Wednesday, October 26, 2016

Why does Lloyd Blankfein's interview with Fareed Zakaria sounds weird to me?

Fareed Zakaria interviewed Lloyd Blankfein, CEO of Goldman Sachs, for his GPS program. Here is the video. There are so many weird things with this one. But I came away ith a feeling that if Elizabeth Warren were to cross-examine him in Court, Lloyd Blankfein would be toast. But first watch this (transcript of full show here):

The interview basically talks about few key concepts:
  1. State of the Economy
  2. Accountability of top management of Banks - context of Wells Fargo scam.
  3. Closeness with Clintons
  4. Why wouldn't Hillary Clinton release the transcripts of the talks at Goldman Sachs
I found many weird things. Let us look at the interview in detail (highlights and in-quote comments are all mine).

I start from first question leaving hi's and hello's out.
ZAKARIA: From your vantage point, what does the economy look like? You know, how strong is growth? Because it still seems steady but tepid. 
BLANKFEIN: Well, it feels steady but tepid. But that being said, it is steady and there are a lot of advantages that the U.S. economy has. So for example, the consumer has deleveraged banks -- the banking system is in excellent shape. If you look at energy, there's a lot of tailwind in the U.S. economy and the fact of the matter is, we went through a big trauma, which included a banking system trauma and it took a while to work itself through. So the answer is, it's tepid but we're definitely growing and it's established, and the latter point is the more significant point. 
This is the first question. Nothing special here. Though as a CEO of Goldman Sachs I would have expected Blankfein to be sharper about his analysis. Instead he comes across as pedestrian.

"Banking is in excellent shape" is the wrong thing to say if you ask me, particularly in the world which wants your head. He could have said Banks are in much better position to support entrepreneurial activity - small businesses and the like, than the time just after the crisis. That will kickstart recovery.

Look at this first part:

ZAKARIA: A lot of people say, though, there's a lot of economic anxiety. People don't feel like these numbers are right, that unemployment is down, but at the same time, you know -- so for some reason, they remain as great sense of economic anxiety, what do you attribute that to? 
BLANKFEIN: Well, I'd say, there's economic anxiety but I'd say there's a more generalize anxiety and a very negative sentiment and I think it's fed and feeds into the political cycle. I have trouble explaining. If you look at the metrics, you talk about unemployment -- unemployment is not just down, we're virtually at full employment.   
Now, you'd say that there's some degree of underemployment or wage (earning) that was always the case. 
I'm not minimizing the consequence to people who should have -- who feel their jobs should be higher paid and legitimately so, and the legitimate issues about minimum wages, but at the end of the day, these problems always existed to some extent. They're less -- people should feel better than they may actually do. I'm not saying they should feel good or there aren't challenges to try to surmount or other objectives to strife for. But the sentiment is a lot worse than the economy.  [Mr. Blankfein, you just trivialized the problems facing normal people across the world who have never felt this way before]
If you knew all the numbers and you are teleported here from two years ago or three years ago and you're told where employment was, where the price of energy was. What the federal deficit was looking like is a percentage of GDP, the strength of the consumer, a lot of other metrics and you heard that. You would think that sentiment would be a lot better than it is today. 

Blankfein sounds like he meant people should stop whining. They are whining for no reason. The people are unhappy because their jobs (a) don't pay them as much as they think they deserve, (b) their jobs cannot be counted on as stable for forseable future, (c) they do not see Government or policy makers doing anything to help the situation AND more importantly (d) they see policy makers going to great lengths in aiding bankers to create more profit through dubious policies when they don't seem to need any help. In this context, Blankfein comes across very insensitive.

Under-employment was always the case? Really? Not correct! It is one thing to argue that the wages were unreasonably high and they have come to normal or that there was over-employment and now it has reverted to mean. But this plain denial. 

To how many did the comment "and I think it's fed and feeds into the political cycle" sounded like he started to blame the US FED and then turned it elsewhere? It did to me. I know it is sly to infer that. But if he wanted to say "anxiety is fed by the political cycle and also feeds the political cycle" then he should have been more clearer. He is CEO of Goldman Sachs, you should speak deliberately and precisely, and more so when you speak to the media. Didn't he get media training? He can't give excuses.

We continue:
ZAKARIA: The one thing that people are sure of still is that they are suspicious of the banks. If you listen to Donald Trump, you know, he varies on lots of different things but the one consistent thing he keeps hitting is that the banks are bad, that they're in cahoots, that they're -- you know, the big banks are part of the group of things he attacks, big media, big government, you know, the Clinton machine, the banks and he always gets wild cheers.   
BLANKFEIN: Well, I think you're being generous. I think it's not suspicious, it's outright accusations and it's not just Donald Trump, you know, frankly. I mean, I don't like telling -- I don't like the fact that I don't like saying it to you but, you know, we're not -- at times, people think of us as, you know, bankers is tone deaf. Believe me, I read the papers everyday and I hear it.  [what are you so stressed about? There is nothing you can't like telling the media that they are unfairly targetted]
Look, variety of reasons. Let me just start out. One of which is, I think, some of the behaviors that have been, you know, highlighted and visited, you know, are real and justify some negative response. And then, other parts of it are just a general -- and I don't want to minimize it so let me pause for a second and say, there has been -- bankers have played an important role in the system, generally, get rewarded for the risks they take. And some of those risks were poorly managed and some of the behaviors were not, you know, recorded as bad behavior. And so, there's a legitimate reaction to that, full stop.
[Ok, Good! That is true - good to admit it.]
Other things also -- let me tell you, bankers are no better at predicting the future than anybody else. And most of what we do are trying to get the future right, trying to make good decisions of how to allocate capital, trying to lend money to people who pay you back, trying to finance winners and not finance losers and guess what, you don't always get it right and you get drawn into the same mistakes and the same confusion that anybody would and everybody does in connection with their efforts to try to figure out what the future is going to be. [This has been debunked, ridiculed so many times cannot believe Blankfein is using this defence.]
So, good to have Blankfein admit that there are bad apples. These bad apples should be punished heavily - in accordance with law. That is where a leader would take it. Blankfein could also say because it is such a complex system ascribing blame is very difficult and it takes time. But Banks don't want bad apples in their system as much as the general public does. 

But then for weird reason, he starts defending bad behaviour. I doubt people think the "bad apples" Blankfein referred to were only people making mistakes. People know you are talking of the cheats. People simply want you to say "we are finding the cheats and sending them to jail". To the lawyer in me, this volunteering of information looks suspicious.

ZAKARIA: One of the criticisms people make about the banks which is playing itself out with this Wells Fargo affair is banks make mistakes. They do bad things. They do things they shouldn't have done and they pay fines in a sense admitting the wrongdoing, whether or not technically they do but nobody at the top gets held accountable. Goldman Sachs has paid fines. Do you think that's a fair criticism? 
BLANKFEIN: I would -- well, let me just say, first of all, I can't own or comment on Wells Fargo situation, you know, I could apply it in abstract. Everyone is looking for someone to hold accountable but sometimes -- the answer is -- look, the short answer is you would like to ascribe malevolence to everything that goes wrong. 
Now there is bad behavior. Someone has cheated or this fraud, well, that's the remedies for that and people go to jail for that. [Para added by me] 
But sometimes, people are just wrong. And they're wrong about things within their area of expertise because I may be in finance and you may be a political scientist but I have views about political science and I may be right, you may have views about where the financial markets are going, you may be right. You just don't know.  
And sometimes, what's going on here is that people are trying to prescribe malevolence for people who were wrong and the evidence that they were simply wrong is look how much money they lost. And at the end of the day, if you still think that their behavior was off, to be punished the way people are saying they should be punished, you still have to find some kind of a criminal intent. 
You know, to this day maybe the law shouldn't be this way. But stupidity is not a crime. Sometimes it's even a defense because if you're merely wrong and you didn't get it right, it's hard to ascribe criminality.
ZAKARIA: But some of the cases -- and again, I know you can't comment about Wells Fargo particularly but there are some cases where it wasn't just being wrong. 
BLANKFEIN: Sure. If there's bad behavior, then bad behavior should be punished. Look, there was nothing -- it was not criminality but there were civil wrongs in Goldman Sachs which we, you know, paid fines with respect to which we paid fines. And so that punishment -- but you're asking something different. You're asking -- 
ZAKARIA: I'm saying that the public sentiment seems to be and you see in the words of Elizabeth Warren which is why the people at the top not held accountable.  
BLANKFEIN: Well, I think people should be held accountable for what they're responsible for. In other words, if somebody has a duty and they didn't fulfill their duty, well, that's a civil wrong.  [Legally correct - but wrong context]
You can fine somebody. The idea, going further and saying there should be criminality, you still have to -- you still have to commit a crime to be a criminal. And to commit a crime, you still have to have some level of intent for what you're doing. So we're talking very abstractly here.  [Legally very smart]
And so I'm not saying look, I'm a citizen, also. Any time there's some malfeasance, I would love to see a head roll, but you have to -- can't -- but once the head starts to roll, it's no longer an abstraction for the person whose shoulders it was on. They have to really have -- there has to be a crime. [Para added here] 
And I -- listen, we were investigated. The people who investigated us, and others, presumably, you know, we were very, very -- a subject of a lot of focus. I would have to say that people looked at a lot of behaviors. And if there was no -- and I'm not talking about myself in particular; [Why did Blankfein want to add this disclaimer] I'm talking about the group -- and the outcome was, was there were people who -- who -- people in the community of people who -- in the enforcement community -- were not going easy. If they failed to bring a case, they felt that there was no case.

This is the part that stumped me. First Blankfein would have done well if he was legal expert. For someone who could't explain why growth is tepid or there is economic anxiety, he breezes through the legal minefield with remarkable ease. He could put a lawyer to shame with his precision. Yes, Mr. Blankfein, people make mistakes and no one in America is against mistakes. 

"People are prescribing malevolence for people" this statement is so ambiguous that it could be a a part of a master confession. It can leave the jury in the "did he or didn't he" zone. Let me clarify what people think. When people see toddler using a semi-automatic gun and kill 20 people, they don't blame the toddler, they blame the parents and the pro-gun lobbies blame the gun manufacturers. So when a whale trader makes $1billion wrong bets, they blame his supervisors and may not necessarily blame him. This is not negligence but criminal negligence and repurcussions are dire - jail. This is not a civil liability but a criminal one. And frankly US Justice Department has dropped the investigations of criminal liability for civil penalties. That looks dubious to people.

Blankfein uses the stupidity argument without being provoked. My ears pricked up when he volunteered that one.

What Blankfein is saying is, in law, called the difference between misfeasance and malfeasance. Misfeasance means a mistake, trying to do the right / acceptable thing but making a mistake leading to a loss. Malfeasance is trying to do the wrong / unacceptable thing and doing it well. Now it may so be that your law and your work are such that they look awfully similar. That is, a mistake while doing normal thing and well-executed bad /wrong thing looks the same. The question then is how to determine which is which. 

Or, it could be so that banks may be trying to do something bad/unacceptable AND made mistake  and thus blew up the system. In this case the liability is not only criminal but also vicarious - i.e. Firm is also liable. The behaviour of Justice Department let the banks off the hook on this major issue. Clearly, banks were doing something unacceptable - Goldman's internal emails themselves said that in so many words while shorting the derivatives.

The thing is if bad behaviour is being displayed repeatedly, you benefit from bad behaviour (get a bonus) when it doesn't explode into a crisis then you are part of the system when it does explode. So you go to jail along with the perp as a co-accused. Now imagine a series of mistakes leading all the way to the top, taking place repeatedly and all those making mistakes are getting rewarded . This is a conspiracy - the burden of proof shifts from prosecution to the accused. How many times will Blankfein say he made a mistake. At the end it will appear he was only making mistakes at Goldman Sachs - wonder why he kept getting all those bonuses.

ZAKARIA: I have to ask you about the relationship of Goldman Sachs to the Clintons. There was a front-page story in the New York Times alleging that there are very close connections, that Goldman Sachs has done all kinds of things, from give money to the Clinton Global Initiative to creating a partnership between the -- your foundation and the State Department when Hillary Clinton was in office, to, of course, holding fund-raisers for both Clintons at various points. 
How do you respond to that charge?  
BLANKFEIN: Well, Hillary Clinton was the -- was our -- was a New York senator. [Trying to avoid the usage of the word "our" ;)] We're largely a -- well, we're certainly a New York- headquartered firm. The -- when -- when Bill Clinton was in office, obviously, he was the president of the United States -- we're one of the larger banks; we have influence in the financial system; of course we engage. We engage with Senator Schumer. We engage with Governor Cuomo.  
I don't know how to -- we could have -- I know that, you know, in the conspiracy world -- theory-driven world in which we live in, you connect data points, but, heck, [hmm?] I have -- I go out and I meet with editors of newspapers. I meet with Republicans, leaders. I -- we -- it's necessary for us to do that. Part of what we do is -- part of our role requires not just that we're committed to [the word Blanfein used was "permitted" to not "committed to]-- our sense of duty requires that we explain the financial system and the ramifications of what official action would be. And of course we engage our political leaders.  [Finally he found the right angle to give the meeetings]
ZAKARIA: But the implication is that there was a tighter connection. Do you -- do you... 
BLANKFEIN: Well, I'll give you -- I'll give you an example of a tighter part of a connection. In the '08 political cycle, I held a fund-raiser for Hillary Clinton. And I could tell you, throughout our firm and other firms, so did a lot of people and so did a lot of people in our firm hold fund-raisers for people running against her. We had no -- I mean, you can -- you can go on and trace it. [No need to trace it but it would have been better to state this upfront] But, listen, if the fact is that we're identified with Hillary Clinton, who, as we say this, you know, the election is coming up and I'm sure this will -- this conversation will survive that moment, but as we sit here now, we don't know who will win the election. But it looks like the odds are favored Hillary Clinton. If the worst thing was that we had a history of having engaged positively with Hillary Clinton, that's not going to annoy me. [Fair point]

ZAKARIA: But do you personally support and admire Hillary Clinton?  
BLANKFEIN: Well, I've -- I'm supportive of Hillary Clinton, and I certainly -- yes, I do -- yes. So, flat out, yes. I do. That doesn't say that I agree with all her policies. I don't. And that doesn't say that I adopt everything that she's done in her political career or has suggested that she might do going forward. [Fair point]
But in terms of, you know, her intelligence, her, I think, her positioning not only in terms of her ideology but what I regard as a certain -- as a pragmatism that I saw demonstrated when she was our senator and in earlier stages of her political career, when she could cross the aisle and engage other people to get things done, I admire that, and it stands out a little today because it's a little -- because it's a little -- that kind of -- that kind of willingness to engage and compromise -- but let's just stop at engage -- that willingness to engage is a scarcer commodity these days. [Again a fair point]

This was a rather innocuous topic. The way Blankfein answers raises suspicion rather than questions themselves. The way to answer it was first admit there is a connection. Personally, raising funds and so forth, then talk about regular interaction with politicians to put forth our understanding of financial system and so on. Blankfein answers weirdly. I felt he was trying to avoid using the word "our" senator - when referring to Hillary. Why? I wonder.

I was surprised by his use of word "permitted". Clearly Fareed did not imply that he cannot meet Clinton. And Fareed probed rightly. So then comes the issue that Blankfein personally held fund-raiser for Hillary. Fareed says both but Blankfein admits only Hillary. Now if I was asked - this relationship would be the first thing to disclose. Also ties between Goldman (the firm) and the Clintons. Blankfein avoided the question on the Clinton foundation and his own foundation.

By the end though he is comfortable talking about general stuff - why I support Hillary and general stuff like that.

ZAKARIA: Why won't she release the transcripts? 
BLANKFEIN: OK, well, you'll have to ask her -- you have to ask her that. I would say -- and the answer is I don't know. [Why so defensive] 
But if it were me in her position, I would have wanted to reveal -- I'm not sure what she's afraid -- you know, these transcripts were her -- somebody who had left office as secretary of state giving a tour of her impressions of the world. They weren't given to Goldman Sachs -- you know, the press talks about Goldman Sachs partners. She spoke at our client meetings. These were meetings with -- with hundreds of people. Believe me, she was not saying -- I didn't think she was saying anything untoward. I don't recall specifically. [Again a hedge - hmm] But nothing that she said would have jarred me that she was going into some impermissible or revealing some secrets. I don't know what secrets she would have had about the financial market that she could have revealed.  [So myopic is Blankfein, doesn't think Hillary may be more smart than he understands]
ZAKARIA: There's a poll out, I think, a couple of months ago. Sixty percent of Americans worry that Hillary Clinton would not be able to properly regulate the financial industry because of her ties to it. What do you say?  
BLANKFEIN: You know, I don't know how to -- I don't know how to -- I'm not sure how to respond to that. People say that. I would say that the financial system today is so much more tightly regulated. The regulators in their seats are so vigilant and so tough and their reputations depend on that toughness. Everyone is -- it's not a place where everybody is disarmed; everybody is armed. And the consequences of any kind of breach are so severe, I think -- I think we've -- I think we've handled that aspect of it. [This is a repeated many times by bankers]
I think -- look at the, you know, it's something I -- you know, frankly, I'm scared to death of mistakes that are made in my organization, and guess what? The world wants me to be scared to death of that and they want me to be vigilant at the end of the day. And they've accomplished their purpose. They have me on edge all the time. [So you weren't vigilant? Weren't scared? And if you have confidence in your risk management systems then why should you be scared?]
My biggest -- I am not -- I don't live in fear that I'll do something wrong. I know I won't. Of course, there are accidents can happen, but I know I'll never do something wrong intentionally. [Again hedging himself] I live in fear that one of my tens of thousands of employees -- and for other people who run big companies, it's hundreds of thousands of employees -- will do something wrong and their bad behavior will be ascribed to me, not simply because I failed to supervise, but in this current milieu, it will be ascribed to me as if I intended that act that was accomplished by somebody in the organization, or even if it's multiple people in the organizations. 
And that's a very -- that's a very hot -- we're talking about an anxious economy. Guess what? You have an anxious industry. And guess -- you know, and I'll say, go further, I'm sure that people are happy that it's that way. [Interesting victim's position he is taking]
These were fairly innocuous questions to which parrotted answers were expected. But Blankfein is unbelievably circumspect. In the entire interview the tone of Fareed Zakaria is quite neutral. Fareed doesn't seem to incite anything. Yet, voluntarily Blankfein is quite shaken up. Why? So if this is the case now, imagine what will happen if Blankfein were to be interrogated (i.e. cross examined) in Court by Elizaebth Warren. She will roast him alive. No before the senate/congress because there he is not obliged to share everything. But in court where adverse inference can be drawn.

I thought for CEO of Goldman Sachs, Lloyd Blankfein did not look one bit of the industry captain he should have been. He looked like a normal trader opining on various things. This opinion I deduce from watching John Mack, CEO Morgan Stanley, in the teeth of the crisis, or Jamie Dimon during his various media interviews since the crisis. He sounds more like a lawyer - which itself makes me suspicious.

Time and again words of Peggy Noonan - protected and unprotected ring in my mind. These people do not have any sense of ground reality. That is both sad and catastrophic.