WHEN: Today, Thursday, November 9, 2017
Following is the unofficial transcript of an EXCLUSIVE CNBC INTERVIEW with Goldman Sachs CEO Lloyd Blankfein and CNBC's Kayla Tausche that has aired across CNBC Business Day programming today, Thursday, November 9th. Following is link to the full interview on CNBC.com: https://www.cnbc.com/video/2017/11/09/watch-cnbcs-full-exclusive-interview-with-goldman-sachs-ceo-lloyd-blankfein.html.
All references must be sourced to CNBC.
Kayla Tausche: Lloyd, thank you for being here.
Lloyd Blankfein: Thank you, Kayla.
Tausche: Busy trip for you. Big announcement with CIC for a new fund. Why are Chinese interested in investing in U.S. industrial output?
Blankfein: Well let me just say, we have a great partner in the Chinese investment corporation. And this is a very interesting structure. They're going to put in funds, we're going to put in funds, so jointly we're pledged to at least 5 billion dollars. They're going to put in half of their half commitment and then they're going to raise money from other Chinese institutions. We're going to put in some of our money and raise money from U.S. institutions and individuals. And together we're going to put together fund, and the purpose of fund is to invest in U.S. companies that could be helped by having great access to China.
Tausche: For instance, give me an example?
Blankfein: Let's say for example a consumer firm that needs extra capital so they can manufacture, but besides capital for manufacturing, they're looking for markets for their products. So they can get capital from us as a private equity vehicle, but also our partner CIC Is committed to helping companies in which we invest getting greater access to China through their China connections. So it's both capital on the one hand, but also access for companies. And, if you want to know, the ulterior purpose has to be you know kind of a response to the criticism on the one hand, that – or first of all, forget about the criticism, the reality of disproportionate and a trade imbalance that China is trying to correct and of course U.S. government is pressuring China to want to correct. But also go in and show how this will be good for the average American. In other words, China is using its funds and its knowledge to invest in American businesses which will in turn create more jobs, and also income for their investors, but jobs for their workers because more and more stuff will be produced for China and sold into China.
Tausche: So the ulterior purpose is not to potentially position Goldman to take advantage of further market access in the future?
Blankfein: Well, to the extent that we have good relationships with important institutions in China like CIC, that benefits ah, that benefits China. I like to think that Goldman's participation in their markets also benefits China. Just like China's connection to us benefits us. These things only work if it's a win/win. It doesn't work if something is good for only us. China won't be that amenable to having us there. And if it's good only for China and not good for us, we wouldn't be there. But I think, look, we're at a meeting at a trade mission, in which a variety of companies have signed deals with their, U.S. companies have signed deals with Chinese counterparties, or Chinese consumers of their services, or consumers of their manufactured goods, designed to show and create great opportunities for each company. Obviously, having Chinese markets are good for U.S. companies. Also U.S. companies make great and innovative products that consumers in China would want to have.
Tausche: All these deals were signed in a ceremony earlier today. You were in the audience. You came up on stage to very ceremoniously sign this deal with other executives. You're sitting there watching President Trump and President Xi on stage together. What went through your mind?
Blankfein: Well, you have to think that when two presidents are up there what a historic moment this is. And I keep – I look at that and I think, "You know, my goodness this is the two biggest economies in the world." Everybody always wants to add, "Gee, this represents companies that represent sales of x-y-z – this amount or that amount." And you think thinking to yourself the GDP of the two greatest countries in the world, and I look at that and I think how much we have to gain if everyone works together. And in this is ceremony, let me tell you, everyone's working together. This is high point. There's no friction in signing ceremony. Everything's been worked out. Some of details going forward may be -- may create some obstacle that has to be surmounted and you deal with it. But certainly at that moment you think to yourself, "Boy if everyone can appreciate what you gained from working together, that's fantastic." Of course, every once in a while you have that errant and I say my goodness what if we don't work well together? Isn't that a big loss?
Tausche: Is that a risk?
Blankfein: Of course it's a risk, and I think you have to be aware of that risk. And I think that thinking about that risk helps to drive you to the right place. You take our transaction for example. Obviously, the purpose of this investment fund is to make money for its investors, but they want to do more than that. They want to show that China, specific investments using Chinese money and our expertise and also our money into U.S. firms would be good for U.S. industry. And therefore help create U.S. jobs. You might think this is a bit of a contrivance, but it's a purposeful move in response to the pressure that's being brought to bear by wanting to move in the direction of solving some of the US criticism of the imbalanced relationship between U.S.and China.
Tausche: So you're laying out their investing philosophy, but all moves by administration and Congress so far seem to be in direction of trying to slow or even thwart Chinese investment into U.S. This would seem to go against that?
Blankfein: No, I don't think. There's no motivation to thwart. Listen, investment is going to be a win/win, we want Chinese investment in the U.S. because it means jobs, it means opportunity, gosh if Chinese money went into develop infrastructure in the U.S. how could that be a bad thing for people in the U.S.? The issue –
Tausche: If it's next to military base or if it's next to a Federal Reserve Bank.
Blankfein: No, no, no. Of course it has to be safe. We have to take care of national interests. We have to -- it has to be fair, it has to be level. I think the point of the president I think which is valid, if you look at imbalance of hundreds of billions of imbalance in trade, and you could look at that and say this is not sustainable in the long run, and what can we do to open up Chinese markets to US exporters? And so you could say that um, that, something has to be done in that respect. Maybe it's not fair. Maybe it's more easier for the, the U.S. has a very open economy. Maybe it's easier for Chinese companies to have access to U.S. than it is for U.S. to have access to China. And so let's address that balance and that's what's being done here. And so people want fair trade, I understand, and people want to protect the national interest. And so there might be certain things, technologies we wouldn't want to export, but I think the more that we understand each other, the narrower that category may become, but it's always going to exist. I mean, you can't have, even at full cooperation, we're going to certainly have some interests that are competitive with each other.
Tausche: When is the tipping point where the Chinese economy surpasses the U.S. economy? Are we close?
Blankfein: We may be close, we may be there already. If you measure economy in constant currency, we're a way away. I've read analyses that on a purchasing power basis their economy may already be larger than us.
Tausche: On a GDP basis?
Blankfein: But their population is 4x our size. So on a per capita basis, it's not nearly as wealthy a country as the United States is. And China has big problems of course.
Tausche: When is the tipping point that the Chinese company surpasses the US economy on a GDP basis?
Blankfein: Well again it depends on how you measure GDP. On a constant dollar basis perhaps, it's a ways away. Might be something like between three quarters, 80% the size of the U.S. I don't have it in my head what the exact number is but it's a ways away. But the, some people think it's already surpassed on a purchasing power basis. But the point is it's a question of timing, eventually it will, but you have to keep in mind, their population is 4 times the population of the U.S. So while their economy will inevitably be bigger than U.S. economy because of their growth rate and the size -- it's a function also of population, and on a per capita basis it's not a wealthy country. And they are still going through development and that's a huge burden and raises huge risks for the Chinese economy that aren't there in the case of the United States. They still have to move people out of poverty, have to move people out of villages, agriculture is inefficient, markets haven't been developed. Capital – the way to allocate capital in the U.S.—those instrumentalities aren't developed yet in China. So they have, ah, they have bigger burdens and consequently bigger risks if things don't work out, more than the United States does.
Tausche: What's your exposure to that growth in long run? President Xi today said over the long term opening up is direction moving in. At what point will you be able to underwrite, lend, and advise in this country in same way you do in the United States?
Blankfein: Well that's one of the issues we have. A lot of issues that go back/forth, by the way, on both sides. In this trade mission, the Chinese listen to our tales of woe of getting access to China, but we listen to Chinese version of their difficulties getting access in the US. So citing CIFISU and other kind of considerations like that – are the regulatory. For us, one of the stories in our tales of woe, and this, you know, I think a bit deal for us, is that we can't own 100% of our own affiliate in China, we can't do investment banking, business underwriting, business brokerage business – other than in a joint venture where we're a minority partner. Which means that if we want to – and effectively, we're managing it, we have expertise, we have long history in these markets, we have the global relationships.
Tausche: Will that change and if so when?
Blankfein: We hope so. We hope soon, but we've hoped soon for a very long time now. We make the point that it's good for China if we can do this because right now, if we own 49% of a company, we own 49 cent dollars, not dollar dollars, we put people's careers into China, but they're, it's a joint venture, and a majority partner is not a Goldman Sachs person. So it's a question of which of our people want to commit their careers to that kind of a joint venture? How much capital we put in it when we only have a claim on less than half of the capital that's—
Tausche: So are you having these conversations here--?
Blankfein: All the time, all the time, I don't think I have to bring it up anymore. I think they look at me and they know that we're asking to remove the ownership caps on our affiliate here, just like our competitors – our U.S. competitors and frankly our foreign competitors are in this country. So that's a very important issue for us. And again, these things don't work if it's only in Goldman Sach's interest for them to do it. It has to be worthwhile for China, and our ability to invest in China is impeded by the fact that we have to be a minority holder in our own business here. And when you think what we do as a firm because we bring capital into the country, we also introduce Chinese capital to people outside the country, we through our M&A arms we reorganize companies, we underwrite debt, we advise people on how to invest or not to invest in risky assets. Those are very, very important things for an underdeveloped capital market like China, and I think it would be a huge benefit for Chinese economy if we were able to kind of do our stuff here.
Tausche: You talk about some of the downside risks to Chinese economy. What are some of the downside risks in the U.S. market right now?
Blankfein: Well, the downside risk. I would say the – everybody – I would say this is a period of high anxiety without a specific thing to be anxious about, in some respects. Because you look at it, and you know, the economy is virtually full employment, interest rates are low, inflation is low, which justifies to some extent the low interest rates that we have, commodity prices are low. Conditions – financial conditions seem pretty benign. And so— but yet, they've been pretty benign for a long time and we all know there's a cycle. And we also know when money is as cheap as it's been, maybe it's not being allocated efficiently. If it's not being well allocated, maybe there are bubbles popping up. And you don't always see them until they burst. And so there's a level of anxiety about it. I would say one specific thing to be anxious about is how the movement back to a more normal monetary policy is achieved. Is that going to be done in such a way to jar the economy and cause, and cause a disruption and bring about a kind of a violent adjustment? Or will that be done so adeptly that we kind of increment our way back to a normal interest rate, a fed that has a kind of a more normal balance sheet? And is it going to be done slowly enough so that adjustment can be made you know subtly and quietly so the market can adjust?
Tausche: And so what happens if that adjustment takes place at the same time that the economy is getting a big stimulus from tax reform or an infrastructure bill? Is that ultimately a good thing for the economy, or could it have unintended consequences?
Blankfein: Well, the nature of unintended consequences is you don't intend them, of course. And I would say and you know, I have said, this is not a moment in time when the economy is going pretty well. You know, the last quarterly GDP was 3%, it was a quarter, not necessarily – it wasn't the whole year. But I – this isn't a moment in time that's crying out for a big stimulus. But the government feels that the rate of growth that can be achieved without – without – that kind of a normal, well, you know growing economy of the scale of the United States could grow more than 3%. That's a big controversy. But if they're right, they can stimulate even higher growth than they have now.
Tausche: And if they're wrong?
Blankfein: And if they're wrong, they run the risk of overheating the economy and inflating it. But I would say we feel so far away from inflation and I never thought I would have said this earlier in my career, we're trying to cause inflation to some extent because there's almost not enough of it.
Tausche: So where's your safe haven right now? Bitcoin?
Blankfein: Well, I'm not sure there's – safe haven is something that pays no interest, and that's really what's going on here, is that people, the other set of risks aside from the Fed adjustment, is you wonder where bubble elements in the equity market could be that kind of a bubble, also. Maybe bitcoin is a kind of a bubble. People –
Tausche: Even though you are, reportedly, considering a bitcoin trading desk? Is that something you're actively working to set up?
Blankfein: I will tell you, I have not – it hasn't crossed my desk to set up a bitcoin trading desk but maybe, but I wouldn't preclude it. I get asked questions, "Is bitcoin the worst thing in the history of the world?" and I have to say, I don't know. I mean, I have a more open mind about these things because there's a lot of things that work really really well today, that I thought were stupid and wrong. And I have a much more open mind about this. And I know a lot of history of finance and I Tweeted this out and I pointed out, there was a time that you know, people only took gold coin, a $5 gold coin was worth $5 because it had $5 worth of gold in it. Then they issue paper money that's backed by gold, in the Treasury, and then one day they issue paper money that doesn't have the backing of gold, there's no pledge that if you turn it in I'll give you $5 of gold. It's a fiat money. I say this piece of paper is worth $5 so therefore it's worth $5 and a lot of people didn't take that for a long time, but now they do without question. You move a little bit further and you get bitcoin, and that's not a fiat – so I don't trust it. I don't like it. I'm not comfortable with it. On the other hand, if it works, I say to myself, "Hmmm, maybe that was a natural progression from hard money to fiat money to consensus money." And so who's to say, it's something I'm not comfortable with – I'm kind of an old dog to be absorbing that kind of a new trick. But again, I said this before, I remember when the cell phone came out. I said, "Why the heck does anybody need a cell phone? There are coin operated telephone machines every 5 steps, why would you ever carry around this piece of machinery."
Tausche: You probably thought the same thing about Twitter when it first came out?
Blankfein: Let me tell you, the list of things that are conventional today that I use every day that I thought would never make it is a very long list. That's why I say I'm not in business of predicting the future. I'm very much trying to predict the recent past.
Tausche: You've used your Twitter feeds to air some grumblings about this administration, whether it was trolling infrastructure week or implication that president was casting a shadow over country. Did you have hesitations about carrying flag in this trade mission?
Blankfein: You know – well carrying the flag, you mean in the sense of being an American in a bilateral trade mission?
Tausche: Throwing your weight behind the administration that you have had issues with in the past?
Blankfein: Let me tell you. Nobody is on all fours with anybody. There's things that I disagree with on the administration, but let me just tell you what I agree with. I think this is a pro-business administration, not for the heck of enriching businessmen at the expense of, you know, there's kind of a narrative that this is a competitive interest between business interests on the one hand, and working people on the other or the middle class on the other. I think that if you support business and growth, that – immediately benefits every American. That's what we really need. We really need to have growth in our country. It's not growth at all costs, we need to have some regulation. But I think this administration has thought itself as kind of a champion for American interests. Sometimes if find the rhetoric excessive, but I'm not against the concept that the chief executive of the country should be pursuing American interests, and not necessarily paramount but just included in those American interests are business and the economy. And I see in the way that Secretary Ross runs this mission, where he's really trying to promote business in the United States to create jobs, jobs, jobs. And I'm all for that.
Tausche: When you think about the concept - or the concepts plural- that the administration has conceived, a lot of it has been generated by Goldman Sachs alums. We're a decade away from the coining of the Goldman Sachs moniker but what is the influence of Goldman right now, on the White House, and by extension the economy?
Blankfein: Well in some ways I wish, I'd have a lot more access if there weren't as many Goldman Sachs people there. And people didn't feel so awkward about engaging. I wish – that turns out to be a bit of an overhang. Listen, let me just say I'm proud of the people at Goldman Sachs, I'm proud of the people we get. I'm proud of what they learn at Goldman Sachs, and I'm proud that they're highly sought after when they leave Goldman Sachs. But when they leave Goldman Sachs, they leave Goldman Sachs. People have talked about the revolving door between government and industry— I would say it's not a revolving door at Goldman Sachs. We're not taking a lot of people out of government, the government is taking people out of Goldman Sachs. And those people aren't returning to Goldman Sachs when they get out. The go out -- like Hank Paulson, or Bob Rubin, or Steve Friedman, or John Whitehead, or –
Tausche: It's a long list.
Blankfein: Rubin who was Treasury secretary is also. It's a very long list and those people had long careers in Goldman Sachs, and they went into public service, and essentially for the most part, stayed I public service. None of them came back to Goldman except Steve Friedman who joined our board. But other than that – and not as an employee. And look, I'm proud of that. By the way, not just in this country. A lot of people go into – you know leave Goldman at height of careers, at the height of they earning power, and put themselves in public service. And by the way, once in public service, they tend stay in public service.
Tausche: Speaking of one of those people. Gary Cohn in interview with my colleague John Harwood said that you and Trump have a lot in common. One of those things being that you're very driven but I'm curious what you would make of that comment.
Blankfein: Well, you know, I'd say, he's been pretty successful at somethings. I didn't hear the reference or the interview. But, I don't mind the comparison. Again, we're not going to be on all fours together on politics. I think, let me tell you a secret – I didn't necessarily – I didn't support him for Presidency --
Tausche: Don't think that's a secret.
Blankfein: But that doesn't stop me from appreciating his commitment to improving the fortune of Americans, and the drive he has in executing that. I'm a beneficiary of that. That doesn't mean I change my world views on other matters either, but I think it's crazy not to – I give my opinion about things that I don't believe in, but I think that to me, it's not, it's not one or the other. It's not a plus or a minus, or a zero or a 1, it's – there are aspects of this administration that I appreciate quite a lot. And there are other parts of it that I don't. And I think I've expressed that a little bit. But maybe I haven't shown enough appreciation for the positives.
Tausche: Your Twitter feed has become a travel journal of sorts with your check ins on your various business adventures. How would you sum up your time in China these past couple days? Give us a preview. 280 characters.
Blankfein: Again -- there's a number of aspects of it. You know, on the one hand, I've been at Goldman for 35 years. This is the most active I've felt our government has been in trying to help business interests become more effective anywhere. And I know I didn't go to the event in Saudi Arabia, but I'd been in Saudi a couple weeks earlier. All around they're pursuing. So that's one set is that I appreciate the people who are doing this. So forget about government as abstract matter. I appreciate the people who are driving this thing. They're government employees, civil servants, not doing it economically for themselves, they're doing this in the interest of the country. I've been coming to China for a long time, so our relationships with our partner CIC, and relationships with our other committees— I know how capable they are, and how they're working hard to develop their economy and how committed they are in patriotic sense to drive the development of China. I know that already, so not learning that new. But I think we're entering into an area of more maturity here. Because I think one of the obstacles to the level playing field has been feeling somewhat in China, and it's been true for long time, but over time it's moved, that they're a developing nation, and we're developed nation – true. But they need to have set of privileges and rules while they gain their footing. In our maturity, we could take on more burdens. And so they should have easy access to us, but we shouldn't necessarily have easier access to them because they needed a chance to develop their industries. So the whole thing is a justification to the unevenness of the playing field. At some point, when you have hundreds of billions of dollars of trade deficit when their economy starting to surpass ours, kind of a new day begins to dawn, and you can kind of reset things to more of a level playing field, or else the subsidy gets a little bit unjustified by the realities.
Tausche: I think that was slightly more than 280 characters but we appreciate your time and getting a window into your deal making ventures and part of this mission this week. Lloyd, thank you.
Blankfein: Well thank you Kayla.
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