Conducted by Jeffrey M. Cunningham, chairman, CEO, and editorial director of Directorship on Tuesday, November 17, 2009 at The Directorship Forum.
Can you share with us the lessons that at least you personally took away from the crisis?
We’ve learned a lot of lessons: do not delegate risk management to rating agencies. That while remotely improbable events will happen rarely, there are improbable things that are guaranteed to happen every day. So you have to prepare yourself for things that have never happened before in the history of the world, like housing prices dropping around the United States. What one has to do is make sure you’re well capitalized. Have all your exposures on your balance sheet. And mark your positions to market so you get the early warning signs. When things start to deteriorate, prices deteriorate, and if you can’t otherwise explain them, you’d better start searching.
Tell us about the first rumblings that led your firm to believe there was more risk in the atmosphere that others missed.
We started to see more volatility and we started to see that the prices of some assets weren’t holding up. To that moment, if you’d asked me, for example, “Would real estate assets at the end of ’06 or the beginning of ’07 go down?” I would have had no idea. I have no idea today where things are going. What I do have an idea about is what risks are we running, and the idea that we should get closer to home. Through this period, I was sure that we were selling things that we would regret selling. Who the heck thought that these things would go down by so much? But the anticipation of that is not what drove us. We were in the world of risk management, not in the world of guessing where things were going.
In what ways has your world changed from being a private to a public company?
We are very mindful of our responsibilities to public shareholders. We embarked on this, because frankly, we were the last partnership probably for longer than was reasonable to do. And so when we became public, it was really by necessity. And to the extent that we possibly could, we carried our partnership culture into the public company. So we have an ownership culture…We mostly pay in shares and we hold essentially the bulk of their shares for their whole career. And when I address my senior employees, I’m really addressing partners, they’re also owners.
I’ll tell you another consequence to the firm. No one at Goldman Sachs gets paid out of his or her own P&L. It matters how your business is doing, it matters how your performance is, but it matters more how the firm as a whole is doing. It makes everybody an agent for everybody else, looks over shoulders, you see something that doesn’t make sense to you. With the self-righteousness born of ownership, people will come up and say, “That doesn’t make sense to me.” In a lot of places, you want to have a good career, you run as fast and as far as you can from the locus of the problem. At Goldman Sachs, you won’t get anywhere if you do that; you have to run to the problem.
What can you tell us about CEO succession that we can share with boards?
Succession, is the hardest thing we have to do at Goldman, I think we have very, very good people, and I think our people tend to be very attractive to others. And it’s not hard to keep the number-one quarterback in the league on your team, but what if the back-up quarter back would be the number-two quarterback in the league. How do you keep that person in your organization and not lose them to another organization where that person would be a number one? And that’s something that we have to do and I spend a lot of time thinking about that, and giving people exposure, and making sure people have a chance to grow in the firm and see succession.
Several of your predecessors went onto prominent government service. Is this part of the culture?
When I first became a partner at Goldman Sachs, a senior partner had a chat with me and said two things, “You’re expected to keep all your shares in the firm.” and then said, “You should organize your career so that, if and when there’s an obituary written for you, and it’s nine paragraphs long, no more than two should be about your career at Goldman Sachs.” And if you look at my predecessors, you’d have to say that not more than two of them, of their nine paragraphs, would be about Goldman Sachs.
What exactly is the future of programs like the TARP and additional regulation?
There is a lot of behavior and practices that has to be fixed and sorted through. There’s no doubt about it and everybody succumbed to it to one extent or another, some more or less, we include ourselves as well. I know I’ve learned a lot from this and we should put those lessons into practice.
You can make anything absolutely safe. But guess what: you’re going to really curtail (growth) and have a very big consequence on growth. We’re going to have to find that right place to be in and understand the tradeoffs. But clearly, we don’t want to be at the extreme level that we were at before.
Fed Chairman Bernanke asked a question whether or not there was a fundamental divide between client business and proprietary trading?
If you separate principal activity, risk-taking, from the advice business, I think the world will be kind of a poorer place. Think of the things, the economic activities, the role that banks, and particularly investment banking plays – it’s to help capital accumulate, to help identify needs, to help allocate that capital. And so you have to step in and intermediate it, often by extending your balance sheet in the interim. If you can’t do that activity, no doubt, business will get done, but it will be a far less nimble system.
How do you keep tabs on the information flow?
We have a pretty flat organization. And I would say I don’t have to invite people into coming in. I think people feel it is their right to come in. They behave that way and they don’t even have to assert that right. They just live that right. I hope they use some judgment, but I never want them to hesitate to tell me, that would have been the stitch in time that would have saved nine. I get a lot of communication.
You’re said to make a 100 calls a day. Is that how you stay in tune with all that’s going on?
I grew up in the middle of a trading room, and it’s just all noise and you can’t break anything out. But if somebody 30 or 40 yards away from you, in just the din of the white noise said something that was wrong or the opposite, the whole room comes to a dead stop and everyone stops to stare.
It’s been reported the day that you were brought down to Washington to accept the TARP funding that you called a special board meeting at the Treasury Department.
Well, that particular day…being down there and being told this is the package and we’d like you to do this; in fact, you have to do it and you’ll be happy to know I raised my hand and I said, “Gee, $10 billion dollars of preferred, put aside the shock of it and the surprise, and this is several weeks after our Buffett deal and our capital raise At the time I said, “This is a $10 billion dollar capital raise. I actually can’t do this by myself. I have to get in touch with my board. And they said, “I understand completely. That’s no problem. You have Conference Room 12C. Take your time and when you’re done, you can leave, whatever time it is. We never close.” So that’s what happened. We went into the conference room and got our board together and at that point, our board was used to impromptu meetings. During this period of time, communication was very important in our firm and our culture. It was a pretty good outcome, all things considered. You didn’t know how difficult things were. But the one thing that was important to us, and frankly, a comfort to me, was being able to share what was going on with my very, very, very involved board who made themselves available for calls everyday. And frankly, at the end of some days, I had nothing special to report, and everyone wanted to hear that I had nothing special to report. And I can tell you, far from being a burden, it was a big help and I felt I was sharing a burden at the time.
What are the skills and expertise you look for in board members?
We look for wise people who are very successful who lived through stressful moments and came out the other side in their own industry. Specific things; we try to make sure that we try to get diversity to reflect the diversity of our businesses and our people. And, frankly, more recently, we try to reflect the areas in the world in which our business is growing. (in terms of the Compensation Committee)– every member of our board is a member of the compensation committee – now, why would that be? We don’t’ have inventory or costs of goods sold. All our firm has is people. The largest expense by far in our firm is people. Everything we produce for our shareholders is their override on the talents of our people.
Are you worried about your image and what are you doing to fix it?
The answer, of course, is we’re very concerned. We’re a confidence business. Our reputation is very important to us, and in some cases, there are things that we had no involvement in and we couldn’t even affect if we wanted to. On the other hand, there are also people who feel that we and the industry participated in things that were clearly wrong and we have reasons to regret and apologize – and, some of this is real and some of this is extrapolated. And so, we’re very concerned, but at the end of the day, we’re an institutional firm. We care what people know about us.
Today, given the flood and the flow, sometimes we’re met with cynicism. But instead of responding in kind, we going to fulfill our commitment and our obligation to the world to be good allocators of capital, to make sure we’re doing the right things, make sure we’re helping the country pull out of recession, grow businesses that help generate jobs, and make the kind of constructive suggestions that people would think Goldman Sachs should be able to come up. Is that enough? I don’t know. I get a lot of opinions. Some people come in and say, “You’re doing too much. Don’t say another word.” And other people say, “We should go on talk shows.” One thing I know for sure: Three years from now, I’ll know exactly what I should have done.