Goldman Sachs is one of the few investment banks that stood out at the time of the financial crisis of 2008. Much of this resilience can be attributed to Lloyd Blankfein, who was heading the bank at that time. Streetwise: Getting to and through Goldman Sachs is his story. Blankfein takes readers through the important stages of his life with a distinct sense of humour. Like when he was asked by CNBC of being worried about angry mobs storming his house, his reply was that he had a doormat.

His life story is not very different from other people who made it big from rather modest beginnings. Starting from scratch, so to say, he managed a seat in Harvard from where he went on to work with J Aron, which was a commodity trading firm. His transition to Goldman Sachs happened when J Aron was acquired by GS. Blankfein describes the extremely illuminating hierarchy of prestige on Wall Street, which Goldman Sachs also followed.

Investment bankers sit highest in the food chain, followed by traders. Within traders, equity traders are higher placed than those dealing in fixed income. Within fixed income, longer duration bond traders were higher in pecking order than short-term traders dealing with the money market. But all these were more important than currency or commodity traders. Also, there was a prestige gap between traders who took risks and sales people who brought in business. It would be interesting to see if such hierarchies exist in broking houses and banks in the Indian context.

Wall Street Food Chain

Blankfein’s biggest challenge at Goldman Sachs once at the top was handling the financial crisis, which he describes as a ‘double header’. The media and regulators were worried about the existential crisis of all investment banks, as it was the order of the day for them to come tumbling down with the meltdown. This was something that was managed by the firm due to some smart thinking even before the crisis. But, more importantly, he highlights how the reputation issue was tougher. While there was admiration and awe to begin with when the firm went through the period successfully, some were aghast at the ‘how’ of it, which gave way to wild speculation.

The clue, according to him, was the conscious strategy of risk management at the time of the crisis as the company had been evaluating the mortgage values of their portfolio even before the problem came up. This was important because they were able to smell the danger before it set in. By January 2007 they were quite neutral in terms of positions on these exposures. Ironically, the author points out, that even the regulators were not aware how the defaults on subprime mortgages would have spillover effects on the AAA-rated securities. This is a lesson for any financial institution, which should be able to not just smell a crisis but be prepared for it with the risk practices in place.

Blankfein’s contribution was that he was a kind of contrarian in the way in which he operated. While GS was known to be a firm which took bold bets, his approach, given his background, was to be a worrier and not a warrior. By focusing continuously on the tail risks, he insisted on hedging all the way, which was something that helped the firm in tough times. He believed in the line: given enough time, everything will happen! Hence the department tried to account for all contingencies. This led to GS taking insurance from AIG and then further taking CDS insurance against risk of default on the part of AIG.

At a more global level, the author talks of the US economy and capitalist culture which is set around risk, resilience and recovery, helping it rebound fast successfully. This is something that is encouraged by the superstructure which actually helps to bring out the animal spirits in the entrepreneurial class. If systems are open and encourage enterprise, one can come out of a crisis and do very well.

ESG Critique

Steve Jobs did what he did after he was fired from Apple (which he rejoined); and the same holds for Jamie Dimon who had a forced exit from Citi Bank. He attributes resilience more to having better understanding of risk which is often pushed back by human nature and emotion. Interestingly, Blankfein makes a comparison between centralised decision making, as seen in China, and those based on myriads of decisions in a market economy like USA. He believes that the latter is better and makes better decisions.

China’s way of doing business in a centralised manner is not efficient and will show fissures in the longer run. There would be a large number of supporters for this view as the economy today is no longer in the same position as it was, say, a decade back. A market system identifies mistakes and forces change better. Hence the information superhighway propagated by Al Gore would have worked less efficiently in case it was governed by more of a technocratic than democratic regime.

Now, the author takes a rather provocative view towards the end in his ruminations where he openly talks against the language of stake holding as it muddies the water around the respective responsibilities of government, corporations and nonprofit sector. He believes that the fad for ESG investing, which puts the largest asset managers in the position of pushing for various kinds of policies, seems to be misguided.

It is, in his view, asking finance to step in because politics does not produce the desired outcomes. He is all for taxing and regulating oil extraction. But asking Exxon to justify their existence by building windmills is not in order. This is a powerful and bold message, which few corporates are willing to speak about, however much they might feel strongly about it. This view will find a lot of support for sure.

Streetwise is not a book which teaches CEOs how to do business, though there are valuable tips to be taken for sure. He does believe that his approach was more of partnership with colleagues which involved cajoling, socialising and sharing information. Sounds the right way to go given that today’s generation deserves more understanding to get the best out of them.

Streetwise: Getting to and through Goldman Sachs
Lloyd Blankfein
Orion Ignite
Pp 416, Rs 799