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Goldman CEO: Markets Healthy But Credit Crisis Is Biggest Risk

Goldman Sachs Chief Executive Officer Lloyd Blankfein said market conditions are “quite benign” but he worries about a potential crisis in the credit markets.

In a wide-ranging interview at The Wall Street Journal's Deals and Dealmakers Conference, broadcast live on CNBC.com, Blankfein said much of the wealth created in the last four or five years has been driven by low interest rates, but many companies could find they’ve taken on too much debt if interest rates continue to rise.

“Conditions seem quite benign if you look at the underlying fundamentals.” he said. He added, however, that “I think the biggest risk we face would be a crisis in the credit markets.”

Market sentiment is now bullish, Blankfein said, but “sentiment doesn’t matter until it does” and when it changes, a “lot of wealth can unravel quickly.”

“It’s smug to think there’s no risk, but it’s also smug to think that the world will revert back to the way it was,” Blankfein said. “We have to prepare for the possibility that risk is being underestimated, but must also see that the world is creating a lot of wealth.”

The obvious danger, he said, is that “it’s easy to see a bubble in hindsight.” But he noted that risk, especially in private equity, now seems “reasonable.”

Blankfein also said that Democrats in Congress should think carefully about rewriting the tax code to target private equity and hedge funds.

Blankfein said there are justified concerns about the huge returns generated by private equity firms, and worried that income inequality was “poisoning democracy.” But he said he wasn’t comfortable with the “get this industry” approach some in Congress appear to have adopted toward private equity.

In the interview with The Wall Street Journal’s Alan Murray, Blankfein discussed presidential politics, taxes, immigration and foreign investment.

--Blankfein said he’s a Democrat, but has not yet endorsed a candidate. “I’m still waiting to be recruited,” he said.

--The U.S. is now at about full employment and the country should think carefully about slamming the door on those who want to come to this country to work. He said the strength of this nation is its ability to attract intelligent, hard-working people who want to build a better life here. He said there’s “very poor communication” with the public “about what’s in their interests.”

--The U.S. is one of the greatest beneficiaries of globalization, but this hasn’t been explained to voters. He said the U.S. should encourage foreign investment and joked that foreign companies investing in the nation’s infrastructure can’t pack it up and take it home. “I hope that everyone overseas invests in my infrastructure here,” he said.

--Many of the advantages that make New York the financial capital of the world are “baked in the cake.” However, companies now seeking to tap capital markets must factor in the cost of doing business here, including Sarbanes-Oxley, litigation and detailed regulations. “There’s a culture that has to change. I think progress is being made,” he said. The U.S. continues to grow, but at a slower rate than emerging markets. “There are more risks in emerging markets than anywhere else, but all things being equal better to invest someplace where things are growing at 11% instead of 2%,” he said. “We’re betting the growth is worth the risk.”

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