We're learning how much big banks are feeling Silicon Valley's pain: Morning Brief

Wednesday, October 16, 2019

Wall Street lost hundreds of millions on tech unicorns

It's been a tough year for some big-ticket IPOs. And now we're starting to see how much these disappointments in the tech space are hitting some big investment banks.

In its third quarter earnings report released Tuesday, Goldman Sachs (GS) executives outlined a tough environment for their own investments in some new issues like Uber (UBER) as well as its position in The We Company. Revenue in Goldman's equity securities division fell 40% from the prior year, a decline the firm said reflected "significantly lower net gains from investments in private equities as well as net losses from investments in public equities."

On an earnings conference call, Goldman CFO Stephen Scherr said the bank’s mark-to-market hit on its public holdings was $267 million, with most of that coming from its stakes in Uber, Avantor (AVTR), and TradeWeb (TW).

Scherr also revealed that the company wrote down its stake in WeWork by $80 million. WeWork, which filed to go public in August, subsequently saw its valuation fall precipitously, pulled its IPO, and is now seeking alternative financing arrangements in order to continue as a going concern. Goldman's writedown also follows Jefferies (JEF) taking a $146 million hit on its WeWork investment in its earnings report released last month.

JPMorgan (JPM), which has been leading efforts to arrange WeWork's latest financing package, was pressed repeatedly on its involvement with the company during a call with the media, but said only that it continues to support its clients in a complex situation. The firm did not offer color on which positions impacted its equities business, though JPMorgan reported a 5% drop in revenue in its equity markets group.

This rough year for IPOs has had some Silicon Valley investors, most notably Benchmark's Bill Gurley, arguing that it is the IPO process itself — not the companies presented to the market — that is the problem.

Wall Street is feeling Silicon Valley's pain. (Getty)

Goldman Sachs CEO David Solomon, unsurprisingly, thinks this year is merely a stark example of how public markets instill discipline on companies that otherwise didn't have much.

"I think the IPO process is alive and well in the United States," Solomon said Tuesday. "I do think that we are going to see a rebalancing of this process of private capital formation."

Solomon added that changes could be coming to how large companies grow and the length of time they stay private before beginning the IPO process, but said he sees the events of this year as a "healthy adjustment." Of course, "healthy adjustment" is exactly how one would expect the CEO of a bank that is pretty directly feeling the pain from some of these IPOs to explain away the market's current view of the space.

But while both bankers and venture capitalists work to prove why WeWork isn't the beginning of a new, frosty period in markets but merely an outlier, along the way the hits being taken are real.

It's part of the reason why officials like Boston Fed President Eric Rosengren have called out the risks WeWork's stumbles pose to the broader commercial real estate market. And why WeWork's non-entry to the public market doesn't mean the story is going away anytime soon.

By Myles Udland, reporter and co-anchor of The Final Round. Follow him @MylesUdland

What to watch today

Economy

• 7 a.m. ET: MBA Mortgage Applications, week ended October 11 (5.2% prior)

• 8:30 a.m. ET: Retail Sales Advance month-on-month, September (0.3% expected; 0.4% in August); Retail Sales Excluding Autos month-on-month, September (0.2% expected, 0.0% in August), Retail Sales Excluding Autos and Gas month-on-month, September (0.3% expected, 0.1% in August)

• 10 a.m. ET: NAHB Housing Market Index, October (68 expected, 68 prior); Business Inventories, August (0.2% expected, 0.4% prior)

• 2 p.m. ET: U.S. Federal Reserve releases Beige Book

• 4 p.m. ET: Net Long-term TIC Flows, August ($84.3 billion prior)

Pre-market earnings

• 6:45 a.m. ET: Bank of America (BAC) is expected to report adjusted earnings of 69 cents per share on $22.85 billion in revenue

• Other notable earnings: Bank of New York Mellon Corporation (BK), PNC Financial Services Group (PNC), U.S. Bancorp (USB), Abbott Laboratories (ABT) and Ally Financial (ALLY)

Post-market earnings

• 4 p.m. ET: Netflix (NFLX) is expected to report adjusted earnings of $1.23 per share on $5.25 billion in revenue

• 4 p.m. ET: CSX Corporation (CSX) is expected to report adjusted earnings of $1.01 per share on $2.98 billion in revenue

• 4:10 p.m. ET: IBM (IBM) is expected to report adjusted earnings of $2.67 per share on $18.22 billion in revenue

Read more

From Yahoo Finance

• Watch reporter Brian Cheung’s interview with David Marcus, co-creator of Facebooks’s Libra, throughout the day on Yahoo Finance from 9 a.m. ET to 5 p.m. ET.

• Cheung is also covering the final day of the Annual Meetings of the Boards of Governors of the World Bank Group (WBG) and the International Monetary Fund (IMF) in Washington DC. Watch live coverage throughout the day on Yahoo Finance from 9 a.m. ET to 5 p.m. ET.

• Charles Schwab, founder of his namesake brokerage and author of “Invested: Changing Forever the Way Americans Invest” will be featured on Yahoo Finance On the Move, which begins at 11 a.m.

• Yahoo Finance UK has released the latest episode of Change Agents, featuring Marta Krupinska, head of Google for Startups UK.

Top News

A screen the reads "If Consumers Use Libra, Who Would They Be Dealing With?" is displayed with questions on potential user actors as David Marcus, CEO of Facebook's Calibra digital wallet service, foreground, appears before a House Financial Services Committee hearing on Facebook's proposed cryptocurrency on Capitol Hill in Washington, Wednesday, July 17, 2019. (AP Photo/Andrew Harnik)

Co-founder of Facebook blockchain: Libra ‘absolutely not’ in jeopardy [Yahoo Finance]

UK inflation stays at 2.5 year low ahead of Brexit deadline [Yahoo Finance UK]

GM, UAW continue talks as signs point toward end of strike [Bloomberg]

Democratic candidates spar over Medicare for All [Yahoo Finance]

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