to get the system up and running, you needed to get the banks up and running. Governments or central banks don't lend money to people. Banks do. And because the banks were in such poor shape, any additional capital they raised did not go into lending or investing in the economy, it went into shoring up the reserves of the banks. So that's why that recession took so long to work its way through, because it was also a banking crisis.

So the people in the official sector had to end the banking crisis, and to rescue the banks you had to in some cases just deliver extra capital so that they could do their job better. But this was undesirable from a social and political point of view and it created the polarization you see even today…

I can understand banks being important and needing capital. But why were bankers getting multi-million dollar packages while their companies themselves were failing?

The senior people at the banks that were the worst performers did not get multi-million dollar packages. They lost all the wealth they had accumulated in the company since they started working there. Senior people in Lehman Brothers, Bear Sterns and others took no bonuses. Me and other senior people at Goldman Sachs also took nothing.

Yes, bankers did get paid, but they got paid much less than usual because their firms underperformed. I think the world would have been happy if they got paid zero, but if they had gotten zero, they would have left and gone to work somewhere else and these banks wouldn't have survived.

It's almost difficult to explain now and it's not going to be understood or appreciated. But let me tell you, these firms would not exist today and be performing their functions today if you paid zero to all their employees that time.

Speaking of things which are difficult to explain, you testified before the US Senate in 2010 that Goldman Sachs had no moral or legal obligation to inform its clients that the company was betting against some mortgage-backed securities which it was selling to them, because it was not acting in a fiduciary role.

First of all, our positions that year were flat, we had zero P&L. I understand there was a lot of back and forth during the testimony, but I was explaining to them that Goldman Sachs was a market maker. Which means, say somebody wants to sell stock in Hyundai, we buy the stock from them, because that's our role, and if somebody wants to buy it from us, we sell it to them. Once we do a transaction, we scurry to find the other side. We were buying mortgages in those days and selling mortgages in those days and we were transacting back and forth.

Yes, we were selling some securities, but we were also simultaneously buying securities, which is why we managed ourselves to be flat. That's generally what a market maker does. There was a lot of confusion at that time. By the way, a lot of the confusion was intentionally generated because at that point the official sector wanted to put down very severe regulations and there was a certain populist effect at the time.

But at the time, there was not a lot of sympathy and people were obviously not willing to take lessons in how markets and finance work. People were just really upset and again for good reason. If you're in the military and your country loses a war, the military is then going to be quite sheepish and apologetic and will be subject to a lot of criticism. Similarly, if you're a financier and the financial markets do as poorly as they did in 2008, then guess what? You're going to be subject to a lot of criticism and recrimination and you're not going to stand up there and tell the world that they're wrong. You're just going to be quite appropriately sheepish about it. By the way, how old were you in 2008?

I actually started my journalism career in 2008 and almost from the very first day I entered the newsroom, I heard names like Hank Paulson, Lloyd Blankfein, Timothy Geithner as also Bear Sterns, Merril Lynch etc, and how the decisions they took somehow caused a crash back in Mumbai.

I'm sure these names had an impact, but I’m not sure they were responsible for everything that was happening in Mumbai at that time. I think you're quite capable of generating your own crisis from time to time!

You mention in your book that you wanted to model Goldman Sachs on JP Morgan (the man, not the bank). Do you think if JP Morgan was alive in 2008, he would have disclosed to clients that he's shorting some securities which he's selling them?

JP Morgan the man wasn't involved in a market making function. And I think he wouldn't have described his other business activities, other than what was relevant to the people he was dealing with.

You have seen a lot of bubbles up close, not just the 2008 financial crisis but also the dotcom burst, the Asian financial crisis of 1997-98 and others. Do you think the present frenzy around AI is a bubble as well?

When we have the 10th reunion of this video call, we'll look back and I'll tell you whether it was a bubble or not. It doesn't matter what I think, because in a bubble everybody's thinking wrong. So right now, I too am caught up in the same enthusiasm that a lot of people are, which is that AI will have a profound effect on organizations, on how we do things today and it will also allow us to do things that we never contemplated doing. But is every dollar that's being spent on AI going to have a return in the future? Not so much. Could we be overspending now, can some of the spending be reckless? For sure. If we have a lot of developers of large language models and other systems, will some be successful? Yes. Does the world need 10, 20, 50 of them? No.

So there'll be bubble elements to what we're doing today. But how can we go and create something brand new that hasn't happened before and know that every dollar is the perfect amount that needs to be spent? We are working on a lot of dead ends and at some point these will have to be written off, but you won't get a bell ringing at the outset or even two years from now. It might be 10 years from now.

But when it happens, it might be violent in the market and people might wring their hands and say, “If you're so smart, why didn't you see that?" And that's the nature of life. That's why you have to be resilient because you have to absorb those criticisms. Anytime somebody tells me about a bubble they've seen, I say, "Okay, if you're so smart, tell me what happens next." And then they get quiet.

There is one line in the book which stayed with me. You write that “few people are able to be objective and rational about risk”. Can you help us understand how a common investor should think about risk?

As we are having this conversation, there's a war in the Persian Gulf. Would you have given that a high chance of happening even two months ago? Would you have 5 years ago thought that we would be having this conversation about AI? Things come at you from odd places.

I would say the difference between investing and risk management is that when you're engaged in risk management, you don't care what goes up or goes down. Risk management is making sure that contingencies that can reasonably occur are accounted for. So for the common person who's investing, I would say don't do leverage, only invest what you can reasonably afford to lose and don't over respond to short-term phenomena that occur because you read about it in the newspaper.

So I would say one should think about things like have I accounted for my needs? Am I investing more than I should be? Do I have liquidity? Because in some assets that you invest in, you can't get your money back easily for a long time. So you should be managing your risks in terms of your cash needs. How close am I to retirement? My kids are going to school and I'm going to have to pay tuition etc. So keeping your resources, that's the risk management part that everybody should be focused on. Also, don't get overly seduced by good investment opportunities because you just don't know how things are going to work out.

For a large chunk of post-Covid investors, it seems like there is a world-ending event every year or even every few months. Is this the most volatile period you've ever seen?

Do you know why this is the worst crisis there has ever been? Because you're going through this one. The other ones you didn't go through. When you read about a crisis, it can't get worse, it has already happened. But when you're in one, your mind extrapolates, thinking it could get worse from here. This is not the worst crisis. In fact, it's a relatively benign period. Look at the history of the 20th century. I remember the late 1960s. In America we had political assassinations, we had National Guards shooting kids on campuses, we had Soviet tanks going into Czechoslovakia and so on. I would say that was even a more polarized time than this. And that wasn't that long ago.

The present escapade in the Gulf, how would that rank among the conflicts of the 20th century? We had World War, Korean War, Vietnam war, we have had the Russian revolution and others. Look at what your parents or grandparents would have experienced when India became a state and split with Pakistan and all the social upheaval that took place as huge waves of refugees moved from one place to another. I mean that was a more volatile time than today, right?

So are we living through the most volatile time currently? This is our mind playing tricks on us because we have the anxiety of the open-endedness of the current moment and we don't have in mind the fact that the resolved crises never loom as large as current ones.

How do you look at the Indian market and economy currently?

I think it's super. And this has been my view for a long time. Even when China was vastly outperforming India, I thought, in the long run, I would bet on the country with a commercial mercantile culture and one in which there's capitalism and decentralized decision making and I would bet against a centralized Politburo or command and control system where a central authority is making decisions of what gets constructed in the provinces and where decision making is overseen with a political dimension. So I always thought that in the long run India would outperform and India is outperforming. And I still maintain that now. Now in America you see a lot of expat Indian nationals and US nationals of Indian descent going back to India thinking they can make a better living and have a better future in India. So that was not a phenomenon that most people would have anticipated but they see it now. So I give a lot of credit to the way the country has been run in recent times.

Now India still has its population and is bringing up the lowest levels of its society which has burdened the country but it will turn out to be a resource for the country because the population once educated and organized appropriately will perform well. The US has been a beneficiary of all those people educated in the technology universities of India who then felt they couldn't get a job in India and came to the US and now in large part are going back and so they're voting with their feet. I think they're making the right decision in a lot of cases.

One headwind for the Indian markets in the recent past has been the record selloff by foreign investors, who have offloaded shares worth almost $30 billion in less than 2 years. Yet, India remains the fastest growing major economy in the world. What explains this dichotomy?

I'm not as current on that question because I'm not investing there now and I haven't run Goldman Sachs for a while. But I can tell you, based on old information, that one of the problems that some foreign investors have had is that sometimes the playing field seems to be overly tipped to domestic interests. And sometimes foreigners haven't always done as well in courts and it hasn't always felt fair.

That was one issue that I always thought India needed to resolve if they really wanted to attract foreign investment at a much higher rate.

Lastly, looking back at your life now, is there something you wish you had done differently?

I talk in the book that I had cancer that I had to work my way through and there were times of darkness where I had to contemplate that this might not work out. At that time, I didn't run off to a foreign place, I didn't buy a Ferrari and drive it around. I just wanted to do the same things I was doing every day.

So I don't have any deep regrets. I guess the flip side of resilience, taking problems in your stride and looking forward is not wringing your hands and expressing regrets about things you can't affect, because they're in the past. But overall, did you like the book?

Oh absolutely. Though I also thought there will be a lot of self-introspection about the entire 2008 crisis and how Wall Street probably had a fair share in causing that crisis.

I'm sorry to disappoint you, but in the interest of honesty and accuracy, I have to reluctantly say that if all the big banks had run their firm the way Goldman Sachs ran itself, we might not have had the banking crisis that we had. I know it's terrible. I hear myself saying it, but I wish everybody had acted the way we did in managing our risks instead of accumulating poor securities on their balance sheet and blowing up.

But okay, I think I'll put out a second volume of the book. We'll call it My Regrets. But it'll only be four or five pages long!