I can smell another financial crash coming, says former Goldman Sachs chief
Todd Gillespie And Sridhar Natarajan
Lloyd Blankfein, who led Goldman Sachs Group through the 2008 financial crisis, is now ringing alarm bells as Wall Street diverts money from U.S. savers into its latest lending spree: private credit.
The financial system is inching towards another potential disaster, with ordinary Americans suffering some losses, the former longtime CEO of Goldman said in an interview on the Bloomberg News Big Take podcast. These assets can be difficult to analyze, have hidden leverage, and be difficult to sell.
“Where there is illiquidity, one has to worry about opaque assets,” he said. “We’re nearing the end of the final stages of the cycles on this issue, and it’s time for some sort of reckoning.”
Blankfein, 71, has for years criticized financial firms that have amassed wealth from private investments for trying to give retail investors access to those assets just at a time when they are more likely to implode. Last year, President Donald Trump signed an executive order that will ease the way for assets, including private credit and private equity, to be transferred into employer-sponsored retirement savings plans in the United States.
This is a particularly turbulent time for the US$1.8 trillion ($2.5 trillion) private credit market. Loans are straining debt funding for some of the biggest asset managers, including BlackRock In the UK, bank-backed mortgage company Market Financial Solutions was forced into bankruptcy last week amid accusations of fraud and double pledging of assets.
Goldman is among the many Wall Street firms that have embraced retail investors. The bank invested in asset manager T. Rowe Price Group last year and said the two would collaborate to further package Goldman’s private markets bets into retirement products.
Blankfein’s memoirs streetwise This document, which will be published on Tuesday (US time), was harshly criticized by some US lawmakers during a marathon hearing in 2010 for Goldman’s role in the financial crisis; That same year, his bank agreed to a $550 million settlement over allegations it mis-sold a complex financial product before the subprime mortgage crisis. Goldman denied any wrongdoing.
At the time, Goldman dealt primarily with complex institutional clients such as money managers, investment funds and corporations, he noted. In the interview, Blankfein said there was a risk of similar disappointments reoccurring if ordinary people were bitten.
“When you lose money for individual consumers, taxpayers and citizens, people in government get very, very upset. Regulators get very, very upset, too,” he said.
In a separate interview Thursday, Blankfein spoke with Pablo Salame, Citadel’s chief investment officer and one of his former protégés at Goldman. Blankfein said he sees signs that the economy is approaching collapse.
“I secretly wonder where the trump card is,” he said. “Now everyone says, ‘Oh, the world is not leveraged.’ That’s exactly what everyone said in the mortgage crisis, until they suddenly discovered there was a lot of mortgage risk in Iceland.”
JPMorgan Chase & Co. Its CEO, Jamie Dimon, said in February that he had seen rivals do “stupid things” to boost earnings, including making risky loans to failing firms. Fears about the risks posed to the banking sector have increased, and the KBW Bank Index suffered its sharpest decline since April on Friday.
Goldman’s asset management arm has sought to reassure clients that redemption rates and exposure to software companies at risk of being sidelined by AI are relatively low at one of the largest retail-focused private credit funds.
Some uneasy echoes of the early days of the 2008 crisis linger, as traders remain nervous and concerns grow about the failure of private lenders.
“It smells like that moment again,” Blankfein said at the Citadel event. “I don’t feel the storm, but the horses in the pen are starting to neigh.”
Bloomberg
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