LONDON — Some of the excess in stock market valuations caused by a rush toward new capital market activities will naturally “flush out,” according to Goldman Sachs CEO David Solomon.
Earlier on Monday, Solomon’s predecessor at the helm of the Wall Street giant, Lloyd Blankfein, had cautioned that a windfall of SPACs — which are special purpose acquisition companies that are designed to take firms public — could backfire for investors. He suggested that such vehicles circumvent the usual due diligence guardrails of a normal IPO (initial public offering) process.
Speaking on a CNBC-moderated panel at the virtual Davos Agenda summit, Solomon said that while there was potential for new capital market activities to cause higher volatility and some excess, the situation should not be called a “crisis.”
“At the moment I certainly see things in the markets that are concerning to me. We have very, very low rates and we are clearly going to have low rates for a long period of time,” Solomon said.
He added that while low rates and inexpensive capital inevitably fuels speculation, there are benefits to extremely loose monetary policy during the time of the pandemic, but with consequences on the “other side.”
SPACs have been around for years, but they exploded in popularity last year. SPACs raised $64 billion in 2020, nearly as much as traditional IPOs, according to Renaissance Capital.
“I do think that it is appropriate to be looking at something like SPACs and thinking about what the consequences of this capital market innovation can be,” Solomon said, adding that such capital market innovations were positive, but have led to an “enormous amount of capital” being accumulated, which would need to be rebalanced over time.
“I think at some point, the market will naturally flush some of this excess out, but that doesn’t necessarily mean when the market flushes that excess out, that we have some sort of a market crisis,” he said.
—CNBC’s Hugh Son contributed this this article.