Goldman's Blankfein: Whatever Bad Can Happen Eventually Will

Friday, 26 Jul 2013 04:24 PM

By Dan Weil

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Goldman Sachs CEO Lloyd Blankfein is apparently a believer in Murphy's Law, which holds that anything that can go wrong, will go wrong.

Investors should always prepare for the most negative outcome possible, he said at a meeting of the Australian Institute of Company Directors Friday, CNBC reports.

"Most risk management is really just advanced contingency planning and disciplining yourself to realize that, given enough time, very low probability events not only can happen, but they absolutely will happen," he said.

"The definition of infinity is that you wait long enough, everything happens."

Blankfein said a major problem during the 2007-09 financial crisis was that regular people couldn't broach the idea that real estate prices might collapse.

"Once you think that something is improbable and everybody thinks it, people modify their behavior in a way that makes it more probable," he said.

That's because they take more risk, not realizing the danger. In the case of real estate, "more capital flowed into that sector" creating the conditions for a meltdown, Blankfein said.

As for Goldman, he thinks it did a good job dealing with the real estate collapse, but that it didn't "manage its relationship with wider society" so well.

When it comes to the financial industry as a whole, a recent survey by the Economist Intelligent Unit shows banks and other institutions have made progress in their risk management since the financial crisis, but still have a ways to go.

For example, "only 20 percent of financial institutions feel they have integrated risk awareness into their corporate cultures, with just 15 percent making substantial improvements toward implementing or enhancing comprehensive, enterprise-wide risk management systems," according to EIU.

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