Why Goldman Sachs Is Betting on Financing

Summary

WSJ What’s News: Episode Summary - "Why Goldman Sachs Is Betting on Financing"
Release Date: January 13, 2025
Host: Alex Osila
Produced by: Anthony Bansi, Pierre Bienname, Michael Cosmides

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1. Goldman Sachs Restructures to Dominate the Financing Sector

Goldman Sachs is making strategic moves to solidify its position as a leading player in the competitive financing landscape. The bank recently announced the consolidation of three key groups within its Global Banking and Markets division into a newly formed Capital Solutions Group.

Details of the Restructuring:
Anna Maria Andreotis, a Wall Street Journal reporter covering Goldman Sachs, explained the rationale behind this significant 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... [01:18]"

The integration aims to streamline financing operations, enhance deal-finding capabilities, and efficiently utilize funding sources. Moreover, Goldman Sachs is positioning itself to meet the anticipated surge in demand from private equity firms and M&A activities.

Strategic Objectives:
Andreotis highlighted three primary goals of the new structure:

1. Efficient Deal Facilitation: Combining diverse financing teams to better identify and fund deals.
2. Meeting Increased Demand: Anticipating greater engagement from private equity and M&A sectors.
3. Convergence of Funding Sources: Merging private and public market financing to enhance deal execution.

Opportunities for Growth:
Goldman is particularly eyeing FIC financing (asset-backed loans), including mortgage-backed and capital call loans. By leveraging its asset management division, the bank aims to expand beyond its balance sheet limitations and explore alternative funding avenues.

"Goldman sees a better way to facilitate and make those deals happen." [02:25]

2. Regulatory Landscape and Lobbying Efforts

As President-elect Donald Trump prepares to take office, banking lobby groups are actively seeking to influence financial regulations. They are urging Trump to halt ongoing regulatory actions and extend deadlines for new rules pending administrative review.

Upcoming Executive Actions:
Trump is anticipated to sign executive orders that counteract the Biden administration's regulatory agenda, a common practice for incoming administrations to reshape policy landscapes.

FTC Lawsuit Against Greystar Real Estate Partners:
In an exclusive report, the Federal Trade Commission (FTC) is preparing to sue Greystar Real Estate Partners, the largest apartment landlord in the U.S. The lawsuit alleges deceptive pricing practices and inadequate fee disclosures to prospective tenants.

"A Greystar representative told the Wall Street Journal that the company has taken proactive steps... [04:11]"

Greystar may still negotiate a settlement with the FTC, but this case underscores the increasing scrutiny of corporate practices by regulatory bodies.

3. Justifying AI Investments Through Cost Avoidance

Businesses have heavily invested in artificial intelligence (AI) for automating repetitive tasks, yet skepticism remains regarding the return on these investments. Companies are now exploring cost avoidance as a metric to demonstrate AI's value.

Understanding Cost Avoidance:
Bel Lin, a WSJ reporter specializing in AI and enterprise technology, provided insights into this concept:

"Corporations are going to look for ways to justify the increased investment... cost avoidance means reducing future headcount." [06:18]

Essentially, by implementing AI, companies aim to avoid the costs associated with hiring additional staff, thereby improving their bottom line.

Impact on the Labor Market:
Lin acknowledged the potential negative implications for employment if this trend becomes widespread but noted that significant job market disruptions due to AI have not yet materialized.

"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." [07:04]

Beyond Cost Avoidance:
While cost avoidance is a prevalent justification, the ultimate aspiration is to achieve top-line growth through AI-driven innovations, such as developing new products or enhancing sales capabilities. However, this remains largely unrealized.

"The sort of holy grail of AI benefits is that you get an increase in your top line... but that's really far from a reality." [07:34]

4. McDonald's Faces Lawsuit Over Latino Scholarship Program

McDonald's is embroiled in a legal battle concerning its long-standing college scholarship program for Latino students. This lawsuit arises amidst the company's recent decision to scale back its diversity initiatives.

Details of the Lawsuit:
Filed in federal court in Nashville, the lawsuit alleges that McDonald's discriminatory practices exclude non-Latino students by restricting scholarships to those with at least one Latino or Hispanic parent. The lawsuit is spearheaded by an organization led by Edward Bloom, known for challenging affirmative action policies at major universities.

McDonald's Response:
The company has stated that it is reviewing the lawsuit and maintains that it has proactively worked to enhance fee transparency in its scholarship programs.

"McDonald's said it is reviewing the lawsuit." [08:19]

This case is part of a broader trend where various activist groups are challenging corporate diversity initiatives, questioning their inclusivity and fairness.

5. U.S. Stock Market Movements and Macy's Revenue Concerns

The U.S. stock market exhibited mixed performances on the day of the episode's release. The tech-heavy Nasdaq declined by approximately 0.4%, influenced by rising bond yields and new U.S. restrictions on certain AI exports. Conversely, the S&P 500 and Dow Jones Industrial Average saw gains of about 0.2% and 0.9%, respectively.

Macy's Revenue Forecast:
Retail giant Macy's has issued a warning about potentially weaker revenues in the crucial year-end period. The company anticipates that its net sales might fall at the lower end or slightly below its forecasted range of $7.8 billion to $8 billion.

Challenges Faced by Macy's:
The retailer is grappling with activist investors and recently uncovered a significant accounting issue, where an employee created $151 million in false bookkeeping entries. These complications add to the company's financial and reputational challenges.

6. Reshoring Bicycle Manufacturing Amidst U.S.-China Trade Tensions

With President-elect Donald Trump's commitment to imposing steep tariffs on Chinese imports, U.S.-based bicycle companies are contemplating reshoring their production to mitigate these costs. However, this transition faces several hurdles.

Challenges of Reshoring:
Natasha Khan, a Wall Street Journal business reporter, shared insights from her discussions with industry players:

"Some companies have said that there isn't really a similar supply chain of these bicycle parts in the US for them to source from." [10:17]

The primary obstacles include the absence of a robust domestic supply chain for bicycle components and the high costs associated with establishing manufacturing facilities in the U.S.

Viability of Domestic Production:
While some companies are attempting to move production stateside, Khan noted that without the necessary infrastructure to produce specialized parts locally, these efforts result in "assembled in America" bikes that still rely heavily on foreign-made parts.

"It's just not that easy given that the supply chain isn't really here." [10:56]

Conclusion on Reshoring Efforts:
Reshoring remains a challenging proposition for most bicycle companies due to the intricate supply chain requirements and the significant investment needed to replicate foreign manufacturing capabilities domestically.

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Final Thoughts:
This episode of WSJ What’s News delves into Goldman Sachs’ strategic restructuring to enhance its financing prowess, the evolving regulatory environment under the incoming Trump administration, the nuanced justifications for AI investments in the corporate world, legal challenges faced by McDonald's diversity initiatives, the mixed performance of U.S. stock markets alongside Macy's financial warning, and the complexities of reshoring manufacturing in the bicycle industry amidst U.S.-China trade tensions. Each segment provides valuable insights into the dynamic intersections of finance, technology, regulatory policies, and global trade.

Transcript

[Alex Osila]

3, 2, 1.

[Danny Lewis]

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.

[Alex Osila]

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.

[Bel Lin]

What they're looking for is cost avoidance and to put it bluntly, it's reducing Future headcount.

[Alex Osila]

Plus, McDonald's faces a lawsuit for its Latino scholarship program. It's Monday, January 13th. I'm Alex Osila 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 incre competitive world of financing. Today the bank announced that it's combining three key groups into what it calls the Capital Solutions Group. Anna Maria Andreotis covers Goldman for the Journal. So Anna Maria, what are some of the details of this restructuring?

[Anna Maria Andreotis]

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 Cap 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, 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, companies like Apollo and Aries, as the competition, much more so than it's viewing large banks as their competition.

[Alex Osila]

What is Goldman hoping that it can do better with this new structure?

[Anna Maria Andreotis]

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 even greater demand from private equity firms and in other parties that will engage in M and 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.

[Alex Osila]

Okay, so clearly Goldman Sachs is betting on the financing business, as we said. But where do they see opportunities for growth here?

[Anna Maria Andreotis]

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 mortgage 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 via private credit, for example, it can find more ways than just its own balance sheet to fund those types of loans.

[Alex Osila]

That was the Wall Street Journal reporter Anna Maria Andreotes. Thanks, Anna Maria.

[Anna Maria Andreotis]

Thank you.

[Alex Osila]

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. 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 greystar Real Estate Partners engaged in deceptive pricing practices and failed to properly disclose certain fees to prospective tenants when advertising its rental units. A greystar representative told the Wall Street Journal that the company has taken proactive steps over the last few years to promote greater fee transparency. Greystar 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.

[Bel Lin]

What then will the future reveal?

[Danny Lewis]

There's one thing we know about the future. It's being built now.

[Bel Lin]

We all have a stake in the future.

[Natasha Khan]

The future, the future, the future.

[Danny Lewis]

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.

[Bel Lin]

For that is where you and I are going to spend the rest of our lives.

[Danny Lewis]

Subscribe wherever you get your podcasts.

[Alex Osila]

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. Bel Lin, who writes about AI and enterprise technology for the Wall Street Journal, is here to explain what that means. So, Bell, cost avoidance as a term, as a concept, what is it?

[Bel Lin]

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 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. 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.

[Alex Osila]

That sounds like it might not have the best impact in terms of jobs and the labor market writ large.

[Bel Lin]

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's hasn't quite happened yet.

[Alex Osila]

Is cost avoidance the only way that companies are evaluating AI's value?

[Bel Lin]

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 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 re 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 a reality.

[Alex Osila]

That was Wall Street Journal reporter Bel Lin. Thanks belle.

[Bel Lin]

Thank you.

[Alex Osila]

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 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. 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 US 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. 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. 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.

[Natasha Khan]

When you consider the impact of tariffs or President Elect Trump's plans to bring back a lot of manufacturing stateside. 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.

[Alex Osila]

So is moving production to the US a viable option for most bike companies.

[Natasha Khan]

Looking to avoid tariffs? Some of the companies we've spoken to have said that it's not like everybody can be in 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.

[Alex Osila]

That was reporter Natasha Khan speaking with my colleague Anthony Banci. And that's what's news for this Monday afternoon. Today's show was produced by Anthony Bansi and Pierre Bienname with supervising producer Michael Cosmides. I'm Alex Osoloff for the Wall Street Journal. We'll be back with a new show tomorrow morning. Thanks for listening.