Goldman Sachs CEO Lloyd Blankfein addressed a meeting of the Council of Institutional Investors on Tuesday, where he called for regulatory reform, including more scrutiny of private equity and hedge funds, and changes to pay systems for financial services firms.
Striking a conciliatory tone, Blankfein acknowledged recent mistakes by Wall Street executives and the public anger that has followed. “To begin with an obvious point, much of the past year has been deeply humbling for my industry,” he said. “We held ourselves up as the experts, and the loss of public confidence from failing to live up to the expectations that we created will take years to rebuild. Worse, decisions on compensation and other actions taken and not taken, particularly at banks that rapidly lost a lot of shareholder value, look self-serving and greedy in hindsight.”
For the most part, though, Blankfein focused on the lessons learned and the need for cautious reform. “Dynamic regulation is needed in capital, credit, and underwriting standards and that there should be some degree of regulation of hedge funds and private equity,” he said
But Blankfein was clear that regulators should proceed with caution and raised the idea that comprehensive regulation could go too far and lead to inflexible and inefficient markets. “As the saying goes, you don’t go shopping when you’re starving,” said Blankfein. He said here is a tendency to put too much emphasis on what has just happened and that there is a danger of policy makers passing rigid regulation for the 100-year storm, he said.
Protesters twice disrupted his address. Shortly after he began speaking, two women walked up on the stage and unfurled a banner behind Blankfein that said: “We want our $$$$ back.” Blankfein shook one of their hands and then asked them to sit down and promised to address the issue during his speech. Later, during the question and answer period one of the women again walked up on stage and disrupted the event by shouting: “Why should taxpayers bail out the failure of Wall Street,” and chanting, “we want our money back.” Security officials physically removed the women from the room.
Blankfein seemed largely unfazed by the demonstration and while he said he didn’t think the tactics where productive, he did acknowledge public anger directed at Wall Street executives. “I want to address it. It’s real and visceral, and felt by most people in the country, maybe everybody in the country and I don’t exclude myself from that.”
The Goldman CEO again addressed the idea that the firm would return the $10 billion in TARP money that it received. “The minute that an institution is allowed to return the money and is capable of returning the money while still carrying out its obligations and its role in the capital markets effectively, then it should do it that minute,” he said. “It’s not a choice, it’s an obligation to the taxpayers.”
The focus of Blankfein’s discussion, however, was on compensation, regulation, and risk management. He suggested a number of changes to Wall Street compensation plans, including only junior employees being paid with high levels of cash and that the percentage of pay awarded as company stock increase with a worker’s total compensation. He said some pay should be held as deferred stock until after retirement and that he favored clawbacks to retrieve ill-gotten gains.
On the topic of risk management, Blankfein said, “Complexity got the better of us. The industry let the growth in new instruments outstrip the operational capacity to manage them. As a result, operational risk increased dramatically and this had a direct effect on the overall stability of the financial system.”
Blankfein’s list of remedies to fix the problems on Wall Street, included careful regulation, changes to compensation practices, and improved risk oversight. “We have to safeguard the value of risk capital, which is at the heart of market capitalism, while enhancing investor confidence through meaningful transparency, effective oversight and strong governance. But, there should be no doubt: Markets simply cannot thrive without confidence.”