Goldman CEO on risk: The worst 'absolutely will happen'

Investors should always prepare for the most extreme risk scenario because it will happen, Goldman Sachs CEO Lloyd Blankfein told the Australian Institute of Company Directors at a breakfast briefing on Friday.

Blankfein has headed up Goldman Sachs since 2006, steering it through the fallout of the global financial crisis of 2007-2008. He said the experience had taught him to accept the reality that the worst thing you can imagine will inevitably happen.

"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," said Blankfein.

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

(Read more: Why Goldman Sachs earnings weren't all that: trader )

Harking back to the time of the financial crisis, which was triggered by the bursting of the U.S. housing bubble, Blankfein said in his view, the major problem was that ordinary people were banking on the fact that the scenario they feared the most, at that time the collapse of real estate prices, was not a possibility.

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

"Everyone thought it was so improbable that so many people would default on real estate, it actually created a greater probability that it would [happen] because more capital flowed into that sector," he added.

(Read more: Goldman Sachs: Keep Calm and Carry On Buying )

Blankfein said risk managers needed to adapt their way of thinking to prepare for extreme events.

"Risk management yourself so well to anticipate the possibility of things, that when things happen you get off the block so quickly that other people think it's a false start. That's the metaphor that risk managers should have," he said.

Steering his firm through the volatility of the global financial crisis had given Blankfein a "thick skin" the CEO told the Australian Institute of Directors, but in retrospect he said the bank failed to "manage its relationship with wider society" in the best way possible.

(Read more: Goldman Sachs: Treasury yields will hit 4% )

"We did a better job navigating through the risks of the collapse of the prices of real estate...We probably did better on [that] than we did in managing our relationships with the wider society... to say it wasn't perfectly executed is an understatement," said Blankfein.

Goldman Sachs' reputation came under fire amidst the fallout from the global financial crisis.

In 2010, the Securities and Exchange Commission filed a civil fraud suit arguing that the bank built the financial equivalent of a time bomb that was set up to fail and sold it to unwitting investors, referring to the sale of a structured product, known as a collateralized debt obligation (CDO), blamed for contributing to the bursting of U.S. real estate bubble in 2008.

-By CNBC's Katie Holliday: Follow her on Twitter @hollidaykatie

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