Anthropic Model Scare Sparks Bessent, Powell Warning to Bank CEOs

0:00If you follow markets, you know the value of long-term thinking. You plan, you diversify, you prepare for volatility. But even the best strategies can't prevent every bad day. For more than 75 years, Cincinnati Insurance has helped individuals and businesses navigate tough moments with expertise, personal attention, and independent agents who focus on relationships, not transactions. The Cincinnati insurance companies. Let them make your bad day better. Find an agent at c-i-n-f-i-n dot com. So there's a lot of noise about AI, but time's too tight for more promises. So let's talk about results.

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2:17And this is a good one. Wow. Treasury Secretary Scott Besson and Federal Reserve Chair Jerome Powell summoned Wall Street leaders to an urgent meeting on concerns that the latest artificial intelligence model from Anthropik will usher in an era of greater cyber risk. Great. Our finance team, Todd Gillespie, Katanga Johnson, Hannah Levitt, and Sri Nanarajan co-wrote that. And the editor is with us on this story. Catherine Chiglinski, U.S. finance team leader for Bloomberg News. What was this meeting and why was it like so urgently called, I guess? Well, it's really interesting because obviously like Besant and Powell are always meeting with bank CEOs and sort of staying in touch with the financial system.

2:58But to have them both sort of in on this meeting in which, yes, they called the bank CEOs, who many of which were in town for sort of a lobbying meeting, they called them in for this urgent meeting. And I think what's really interesting is it really is about this anthropic mythos model and what it really pretends for the industry. And I think that's key. You know, it sounds like, obviously, Anthropic is trying to be very thoughtful on sort of releasing it to select few companies to sort of be able to test their systems. And I think banks obviously are kind of a key, you know, source that we need to, needs to make sure that they can sort of batten down the hatches and make sure they're ready for this next era of cyber risk.

3:36How unusual is this, Catherine, for bank leaders to be summoned on such short notice over the potential systemic risk of a private company to their industry. Yeah, well, and I think it's interesting because they'll meet on macro events, they'll meet on larger, broader trends in the industry. I think this is a little bit interesting in that I'm not sure that there's exactly been an AI prompt before that has spurred them all to come together and come together quickly. AI has been definitely a risk factor that all the companies are talking about and have been talking about for many years at this point.

4:12But for them to sort of come together and say, listen, this is, to get a warning from the Fed and the Treasury that says this is a big risk and you need to be preparing is like a very big statement. What are the banks, have the banks acknowledged this risk or how have the banks responded to some of these AI risks that may be out there as it relates to cybersecurity? Well, I think honestly, in the past few years, banks have really ramped up their cybersecurity protocols. I think AI is a new challenge, obviously, because it just it makes it quicker that these these attacks and these risks can evolve.

4:47So I do think that, you know, banks have been responding already and are already sort of quickly on this. Like you look at Project Glasswing, which is that sort of anthropic led limited release to certain companies to protect their defenses. And JP Morgan is already on that list. So it's clear that they're quickly trying to get involved and to make sure that they can sort of ready their systems as best you possibly can in this sort of new age. But I do think it's interesting that this is enough of a, you know, as we're sort of questioning how good really is mythos, I think this is a real indicator that regulators are taking it seriously.

5:25Have there been certain banks within that group that are more proactive about mitigating these AI and cybersecurity risks than others? any kind of standouts in terms of what they're doing? Well, I think you have all the, especially the big Wall Street banks, I think have been ramping up that a lot. And part of it is honestly cyber risk, you know, affects your reputation. And if you're JP Morgan, the top US bank, you've got a lot to protect. I do think what's going to be really interesting is like how regionals handle this, you know, a smaller bank that maybe doesn't have as much of the flexibility and the capital to sort of support large scale sort of cyber initiatives.

6:01It is going to be really important how the big giants, JP Morgan, Morgan Stanley, Citigroup address this, because I think it'll sort of set the tone for the rest of the industry. Anthropic, your reporting shows Anthropic has separately been battling the Trump administration in court. The Pentagon had labeled the company Anthropic as a supply chain, a chain risk, a designation that Anthropic has opposed here. So the government's definitely looking at this stuff from a lot of different angles, aren't they? Definitely. And, you know, I think right now, whenever anyone sees anthropic in the government, you're grown, you're thinking about this sort of political battle that they're in over the Pentagon's designation.

6:41And I do think, though, the fact that Jerome Powell was in this meeting, you know, he's obviously trying to be very careful. They don't want to be, you know, seen as a very political institution. But I think the fact that the Federal Reserve was in this meeting really understates the fact that this is less of a political thing. And this is really more of a, you know, as a top banking regulator, the Fed is concerned about sort of cyber risk and how the industry is doing it. And the Fed knows banks well. I mean, they have the examiners who are going in routinely to sort of supervise operations. So, yeah, I think a little less of a political bent for this meeting in particular just really underscores sort of how cyber becomes a top topic for them.

7:21We have bank earnings coming up. We're earnings calls next week. Do you expect that they'll address this at all? It would be shocking if they don't, mostly because we're always talking about AI. I feel like every earnings call, you know, everyone wants to know, how are you using it? What does it mean for your employees? And I think a natural extension is sort of, what are you doing for the risks of cyber? Especially, you know, you see with escalating global conflicts like the Iran war. We just had, you know, a fintech chime got hacked. So I think, you know, there's some, there's definitely an impetus for them to address this next week.

8:00What is the expectation for earnings next week? Well, a blowout quarter for trading. It's going to be like, potentially across all the five biggest trading desks, we're expecting stock trading to set records. And fixed income trading, good at most of the banks. I think that'll be up. M &A, it's kind of interesting because you would think that geopolitics really put a damper on it. But most of what we've seen so far and what they've been signaling is that it's really held up. So that'll be interesting. I think another wild card, in addition to sort of how they address the AI, though, is private credit.

8:33Like, how do they address it? Investors want details on what are their exposures. And so we'll be monitoring that pretty closely. Stay with us. More from Bloomberg Intelligence coming up after this.

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11:04At IBM, we've seen this firsthand. But by embedding AI across HR, IT, and procurement processes, we've reduced costs by millions, slash repetitive tasks, and freed thousands of hours for strategic work. Now we're helping companies get smarter by putting AI where it actually pays off, deep in the work that moves the business. Let's create smarter business, IBM. You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business app. Listen on demand wherever you get your podcasts or watch us live on YouTube.

11:46Let's talk about the consumer. Let's talk about the consumer. What are they buying? And one of the great places to look is sneakers. And you look at Nike and you can do that with Poonam Goyal, senior U.S. e-commerce and retail analyst at Bloomberg Intelligence. intelligence um there's so many puts and takes for the nike because i mean it's a product everybody knows it's a global product um but that has pluses and minuses punim what's the what's the nike story here i know they've had a lot of challenges with china they've had a lot of challenges managing their inventory tariffs like a lot of other companies what's what's the nike story right now punim yeah so nike is basically going under a turnaround um there's a lot of things that they need to fix, but there are things that they have fixed.

12:30So let's start with the biggest piece of the business, which is North America. In North America, since Aliyah Hill has taken helm, they have made improvements. In fact, sales have turned positive there. And that's a sign that the initiatives put in place, getting the right product back in, working on speed, clearing out old product, reducing inventory. It's all paying off and we expect that to continue. The challenge, however, has been China. As we know, we spoke about this earlier, China is a market that not just Nike, but every athleisure company is eyeing for growth, for long-term growth. And in China, Nike has had major hiccups.

13:10So the playbook there is to repeat what they did in North America to fix the business, but it's not going to happen overnight. It is going to take time. And I think it's just about being patient and watching them execute against China as well. Chinese consumers broadly have just been shifting to more local brands. What will it take for Nike to recapture their appetite, Poonam? I think it's building brand heat, right? The first thing they have to do is get the right product in. So when you look at the product that's being sold in China, it's heavily discounted. In fact, Nike's perceived as an off-price label in China.

13:47So they need to flip that image. They need to move the discounting because that's clearly not good. They need to introduce premium product into the Chinese marketplace and then have local ambassadors, local clubs really validate the brand for them. And all that will start with product first and then after. And we do think it's possible, but it's just there's so much old inventory there still right now that needs to be discounted. It's going to take, I think, at least 12 to 18 months. um if i'm an investor that's what 18 month time frame i'm not sure i'm that interested in it how how's the company trying to position its turnaround here to appeal to investors i mean look people investors are not being patient and we can see that with the reaction and the shares shares are down year to date and um nike is just reiterating exactly what it's doing it's talking about its playbook lowering inventories taking out discounts getting the right product in.

14:45I think the next catalyst for Nike, in my mind, is going to be its analyst day. It's a day that we've been waiting for for years. They postponed the last one they announced a few years ago. It'll take place in the fall. And we think that's when Nike will be able to really highlight the success it's had and also show its path forward with new inventory, new product, new collaborations, et cetera. Poonam, how does this war and any disruptions from it, higher oil, the risk of inflation make Nike's turnaround even more difficult? What challenges does it pose? You know, the risks of the war are not specific to Nike.

15:23I think it's across the consumer space. Higher oil prices means higher gas prices. It impacts low-income consumers more than it does high-income consumers. Thankfully, Nike is a brand that probably leans more towards the mid to high end than the low end. So they do have some buffer compared to a low-end retailer. That said, you know, if things prolong for a long time and inflation continues to tick higher, consumers will pull back. And the first place they pull back is on discretionary goods and sneakers is a discretionary purchase. Putnam, just step back a little bit. What's the competitive landscape for athleisure?

15:59Because there's so many. I mean, Nike used to be just, to me at least, a dominant brand. But it seems like it's gotten more and more competitive. I'm seeing brands of sneakers around here that I haven't seen before. You're absolutely right. Nike is still the dominant sneaker player globally. It is the largest footwear brand in the world. It remains that, but it has lost share over the last five years to other brands. Some of the brands that you may be referring to include Onhoka, A6, New Balance, all these brands and some others have gained traction, especially in the lifestyle and running space.

16:32That said, when you look at the size of those brands against Nike, there's still a wide gap. So we run a sneaker survey twice a year. And when we ask consumers, you know, what is the choice of brand when it comes to sneakers? Nike is still number one. So when you look at broadly, Nike is still the favorite brand. But when you look into niche markets, you are seeing the rise of some of these other brands, which is obviously why Nike has been losing share. Poonam, very quickly, what else stood out to you as some of the key differences in this report compared to prior quarters? Any metrics that caught your attention?

17:06I think the biggest metric that caught my attention was the inventory levels. They have been dropping. And that's a really good sign because that just shows us that the efforts that the management team is putting in place is bringing a new product. And the new product results are actually quite impressive. If you look at the sales of their new products, they are up nicely. And that reflects that anything that they're putting their mind on is working. Stay with us. More from Bloomberg Intelligence coming up after this. Support for the show comes from Public. Public is an investing platform that offers access to stocks, options, bonds, and crypto.

17:43And they've also integrated AI with tools that can assist investors in building customized portfolios. One of these tools is called Generated Assets. It allows you to turn your ideas into investable indexes. So let's say you're interested in something specific like biotech companies with high R &D spend, small cap stocks with improving operating margins, or the S &P 500 minus high debt companies. Chances are there isn't an ETF that fits your exact criteria. But on public, you just type in a prompt and their AI screens thousands of stocks and build a one-of-a-kind index. You can even backtest it against the S &P 500.

18:19Then you can invest in a few clicks. Go to public.com slash market and earn an uncapped 1 % bonus when you transfer your portfolio. That's public.com slash market. Ad paid for by Public Holdings. Brokered services by Public Investing, member FINRA SIPC. Advisory services by Public Advisors, SEC Registered Advisor. Crypto services by ZeroHash. Sample prompts are for illustrative purposes only, not investment advice. All investing involves risk of loss. See complete disclosures at public.com slash disclosures. If you follow markets, you know the value of long-term thinking. You plan, you diversify, you prepare for volatility.

18:55But even the best strategies can't prevent every bad day. For more than 75 years, Cincinnati Insurance has helped individuals and businesses navigate tough moments with expertise, personal attention, and independent agents who focus on relationships, not transactions. The Cincinnati Insurance Companies. Let them make your bad day better. Find an agent at CINFIN.com. The thing about AI for business, it may not automatically fit the way your business works. At IBM, we've seen this firsthand. But by embedding AI across HR, IT, and procurement processes, we've reduced costs by millions, slash repetitive tasks, and freed thousands of hours for strategic work.

19:43Now we're helping companies get smarter by putting AI where it actually pays off, deep in the work that moves the business. Let's create smarter business. IBM. You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts or watch us live on YouTube. The war in Iran is creating, obviously, some logistic concerns, particularly in the energy space, but also in some of the metals that come out of that part of the world. And that's a little bit of an issue for the auto industry.

20:21Let's check in with Steve Mann, Bloomberg Intelligence, Global Autos and Industrials analyst. Steve, talk to us about the global auto companies and are they facing any challenges by the unrest, the war in the Mideast? Yeah, definitely they are facing a lot of logistic issues. You know, gasoline prices are high. But we published a piece of research today focusing on aluminum. because aluminum is a critical metal for the auto industry. It's a substitute for steel. And it's supposed to be, it's used to make the vehicle a little bit lighter. It's used even more so on EVs because, you know, they want to, you know, reduce the weight of the vehicle so the driving range is longer and extends the battery life.

21:10So EVs typically use about 75-80 % more aluminum, around 800 pounds per car. Gasoline cars, a little bit less. It's about 400 pounds to 500 pounds per vehicle. It doesn't seem like it's significant, but it is a big cost for the auto industry. Steve, how quickly does the spike in aluminum costs feed through to production costs, and does that eventually get passed on to the consumer? Well, fortunately, the aluminum cost is more of an inflationary. The aluminum supply chain issues that we're seeing, it's more of an inflationary for the automaker, less so of a supply crunch. Now, aluminum coming from the Middle East, it's about 15%.

22:04Coming into the U.S., it's about 15%. It's significant. But if you look at the auto industry alone, actually, most of the aluminum is actually produced locally in the U.S. And about half is coming from Canada. Now, even though it's locally produced, it's under the USMCA realm, but the prices, the global prices is rising. And that's what's causing the inflationary impact on the automakers. Steve, can you give us an update on tariffs? Where are we with tariffs in the auto industry? Quite frankly, I can't keep track. Yeah, and the tariffs has a huge impact on aluminum. The fact that it's produced in the U.S.

22:49and in Canada, there's actually no tariff impact. Remember, aluminum, there's a tariff of 50 % on aluminum and steel. but because they fall under the USMCA, the United States, Mexico and Canada Free Trade Agreement, the exchange of metals between the two countries is not part of that 50%. So, look, again, we estimate the per vehicle cost is around as much as$385 for EVs, less for ICE vehicles. So, again, I think the automakers can actually pass on that cost to the consumer or somehow, you know, do some cost initiatives to absorb those costs, higher costs. Steve, you mentioned that Tesla and electric vehicle makers specifically are, you know, most at risk from higher aluminum costs.

23:47Are there any automakers that are more insulated from the switch companies? Yeah, Tesla, Rivian, Lucid, any, actually anybody that makes EV is going to face higher costs for those EVs. But because, you know, Tesla, Rivian, Lucid are peer plays, they're going to face, you know, bigger impact than, say, the GM and the Ford. Now, EVs do use a lot of aluminum. Like I said earlier, help cut down costs. There's a lot of aluminum. You'll find a lot of aluminum in the batteries. You'll find a lot of aluminum in the motor, in the motor housing. So the intensity is much greater on EVs. So you know who I haven't heard of a lot from recently?

24:32It's Elon Musk. What's he up to these days, Steve? Is he getting ready for a SpaceX IPO? What's going on with him and Tesla? Yeah, there's a lot of rumbling rumors for Tesla specifically. Obviously, he is very busy with SpaceX. There's a lot of headlines around SpaceX IPOs. But within Tesla, it seems like based on social media and other media reports that, you know, Elon Musk is actually revisiting and launching a smaller vehicle. And that would be great, especially for emerging markets. We are seeing a lot of sales improvement over in South Korea and Japan. They're expanding their network, retail network there, expanding their service network there.

25:21So launching a smaller vehicle will be really helpful. The other thing that the investors are very focused on is the robo-taxi. The rollout is a little bit slower than we initially thought, but we are hearing they're testing, they're putting cyber caps in multiple cities across the U.S. to validate the vehicle. This is the Bloomberg Intelligence Podcast, available on Apple, Spotify, and anywhere else you get your podcasts. Listen live each weekday, 10 a.m. to noon Eastern on Bloomberg.com, the iHeartRadio app, TuneIn, and the Bloomberg Business app. You can also watch us live every weekday on YouTube and always on the Bloomberg Terminal.

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