The FTC Is Investigating OpenAI — Here’s Why

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1:20Money market matters. If money is evil, then that building is hell. The show goes on! The folks in there have watched the show, show! Welcome to Prof G Markets. I'm Ed Elson. It is October 1st. Let's check in on yesterday's market vitals. The S &P 500 and the Dow fell despite better than expected inflation data. More on that later. Meanwhile, the Nasdaq climbed. The yield on 10-year treasuries breached 5.3%, setting a new 52-week high. Brent crude rose back above$103 per barrel. And finally, Google shares climbed after hours on news that it is rolling out its most advanced Gemini model yet. OK, what else is happening?

2:06The FTC has opened an investigation into OpenAI and Anthropic over safety concerns. The news follows a turbulent week for the AI labs. Over the weekend, Axios reported that tens of thousands of AI safety incidents were flagged by researchers at OpenAI and Anthropic, indicating that the AI safety issue is far more entrenched than just a single accident at Hugging Face. OpenAI then cancelled the release of its latest Astra model. The company said the model showed high levels of deception during testing, and OpenAI's head of safety systems said it, quote, didn't quite meet the bar in terms of staying within scope.

2:48So are we finally starting to see some signs of accountability in the AI safety saga? And where does it lead next? Here to break it down, we're speaking with Madison Mills, the senior AI reporter at Axios, who actually broke the security incident news over the weekend. Madison, great to have you on the show. We'll start there because that sort of is what started this cascade of events that we saw this week leading to now the FTC has opened this investigation, but you reported about thousands of security breaches. What do we know about this? This is really about the scale of these incidents being much larger than was previously publicly known.

3:29OpenAI last Friday came out saying that there were dozens of security incidents where their agents had misbehaved and they were working with third parties to disclose to those who were affected, that they had been impacted by those incidents. And through my reporting, we were able to find out that that number is actually in the tens of thousands, not just for open AI, but also for anthropics. So the big takeaway here is that the scale of these incidents is much larger than was previously known. And an incident is described to me by my sources in a lot of different ways, but not a lot of them seeming like nothing burgers.

4:03You know, I had sources telling me an incident can be very similar to what we saw last week with the Australian Medicare portal being meddled with and private medical data from users being taken and accessed. So if we're comparing these tens of thousands of incidents to that kind of behavior, it's not as surprising to hear about this investigation from the FTC. Why didn't we know about it? Were they hiding it, do you think? Well, a lot of the researchers I've talked to have said that looking for an AI incident on the internet is like trying to find something in the ocean, right? The internet is vast.

4:37It's really difficult to sort of track all of this agentic behavior. By the way, that's why a lot of these AI researchers are calling for a slowdown, because if the best experts in the world are saying that they can't even keep up with the impact of this technology, it's not surprising to then hear from those people that they want some kind of slowdown. The other thing here is it depends on how nefarious the agents are and how kind of misbehaved or out of alignment they're acting. In some cases, sources told me that AI agents were intentionally deleting their behavior so that it couldn't be tracked by humans.

5:11So you're talking about a wide scale here where, you know, the amount of behavior is so vast, it's hard to track. And also in some cases, the agents are purposely deleting their tracks so that they can't be found out. But if they knew enough to tell you that, yes, these things are happening, then it leads me to believe they at least knew that something was happening. And the only reason we're finding out about it is because you reported on it. And now knowing that Sam Altman is pulling an opening eye, they're pulling the Astra model. It leads me to believe the way it looks is that you reported that the way that they're conducting their safety isn't good enough, and now they have to sort of backpedal, and now they have to say, sorry about this, we're pulling it, because you disclosed something about the company that they maybe knew but didn't want to disclose.

5:56Am I reading too much into it? I don't know if I would not have the humility needed to think that a story I broke is the reason they pulled a model. Well, I know it's the reason at least the Florida suing them. They specifically cited your reporting and said that's why we're suing OpenAI. I think for OpenAI here, they would say that they don't want another hugging face. That breach was really tough for them. I talked to a lot of OpenAI investors who were concerned and potentially wanting the company to delay its IPO because of it. Now, as you know and cover all the time, there were other reasons that OpenAI wanted to delay the IPO beyond those safety concerns.

6:33But if you have your investors worried about safety and then you've already had this massive security breach that did not make the company look good, and then you're testing a model internally and it is having some security agent incidents go on, it makes sense that then the company would say it's just not worth the risk. Maybe three months ago, there was a path forward where open AI models, anthropic models that were misbehaving was seen as sort of good marketing. We're very much past that phase in AI right now. I guess the question then, this is a speculative question, and you can say your opinion.

7:10Do you think that Sam Altman was surprised to see your report, reporting that there were not just one, but thousands of similar agentic breach incidents? Do you think he reads that and he goes, oh my gosh, I didn't realize that? Or oh my gosh, it got out? I mean, how do you think he would react to your own news? I can tell you that I had a source tell me who is a top expert at one of the leading AI companies that they think my story is going to turn into the millions in the coming weeks because of the amount and scale of these incidents. OpenAI themselves on one of their recent blog posts about these security incidents said that they're hesitant to come forward about the details of the incidents because they don't want to say, hey, company A is having a security problem with our agents.

8:02They're having an issue because then that makes company A vulnerable to more attacks. That's the wording from OpenAI. Of course, some people could read that as a convenient message from OpenAI, but that does make sense when you talk to cybersecurity experts. We also have to remember that these are primarily private companies and they don't have to follow the same rules that public companies do when it comes to cyber incidents. If open AI was public, there would be legal requirements in place that force them to have more transparency with regards to these incidents. And right now they don't have to follow those rules.

8:34And a lot of their customers are also private AI companies that don't have to follow them as well if they're impacted. We know about the Hugging Face breach because Hugging Face told us about it. And so it'll be interesting to see whether or not more private companies come forward about these impacts. And that's what happened with Australia and could happen with other companies too. Well, this seems to lead us into the next piece of news, which is that the FTC has opened an investigation into both OpenAI and Anthropic, which personally, I'm glad to hear that because I feel like there's been no accountability on anyone's part throughout this entire debacle.

9:11And it seems like now the regulators and the FTC is going in and say, OK, let's figure out what happened here. But what do we know about this investigation? What can we say about it right now? Well, we can say that it is confirmed that this investigation is happening and that the FTC kicked it off a couple of weeks ago, which is interesting timing, given that we did see the FTC chair at the White House this week with a slew of other tech executives talking about this new AI safety accord, this executive order on changing the name of AI to superintelligence. It looked like there was some sort of resolution between these groups.

9:47And then you have news of this investigation today. So the big question that I have and my colleagues and I are going to be reporting on is whether or not the safety accord that these tech executives agreed to is something that the FTC is going to be factoring into this investigation. And it also makes sense to me, given the amount of sources who told me that there were these incidents going on at these AI labs, that that information would get to the FTC. We spoke with a lot of AI safety researchers. You've seen this in the coverage of The Times, The Journal. These people are wanting to be as vocal as possible about what they're seeing because they are very concerned about the scale of these incidents.

10:27And so, you know, after something like a hugging face happened, we have heard a lot more from these AI researchers, and it seems like that's now getting to the FTC as well. Yeah. Yeah. I think the question is, when will this infect the markets and infect the price of these companies? Seems like, so far, not at all. OpenAizen talks to raise at least$30 billion at a$1.4 trillion valuation. Anthropic is trying to go public at a$2 trillion valuation is what people think. Those are massive numbers. I guess the question is, are investors eventually going to be worried by the fact that the FTC is investigating these companies?

11:07Also, they have these lawsuits that are piling up. Do you have any thoughts or insights into whether this is becoming more of a role in the risk factor of investing in these companies? Yeah, I had a scoop yesterday on OpenAI's ARR hitting very close to$70 billion. And that is closer to a previous ARR number from its rival, Anthropic, than we previously saw. What that tells me is that enterprise customers, according to the financials that I was able to review, are still going to open AI. And so if it's not material to their bottom line, I would be surprised if it was material to investors. What Palantir CEO Alex Karp has been pushing is that enterprises shouldn't feel comfortable using these frontier AI companies because of challenges with copyright and IP protection.

11:55But that's not showing up in the numbers just yet. After I broke that story yesterday, we saw Oracle's stock surging up 6 % or so. And that is sometimes a barometer that we like to use as reporters to see how public market investors are thinking about these AI companies. So that tells me that in that one micro example, it doesn't seem like investors are flying away from these AI companies because of safety concerns yet. They don't care yet. Madison Mills is senior AI reporter at Axios. Madison, we really appreciate your time. Thank you. Thank you, Ed. After the break, a check-in on the economy.

12:33And as a reminder, we have been nominated for three Signal Awards, so please vote for us at vote.signalaward.com. Type in Prof G Markets. We'll also leave a link in the description.

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14:30We're back with Prof G Markets. Consumer prices rose less than expected in August, but inflation is still well above the Fed's target. The Personal Consumption Expenditures Index, the Fed's preferred measure of inflation, rose 3.4 % from a year earlier and 0.3 % from July. Meanwhile, Core PCE, which excludes food and energy, rose 3 % annually. At the same time, consumers are showing little sign of slowing down. Consumer spending saw its biggest monthly increase in over a year, and the personal savings rate fell on CalShea odds that the Fed hikes rates in October declined from 51 % to 34 % following this report.

15:12So joining us to dig in to this economic update, we're speaking with Justin Wolfers, professor of public policy and economics at the University of Michigan and founder of Platypus Economics. comics. Justin, great to see you. Let's dig into this report here. Personal consumption expenditures up 3.4%. I feel like the reporting has been that this is good news, but to me, it's like inflation's still high. What do you make of this report? It's a good report if you're a storyteller, because you can tell all sorts of different stories. And I think that's actually right. Sometimes that is the truth. There are lots of stories consistent with this.

15:51So let's start with Ed's story. Ed's story is 3.4%. 3.4 is greater than two. The good thing is like a large language model sometimes gets that wrong, but Ed Elson never does. And you're absolutely right. So that feels uncomfortably high. A different story, if you were to look at price growth over the last few months, depends on exactly which story you want to tell. You could convince yourself that the underlying rate of price growth over recent months is down to two point something, whether something is small. So if you went shopping for your favourite, should you look at the headline or should you look at core?

16:33Should you look over the three months, four months, six months? There's a lot of stories you can tell. And honestly, I think folks who are looking for a moment of good news and saying price growth has weakened over recent months, they get something there, they're right. Then there's the usual, let's compare this to what markets expected. And this was a healthy amount better than we thought it would be last night. And if you're in the business of changing your mind, we all should be, you should be a little bit more optimistic. So we could still think it's too high and feel more optimistic about the future.

17:11And then I think there's the story, I think, that really got people excited about, well, let me tell you this, the complicating story, which is they changed how they measured a few of the items. And that brought the headline down a bit, but realized that complicating story, everyone on Wall Street understood it. So when we beat expectations, that's a real measure of how much better this news is than we had anticipated. So, and then there's, I think, the story that you led with, Ed. Why does everyone care? One answer is we don't. That's just one indicator. Who cares? A different answer is the Fed cares deeply because this is their preferred inflation gauge.

17:48And we were, as of last night, sort of looking at maybe, you know, what I'm looking at, you were looking at, Colshie, I'm looking at the CME, Federal Funds Futures. and it says the chance that they keep rates where they are has gone from being about 50-50 to being maybe 60-40, 60 they keep where they are, maybe even, you know, two to one. So that's an awfully large move in federal, in betting on the Fed for a single indicator on a single day. It's hard to know how people feel about it, how investors feel about it, because on the one hand, And as you say, it seems like maybe it's slightly stabilizing.

18:30I guess the growth itself is stabilizing, but inflation still seems to be a pretty large issue. And I think where I'm paying attention now is looking at the bond markets and yields, which continue to go up. And I keep thinking that one day it'll stop. But over the past several weeks, every day there is a new record high. There's a new record high today on the 30-year, a multi-decade high. Yields keep rising. which seems to suggest that bond investors are, to use a turn of phrase, becoming scared shitless about the state of inflation and potentially the U.S. economy, or at least our fiscal positioning.

19:12I mean, what do you make of what we're seeing in terms of yields, and how do you foot that with what we're seeing in terms of inflation? So your pivot there was from the Fed to bond yields, and often these are written up in the same paragraph in the newspaper and I think that leads to a lot of confusion. So if you're comfortable with it, Ed, I'm going to go back and tell you how I'd teach this to freshmen. Please. Because I think that gives us a clarifying framework. So at one level, you and I often talk and we say, well, interest rates are determined by the Fed. At another level, sometimes we talk and we say interest rates are determined by long-run demand and supply for loans.

19:51How can both be true? Well, what we typically do is we teach different things on different days, which is there's the economics of the long run and the economics of the short run. Let's talk about the long run. The long run says the market for loans is like any other market, that it's determined by the demand for loans and the supply of loans. And that the equilibrium that comes out of that is the long-term real interest rate. and the equilibrium that comes out of that, what is the long-term interest rate that you think of as the Goldilocks rate that is not too hot, not too cold, basically consistent with full employment in the economy or rough full employment.

20:29The technical term we use for that is R star. We do that because it makes us hard to understand and therefore people have to pay more to see you and I talk about it. Now, this is free. The advertisers pay. Wow. And I hope they're impressed by R star And the star is actually a subscript, but it's come down and joined the main text. But for those who don't know all the codes, R star is basically what we call the neutral rate of interest. Neutral here really does mean Goldilocks, not too hot, not too cold. When we're talking about that, we're usually talking about some long-term interest rate. So think about demand and supply of bonds determine R star.

21:06If you think about interest rates over the next 10 years, let me then go to the short-run chapter. all right next day of class the fed determines short-term interest rates and it does so trying to heat the economy up or cool it down so basically what it's doing is if r star is the goldilocks level sometimes it wants to set the interest rate above r star in order to cool the economy sometimes it sets it below in order to stimulate the economy so this now is kind of interesting gives you a different way of thinking about it it says if i want to think about what long-term interest rates Over the next 10 years, on average, the interest rate might be a bit hotter sometimes, a bit colder sometimes, but on average, it'll be R-star.

21:45So that means if you and I want to have a conversation about long-term bond yields, we should be talking about R-star. And that means we should be talking about supply and demand of bonds. If you and I want to talk about what's happening to interest rates tomorrow, next week, maybe even next year, that is really determined by the Federal Reserve, which says, I know what R-star is and I'm going to make it a bit lower or a bit higher. so that then means i think our conversation is going to be a whole lot clearer if we have two separate conversations here's the fed conversation where do you want to set r relative to r star r being the real short-term interest rate and then there's the bond market discussion what's going on with r star so let me come back this why did i bother giving you an introductory economics lesson that you already know but it's to add some clarity i don't think anything going on with the long end of the bond market's got anything to do with the Fed.

22:35The other thing is you said, well, it could in some sense, which is if the Fed basically gave up control of inflation, well, that would lead people to worry a lot about interest rates over the next 10 years. Except when you look at the long, real interest, if you look at what's happening to long-term bonds, they've risen if you look at nominal bond yields, that's what's running at close to 5.3 % today and getting all the headlines like the 10 years at 5.3. But we also have inflation index bonds. And the important point to note is almost every step in the marcher upward of long-term nominal bonds has been matched one for one with a step upward in the real interest rate, the inflation index bond.

23:16So what that tells us is almost none of what's going on in the long run is about changing inflation expectations, whether the Fed's got the genie in the bottle or not. So that sort of says, to me at least, and I know you have a very, very sophisticated audience and they might be annoyed that I just was simplifying and they're going to have more complicated stories. But it basically says to me, if you want to talk about this, one big story of the day, what's going on with long-term bonds. If you want to talk about that, stop talking about the Fed. In fact, stop talking about inflation. I think that's an important point, which is we don't fully know what long-term treasuries are telling us right now.

23:55And I think it seems to be a real debate and an increasingly important one because that number keeps on going up. And the more that number goes up, the more we have to start making decisions about our portfolio construction and what it's actually telling us about the United States and the health of the economy. Is it saying anything about the health of the economy? I think this is an open debate. I guess my question to you, what do you think it might be telling us? What are they saying? So let's take my very simple story, which says the market for loans is like any other market. If I saw the price of apples rise, I might think either it was a bad harvest, there were fewer apples produced, or a lot of people want to buy apples.

24:38If I see the price of loans, and that's what I call the interest rate. Now, I know people sometimes want to do it a different way, but that's because I try and make things as simple as I can. An interest rate is the price of a loan. If I see that price go up, either someone's cut back on the supply of loans or there's a big boost to the demand for loans. What could it be? The most obvious things I see out there in the economy right now are an AI build-out, big increase in the demand for loans, billions, hundreds of billions. I see the US government currently borrowing 6 % of GDP every year. That's bigger than the AI builder.