WSJ What’s News - Why Goldman Sachs Is Betting on Financing

Episode Date: January 13, 2025

P.M. Edition for Jan. 13. Goldman Sachs restructures itself aiming to be one of the biggest players in the increasingly competitive world of financing. Reporter AnnaMaria Andriotis explains what the s...hift means for the bank’s business. And the Federal Trade Commission plans to sue the U.S.’s biggest landlord over hidden fees. Plus, reporter Belle Lin talks about the new term companies are using to justify the cost of investing in artificial intelligence. Alex Ossola hosts. Sign up for the WSJ's free What's News newsletter. Learn more about your ad choices. Visit megaphone.fm/adchoices

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Starting point is 00:00:00 Three, two, one. What will the world look like 10 or 20 years from now? The Wall Street Journal's Future of Everything podcast is here to give you a peek. And we can't wait to show you what's coming. Subscribe now. Goldman Sachs restructures in an effort to be one of the biggest players in the world of financing and how companies start justifying the high cost of artificial intelligence. What they're looking for is cost avoidance, and to put it bluntly, it's reducing future headcount.
Starting point is 00:00:35 Plus, McDonald's faces a lawsuit for its Latino scholarship program. It's Monday, January 13th. I'm Alex Osala for The Wall Street Journal. This is the PM edition of What's News, the top headlines and business stories that move the world today. Over the past few months, we've talked many times about the rise of private credit. Now Goldman Sachs has ambitions to be one of the biggest players in the increasingly competitive world of financing. Today, the bank announced that it's combining three key groups into what
Starting point is 00:01:09 it calls the Capital Solutions Group. Anna Maria Andriotis covers Goldman for the journal. So, Anna Maria, what are some of the details of this restructuring? Goldman Sachs is bringing together three key groups that are in its global banking and markets division. These groups work on finding or facilitating various types of financing deals. It's also creating a team that will be in this new group that's called Capital Solutions. This fourth piece to it is going to be finding alternative sources of financing, especially for Goldman's corporate clients. What we're talking about here is the coming together of several teams that focus on financing, especially for Goldman's corporate clients. What we're talking about here is the coming together
Starting point is 00:01:46 of several teams that focus on financing, but that do so in different worlds. Goldman is uniquely situated as a bank. There really aren't other banks where they not only are huge in investment banking, but have built up a private credit business over the course of many decades. And Goldman is increasingly viewing the alternative investment firms that specialize in private credit or other types of private investments,
Starting point is 00:02:14 companies like Apollo and Aries, as the competition, much more so than it's viewing large banks as their competition. What is Goldman hoping that it can do better with this new structure? So it has all these different types of financing teams spread out across its universe. By bringing them together, the thought process here is, number one, they'll be able to find financing deals and they'll be able to figure out how to fund those deals in a more efficient way. The other thing that it's trying to do here is get in front of what it's expecting to be
Starting point is 00:02:48 even greater demand from private equity firms and in other parties that will engage in M&A. And then third, it used to be with financing that the deals were either private credit or done in the public markets. Increasingly, there's a convergence of that where financing deals are both being funded by the private markets as well as the public. And by bringing these units together, Goldman sees a better way to facilitate and make those deals happen. Okay. So clearly Goldman Sachs is betting on the financing business, as we said. But where do they see opportunities for growth here?
Starting point is 00:03:25 One really interesting area here is FIC financing. This is a broad way of talking about asset-backed loans. And much of this type of lending, whether it's a mortgaged-backed loans, whether it's capital call loans to private equity firms and other investment firms, much of this type of lending for Goldman has been happening on its balance sheet. Well, Goldman's a bank and you only have so much room as a bank on your balance sheet to do this type of lending, especially given the regulatory constraints. But if it turns to its asset management division
Starting point is 00:03:56 via private credit, for example, it can find more ways than just its own balance sheet to fund those types of loans. That was The Wall Street Journal reporter, Anna Maria Andriotis. Thanks, Anna Maria. Thank you. Banking lobby groups are asking President-elect Trump to stop ongoing actions by financial regulators and extend deadlines for new rules pending a review by his administration.
Starting point is 00:04:22 Trump is expected to sign executive orders countering the Biden administration's agenda in several areas. Freezing ongoing regulatory action has become a matter of course for incoming administrations. We're exclusively reporting that the Federal Trade Commission is preparing to sue the U.S.'s largest apartment landlord. According to a person familiar with the matter, the civil suit is expected to allege that Grey Star real estate partners engaged in deceptive pricing practices and failed to properly disclose certain fees to prospective tenants when advertising its rental units.
Starting point is 00:04:55 A Grey Star representative told the Wall Street Journal that the company has taken proactive steps over the last few years to promote greater fee transparency. Grey Star could still reach a settlement with the FTC. Coming up, how companies are justifying their investment in artificial intelligence. That and more after the break. What then will the future reveal? There's one thing we know about the future. It's being built now.
Starting point is 00:05:24 We all have a stake in the future. The future. The future. The future. And the Wall Street Journal's Future of Everything podcast is here to give you a glimpse of what's on the way. I'm Danny Lewis. Join us as we dig into how science and technology are shaping the future. That is where you and I are going to spend the rest of our lives.
Starting point is 00:05:43 Subscribe wherever you get your podcasts. Lots of businesses have invested in artificial intelligence to do things like repetitive tasks, but many of them have faced skepticism that those investments will pay off. So companies are now looking for new ways for AI to show its value. One way is through a concept called cost avoidance.
Starting point is 00:06:07 Belle Lin, who writes about AI and enterprise technology for the Wall Street Journal, is here to explain what that means. So, Belle, cost avoidance as a term, as a concept, what is it? Well, it kind of sounds as it is, a little bit of corporate jargon. And that's because it really is. Corporations are going to look for ways to justify the increased investment that they're having to put up for things like artificial intelligence. And as you said, so far, it's been pretty difficult to show that there are positive returns.
Starting point is 00:06:39 And so what they're looking for is cost avoidance. And to put it bluntly, it's reducing future headcount. So the idea that you can avoid the cost of hiring X amount of people in the future by using AI is a cost savings. And that ultimately is a good thing for your bottom line. That sounds like it might not have the best impact in terms of jobs and the labor market writ large.
Starting point is 00:07:04 You're right. There are profound effects that this could have if adoption of this mindset becomes pretty widespread. But so far, we're really not seeing that. We haven't seen large swaths of the job market in any particular way be significantly impacted by AI. Certainly, automation has popped up in various areas and that's an ongoing trend, but for AI specifically, it hasn't quite happened yet. Is cost avoidance the only way that companies are evaluating AI's value? It's not, but one of the reasons why it's become a more well understood and popular buzzword is because you can pretty easily say, well, I could hire this full-time person
Starting point is 00:07:47 for $80,000 a year, or not hire a full-time person for $80,000 a year. The sort of holy grail of AI benefits is that you get an increase in your top line. So that means that you're actually seeing revenue growth because maybe you have a new product that AI has helped you to generate, or you have AI salespeople that are going out and making new deals for you. But that's really far from reality.
Starting point is 00:08:11 That was Wall Street Journal reporter Belle Lin. Thanks, Belle. Thank you. McDonald's is being sued over a decades old college scholarship program for Latino students. The move comes a week after the burger chain said it would roll back a range of diversity initiatives. The lawsuit, filed in federal court in Nashville, alleges that, by limiting its scholarship to students with at least one parent of Latino or Hispanic heritage, McDonald's is discriminating
Starting point is 00:08:39 against non-Latinos. The suit is coming from an organization run by Edward Bloom, the activist whose lawsuits against Harvard and the University of North Carolina led the U.S. Supreme Court to end affirmative action at colleges nationwide. It's the latest in a growing body of cases by various activist groups challenging corporate diversity initiatives. McDonald's said it is reviewing the lawsuit. U.S. stocks were mixed today.
Starting point is 00:09:05 The Nasdaq was down about 0.4%, fueled by the drop in tech stocks, weighed down by a run-up in bond yields, and the news of U.S. restrictions on certain artificial intelligence exports. The S&P 500 rose by about 0.2%, while the Dow was up approximately 0.9%. Macy's has warned of weaker revenue in the crucial year end period.
Starting point is 00:09:28 The retailer said that net sales will likely come in at the low end or slightly below its previously guided range of $7.8 billion to $8 billion. Macy's has been battling activist investors and recently revealed that an employee had created $151 million in false bookkeeping entries. Finally, according to industry estimates and trade data, almost all of the bicycles sold in the US are imported. Most of them are made in China or assembled from Chinese parts.
Starting point is 00:09:58 Now, as president-elect Donald Trump has pledged to impose steep tariffs on goods imported from China, some US-based bicycle companies are bringing the production of bicycles and their parts closer to home. My colleague Anthony Bansi spoke with Wall Street Journal business reporter Natasha Khan about what this so-called reshoring looks like. When you consider the impact of tariffs or President-elect Trump's plans to bring back a lot of manufacturing stateside,
Starting point is 00:10:25 some bike companies have said that one of the challenges is yes, even though they're bringing manufacturing back, they're still really assembling bikes that are using foreign-made parts. When companies are looking to reshore, some companies have said that one of the challenges is that there isn't really a similar supply chain of these bicycle parts in the US for them to source from. It's not necessarily even that, oh, it's more expensive here. Some of it is just not made here right now. So is moving production to the US a viable option for most bike companies looking to avoid tariffs? Some of the companies we've spoken to have said that it's not like everybody can be in
Starting point is 00:11:10 the position to build factories here and reshore. It's just not that easy given that the supply chain isn't really here. Some have argued that while we could be making it here, if we're not prepared to make our own parts, then their argument is that essentially it's still a assembled in America bike, but with a lot of foreign made parts. That was reporter Natasha Khan speaking with my colleague Anthony Bansi. And that's what's news for this Monday afternoon. Today's show is produced by Anthony Bansi and Pierre Bienamé with supervising producer Michael Kosmitis. I'm Alex Osola for The Wall Street Journal.
Starting point is 00:11:46 We'll be back with a new show tomorrow morning. Thanks for listening.

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