Gary Gensler, SEC Chief, Worries About AI

A financial regulator issues a warning on A.I.

Gary Gensler, the chairman of the S.E.C., has been studying the potential consequences of artificial intelligence for years. The recent proliferation of generative A.I. tools like ChatGPT has demonstrated that the technology is set to transform business and society.

Mr. Gensler outlined some of his biggest concerns in an interview with DealBook’s Ephrat Livni.

A.I. could be the next big systemic risk to the financial system. In 2020, Mr. Gensler co-wrote a paper about deep learning and financial stability. It concluded that just a few A.I. companies will build the foundational models that underpin the tech tools that lots of businesses will come to rely on, based on how network and platform effects have benefited tech giants in the past.

Mr. Gensler expects that the United States will most likely end up with two or three foundational A.I. models. This will deepen interconnections across the economic system, making a financial crash more likely because when one model or data set becomes central, it increases “herding” behavior, meaning that everyone will rely on the same information and respond similarly.

“This technology will be the center of future crises, future financial crises,” Mr. Gensler said. “It has to do with this powerful set of economics around scale and networks.”

A.I. models may put companies’ interests ahead of investors’. The meme stock frenzy driven by social media and the rise of retail trading on apps highlighted the power of nudges and predictive algorithms. But are companies that use A.I. to study investor behavior or recommend trades prioritizing user interests when they act on that information?

The S.E.C. last month proposed a rule that would require platforms to eliminate conflicts of interest in their technology. “You’re not supposed to put the adviser ahead of the investor, you’re not supposed to put the broker ahead of the investor,” Mr. Gensler said. “And so we put out a specific proposal about addressing those conflicts that could be embedded in the models.”

Who is responsible if generative A.I. gives faulty financial advice? “Investment advisers under the law have a fiduciary duty, a duty of care, and a duty of loyalty to their clients,” Mr. Gensler said. “And whether you’re using an algorithm, you have that same duty of care.”

Precisely who is legally liable for A.I. is a matter of debate among policymakers. But Mr. Gensler says it’s fair to ask the companies to create mechanisms that are safe and that anyone who uses a chatbot is not delegating responsibility to the tech. “There are humans that build the models that set up parameters,” he said.

HERE’S WHAT’S HAPPENING

“Barbie” is a billion-dollar phenomenon. Warner Bros. said that the movie had reached the $1 billion mark faster than any other in its history. The feat may help further dispel the notion that women-focused movies are limited in their appeal, with “Barbie” having outperformed bigger-budget blockbusters like the latest “Indiana Jones” and “Mission: Impossible” sequels.

Saudi Aramco reports a 38 percent drop in quarterly profit. The state-controlled oil giant earned $30 billion in the second quarter, sharply lower than in the same period last year, driven partly by declining global crude prices. Riyadh is trying to counteract that by prolonging a production cut of a million barrels per day through September, a move that the kingdom said could be “extended or extended and deepened” as necessary.

The U.A.W. makes a bold opening bid in talks with big automakers. The United Auto Workers has asked for concessions including a 40 percent wage increase and guarantees that workers hired at new electric-vehicle battery plants would be covered by the union’s national contracts. Behind its demands are high profits at Ford, General Motors and Stellantis — and the risk of job cuts amid a switch to E.V. production.

Warren Buffett’s Berkshire Hathaway reports a rise in earnings. The conglomerate benefited from improving performance at its Geico insurance arm and strong performance in stocks it holds, principally Apple, as it reported nearly $36 billion in net income and $10 billion in operating earnings. Berkshire’s cash holdings are now about $147 billion, near a record, raising questions about what Mr. Buffett will do with that war chest.

U.S. researchers duplicate a nuclear fusion feat. Scientists at the federal Lawrence Livermore National Laboratory said they had again managed to achieve net gain in a fusion reaction — meaning that it yielded more energy than it consumed — but managed to get even more power out this time. The results are an advancement in a process that researchers hope will produce clean and cheap energy, though it could be decades away.

A bankruptcy that could cost taxpayers millions

The trucking giant Yellow finally filed for bankruptcy protection overnight, nearly two weeks after shutting its doors and three years after receiving a $700 million loan from the federal government during the pandemic. The shutdown means the loss of 30,000 jobs and could shake up the business of moving goods around the United States — as well as raise questions about how much money taxpayers will lose.

Yellow has struggled for years. A final blow came when the company, formerly known as YRC, was unable to strike a deal with the Teamsters union, which represents its drivers, on a new contract.

Yellow has accused the Teamsters of blocking a restructuring effort that, the company argued, would have helped it avoid Chapter 11. The union “knowingly and intentionally triggered a death spiral for Yellow,” Matthew Doheny, the company’s chief restructuring officer, wrote in a court filing.

A Teamsters spokesman told The Wall Street Journal that the union had been giving wage and pension concessions for years: “Yellow couldn’t manage itself, and it wasn’t up to Teamsters to do it for them,” the representative said.

Yellow’s deal-making didn’t help. The company embarked on an acquisition spree after the 2008 financial crisis, and experts said it failed to integrate those businesses. The deals also contributed to an onerous debt load that totaled about $1.5 billion as of March. The company has twice had to reorganize its finances to avoid default.

“Yellow was struggling to keep its head above water and survive,” Jack Atkins, an analyst at Stephens, told The Times.

Taxpayers could be on the hook for losses. In 2020, Yellow took out a pandemic relief loan from the federal government. That move has since been questioned, with House Democrats writing in a report last year that the Trump administration had provided the rescue package over objections from Defense Department officials.

The company has repaid just $230 of the principal on the loan, which comes due next year. The government acquired a 30 percent stake in Yellow via the deal, and could end up assuming or trying to sell off much of the company’s fleet of trucks and terminals — though how much it will recover is unclear.

‘Do we need another rate increase?’

John Williams, the president of the New York Fed, expects interest rates to start coming down next year as efforts by the central bank to cool the economy near their peak.

Mr. Williams’s comments suggest that slowing inflation could prompt a shift in Fed policy amid hopes that the economy is heading for a soft landing and avoiding a recession. From his conversation with The Times’s Jeanna Smialek:

Given what I see today, from the perspective of the data that we have, I think — it’s not about having to tighten monetary policy a lot. To me, the debate is really about: Do we need to do another rate increase? Or not?

I think we’re pretty close to what a peak rate would be, and the question will really be — once we have a good understanding of that, how long will we need to keep policy in a restrictive stance, and what does that mean.

“Exact date is still in flux. I’m getting an MRI of my neck & upper back tomorrow. May require surgery before the fight can happen.”

— Elon Musk, responding to questions about when he would stage a cage fight with the Meta C.E.O. Mark Zuckerberg. The tech moguls have traded barbs recently; Musk posted his message after Zuckerberg said his rival hadn’t responded to his suggestion of holding the match on Aug. 26.

The week ahead

A key reading on inflation and Disney’s latest earnings will be top of mind for investors this week. Here’s what to watch.

Today: The online homework help company Chegg — whose stock plunged in May after its C.E.O. warned that ChatGPT threatened its business model — is set to report earnings.

Tomorrow: UPS and Restaurant Brands, the owner of Burger King, will report. The Japanese tech investor SoftBank will also disclose results; it may announce a profit after five quarters of losses.

Wednesday: Disney reports, and analysts are sure to press its C.E.O., Bob Iger, on an array of topics, including: efforts to find a strategic partner for ESPN; whether he intends to sell the company’s legacy TV businesses like ABC; any improvements on streaming numbers; and his outlook on Hollywood, given the writers’ and actors’ strikes.

Also, China reports inflation data for July. Economists are worried that the country may slip into deflation.

Thursday: U.S. Consumer Price Index data for July is due. Economists forecast a 3.3 percent rise in headline inflation from the same time a year ago, up only slightly from the 3 percent increase reported in June. That would be the smallest monthly price rise in two years; the measure will be closely watched by Fed officials ahead of their next rate-setting meeting in September.

Also, the Chinese tech giant Alibaba reports, and Virgin Galactic will launch its second commercial flight to the edge of space.

Friday: The University of Michigan publishes preliminary data for its Consumer Sentiment Index; the measure has been showing steady rises in recent months as the economy improves.

THE SPEED READ

Deals

• Saudi Arabia’s sovereign wealth fund, the Public Investment Fund, lost $15.6 billion last year, as investments in SoftBank’s Vision Fund and other tech ventures soured. (Bloomberg)

• Private equity firms are reportedly offering incentives including discounts on management fees to prospective investors, as many struggle to raise new funds. (FT)

Policy

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