At the end of the day, we’re an institutional firm. We care what people know about us. Sometimes we’re met with cynicism. But instead of responding in kind, we’re 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 should come up with.
Can you share with us the lessons that at least you took from the crisis?
Lloyd: 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 what led you to believe there was risk that others missed.
We started to see more volatility and we started to see 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 clown?” I would have had no idea. I have no idea today. 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.
How did Goldman Sachs change when you chose to shift from a partnership 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 be came public, it was really by necessity. And to the extent that we possibly could, we carried our partner ship culture into the public company so we have an ownership culture…We mostly pay in shares and we hold essentially the bulk of our 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, but it matters more how the firm as a whole is doing. It makes everybody an agent for everybody else. 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, if 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 you have to run to the problem.
What can you tell us about CEO succession planning at Goldman?
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 quarterback 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 number one? And that’s something I spend a lot of time thinking about, and giving people exposure, and making sure people have a chance to grow in the firm.
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, “When your epitaph is written, 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.
Fed Chairman Ben Bernanke asked whether 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 mediate 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 far less nimble.
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 into my office. I think people feel it is their right. They behave that way and they don’t even have to assert that right. I hope they use some judgment, but I never want them to hesitate to tell me something that would have been the stitch in time.
You’re said to make a 100 phone calls a day. Is that how you stay in tune?
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 and said something that was wrong or the opposite, the whole room comes to a dead stop and everyone stops to stare. It’s the same way with my phone calls.
What are the skills and expertise you look for in board members?
We look for wise people who are very successful and who have lived through stressful moments and came out the other side in their own industry. Specific things: we try to make sure that we get diversity so that it reflects the diversity of our businesses and our people. And, frankly, we try to reflect the areas in the world in which our business is growing. Compensation is the story of the moment and every member of our board is on the comp committee. Why? 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 an override on the talents of our people.
What makes the lead director effective?
The lead director is very important, and my business relationship with John Bryan is spectacular. Remember the improbable circumstances in which I got transitioned into the CEO roll. It took about a minute and a half when my predecessor [Hank Paulson] got called from the White House and nominated to be secretary of Treasury and from that minute on he was recused from dealing with Goldman Sachs. So, sometimes you have long-term succession plans, but what happens if someone gets hit by a bus? This was the bloodless version of getting hit by the bus.
Are you worried about your company’s image?
The answer, of course, is yes. 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 participates in things that are clearly wrong, 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. Sometimes we’re met with cynicism. But instead of responding in kind, we’re 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 should come up with. 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.