The Goldman Standard

Question: Does Goldman Sachs deserve the credit as some have given it for avoiding most of the crisis?

Bill George:  Well Goldman recognized some of the problems early on.  I can’t say they understood all that was coming, but certainly they recognized the subprime mortgage crisis early in 2007, long before the crunch, 18 months before the big crunch hit in the fall 2008, so you had a lot of firms like UPS, a Swiss firm, continuing to invest heavily is subprime mortgages and losing tens of billions more.  I think Goldman lost about 70 million in that crisis, but then in August of 2007 a very significant event took place and I talked about it in my book Seven Lessons and that’s three of the quantitative funds Goldman has went way down, 30 to 40% as did all the quantitative fund that day and it the volatility was so extreme that the management saw that there is something odd going on in the markets an our models don’t predict what is going on and as a result they pulled back and said, “We’re going to start accumulating cash.”  You could say hoarding cash.  Accumulating cash and so they spent a full year accumulating a lot of cash, so they came into the crisis in September 2008 with over 120 billion dollars in cash.  If Lehman had had another 20 billion they probably would have been saved, but they didn’t take those kind of moves and so yes, there was a run on cash.  Yes, there was liquidity crunch, but they had the capacity to stand into that and I think that’s a good lesson for all of us.  One of the things I talk about in my book, get ready for the long haul because if you think things are bad today, they’re going to get worse, not better and so you need to be ready for a long haul problem and have the cash reserves to pull you through it.

Question: Is Goldman becoming more of a technology company and less of a human driven financial firm?

Bill George:  I think a firm like Goldman-- it’s human capital that matters and that’s why you have to be so sensitive.  The board spends an enormous amount of time on the human capital, getting to know the people at all levels.  Who are the rising stars?  Who are the people coming up in the system?  I got a surprise as did the rest of the board when Hank Paulson changed his mind and decided to accept President Bush’s offer to become secretary of the treasury.  That was May of 2006 and thank goodness we not only knew Lloyd, but we knew all the other top people and we could make considered decision not just about the CEO, but who the other structure were, a Gary Cohan or John Wanko where he could step up and other people could take on greater responsibility in the awake of Hank’s departure.  Had we not know these people we couldn’t have done that.  Now we’re asking who is going to be the next CFO?  Who is going to be the next chief personnel officer?  Who is going to be the next general counsel?  Who are all these people?  And so we have dinner with these people.  We get to see them live and in action.  They present to the board.  A very good system.  If the board doesn’t do that you’re in trouble, but it is human capital.  You do the technology, but everyone does the technology.  That’s nothing unique about that.  The only thing unique is the human capital. 

Well there is no reason that you can’t setup a hedge fund with half a dozen people and get access to those tools.  You may go right back to Goldman Sachs and ask them to setup the tools for you, but these are commonly available.  This is like saying I have these great computer systems from ASP.  Yes, so does everyone else, so there is nothing about it.  The only thing unique is two things.  It’s the people, but it’s also the system.  The reason Goldman didn’t get in trouble last fall is because it had very good risk management systems.  That’s what uncovered the subprime mortgage problem.  Goldman marks its books to market everyday and people say, “What about class 3, class 4S and what about these complex assets?”  They get marked too and it’s those marks that are very realistic and one of the reasons the company bounced back and made so much money is they had reasonable marks whereas other of the big banks are still taking huge write offs a day in their consumer and commercial portfolios, particularly on real estate.

Question: Has the crisis changed your thinking about how we need to build a successful and resilient business? (Ryan Avent, The Economist)

Bill George:  With the timeframe compressed for technology, change and operating in global markets they are going to be more crises.  This is hardly the last and so I think firms need to be resilient and the system needs to be resilient.  I’m waiting for Secretary Geithner and Ben Bernanke to put in some complete policies including regulations and ensure the system’s resilience.  They keep talking about it.  Here we are a year later.  Nothing has been done unlike Sarbanes-Oxley was done in 31 days.  I think firms need to have the resilience.  One of the ways to have resilience is never to get so much leverage and drive your firm so hard that you don’t have the cash to fall back on when you hit a crisis.  That’s why General Motors went bankrupt and that’s why Ford came through the crisis because they’d taken out 24 billion dollars in loans and that has allowed Ford to come through this very strong whereas GM and Chrysler had to get bailed out by the government.

Recorded on December 9, 2009

Will it last? Harvard management professor Bill George sits on the board of the financial giant; he reflects upon its future.

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