Economy

Losses Pile Up in FTX Bankruptcy Turmoil

Where have the missing funds gone?Credit…Stefani Reynolds/Agence France-Presse — Getty Images

Big rifts emerge as FTX bankruptcy moves forward

Two weeks after the epic collapse of FTX, Sam Bankman-Fried’s crypto exchange, disagreement and confusion still reign. In the first bankruptcy hearing on Tuesday, FTX lawyers said that a “substantial amount” of the firm’s assets were missing or stolen, and that the empire was run like the “personal fiefdom” of Mr. Bankman-Fried. Adding to the drama around Bankman-Fried, or S.B.F. as he’s known: Elon Musk slammed a report that the former crypto mogul has a stake in Twitter.

S.B.F. broke his weeklong silence on Tuesday. In a letter to FTX’s remaining employees, he divulged that the company suffered a $51 billion collapse in collateral, and apologized for the group’s rapid demise. Still, he seemed to reject the proceedings unfolding in Delaware bankruptcy court, saying FTX might have been saved had he not caved to pressure to file for bankruptcy. “Potential interest in billions of dollars of funding came in roughly eight minutes after I signed the Chapter 11 docs,” he said. Left out of the letter: any response to reports of the firm commingling funds or loaning money to the C.E.O. and other executives.

FTX wants to keep some things secret for now. Its lawyersargued that disclosure threatens their efforts to sift through the rubble, protect whatever is left and preserve what may be sold. They said they also believe that keeping creditor and asset investigations sealed for now just might add some stability to the wider crypto market, which has seen a broad sell-off and even hack attacks on FTX. The day of the bankruptcy filing, in an apparent security breach, hundreds of millions of dollars worth of crypto were removed from FTX’s digital vaults. The court said creditor information would be disclosed eventually.

Damage is spreading beyond the bankruptcy. Sequoia apologized to its limited partners on Tuesday for its $150 million investment in FTX. Meanwhile, more crypto businesses face potential failure. The crypto lender Genesis, which has $175 million stuck at FTX, has hired restructuring advisers to explore options including bankruptcy, DealBook reported on Tuesday.

Is this a wake-up call to lawmakers? Senator Elizabeth Warren, Democrat of Massachusetts, in a Wall Street Journal opinion piece, likened crypto to the subprime mortgages of 2008 and called on Congress to act fast to prevent risk to the wider financial system. Warren and two Democratic colleagues also wrote to Abigail Johnson, C.E.O. of Fidelity Investments, urging her to reconsider allowing Bitcoin exposure through the firm’s 401(k) plans and sponsors. Attorney General Laetitia James of New York urged Congress to stop retirement investments in crypto altogether. “We don’t need another reminder that cryptocurrencies are unstable,” she wrote on Twitter.

And what about the Mr. Musk connection? Semafor reported that Musk texted S.B.F. in May asking if he would roll over his $100 million investment in Twitter once Musk took it private. Musk denied the report, and questioned the news site’s journalistic integrity, noting that S.B.F. invested in Semafor.

HERE’S WHAT’S HAPPENING

Credit Suisse shares fall as the bank forecasts more trouble ahead. Ahead of a big capital-raising vote on Wednesday, the beleaguered Swiss lender said in a trading update that it expects to lose $1.6 billion in the current quarter as its wealth management and investment banking divisions underperform. The bank has also laid off staff in China as part of its restructuring.

U.S. stock futures edge up ahead of the release of Fed minutes. This afternoon the Federal Reserve will publish the minutes of this month’s Federal Open Market Committee meeting, when it raised interest rates 0.75 percentage points for the fourth straight time. Investors will be watching for any sign of a split between governors on when the central bank should adopt a more gradual approach to rate rises.

The Supreme Court allows the House to get Trump’s taxes. It rejected the former president’s request to block the I.R.S. from turning over six years of his tax returns to the House Ways and Means Committee, ending a lengthy legal fight over the documents just before Republicans take control of the chamber in January.

With PC demand in decline, HP plans big layoffs. The computer maker said it would cut 6,000 jobs over the next three years as it anticipates a “challenging” market ahead. It’s the latest tech giant to slash head count as the global economic downturn hits its bottom line.

FTX’s small-town bank

Among the surprising assets uncovered in the bankruptcy of the failed crypto exchange FTX is this: An investment in a one-branch bank in northwest Washington that earlier this year had just three employees, and didn’t offer online banking.

In March, Alameda, FTX’s trading arm, invested $11.5 million in the parent company of Farmington State Bank, the hometown lender of Farmington, Wash., population 130. At the time of the deal, Farmington was the nation’s 26th smallest bank, and the FTX investment was about twice the bank’s $5.7 million net worth.

The tiny bank’s connection to FTX raises questions. Among them: How closely tied is FTX to the broader financial system? The investment “should have raised massive red flags for the F.D.I.C., state regulators and the Federal Reserve,” Camden Fine, a bank industry consultant who used to head the trade organization Independent Community Bankers of America, told DealBook.

Another question: In the hunt for FTX’s missing assets, will this tiny bank get dragged into the multibillion-dollar bankruptcy of the crypto exchange?

FTX never said why it was interested in the tiny lender. The presence of FTX (and other new investors) does appear to have modernized the bank a bit. Farmington now goes by Moonstone Bank online. The name was trademarked a few days before FTX’s investment. Moonstone’s website doesn’t say anything about bitcoin or other digital currencies, but it does say Moonstone wants to support “the evolution of next-generation finance.”

Farmington has more than one crypto connection. The bank, which has been around since 1887, was bought by FBH Corp. in 2020. The chairman of that company is Jean Chalopin, who, along with being a co-creator of the cartoon cop Inspector Gadget in the 1980s, is also the chairman of Deltec Bank, which, like FTX, is based in the Bahamas. Deltec’s best known client is Tether, a crypto company with $65 billion in assets offering a stablecoin that is pegged to the dollar. Tether has long faced concerns about its finances, in part because of its reclusive owners and offshore bank accounts. The fact that Tether’s main banker and FTX were co-owners of a small Washington bank is sure to get Tether’s critics talking, if not regulators poking around.


Could the Glazers sell Manchester United?

Manchester United parted ways with its star player Cristiano Ronaldo on Tuesday, but its investors (and plenty of disgruntled fans) couldn’t be happier. Shares of the fabled soccer club jumped nearly 15 percent on the New York Stock Exchange after its American owners, the Glazer family, said they had hired advisers to find outside investors or sell the team.

The club’s market capitalization hit nearly $2.5 billion following Tuesday’s rally. But Forbes has valued Man U, which has an avid global fan base and rich history, at closer to twice that. Fans have been clamoring for a change in ownership for years, as the club hasn’t won a league title since 2013.

Dealmaking is heating up in the Premier League. In May, the private equity firm Clearlake Capital and the American billionaire Todd Boehly, a part-owner of the Los Angeles Dodgers, acquired Chelsea from the Russian oligarch Roman Abramovich for $5.4 billion. Liverpool is also on the block. The club’s American owners, Fenway Sports Group, which also owns the Boston Red Sox, put it up for sale earlier this month.

Who would bid? The private equity group Apollo and Britain’s richest man, Jim Ratcliffe, emerged as possible suitors in August when rumors began circulating that the Glazers, who also own the Tampa Bay Buccaneers, were looking for an exit. A spokesman for Ratcliffe, the billionaire founder of the chemicals giant Ineos, told DealBook at the time that he “would be interested in buying the club if it was for sale.” When reached this morning, he had no further comment. Apollo did not immediately respond to a request for comment.

Manchester United has hired the Raine Group and Latham & Watkins to advise in any deal; the Glazers have also brought on Rothschild and Co. to assist.


+46 percent

Flying for Thanksgiving? The price of airline tickets has soared by 46 percent since this time last year. Inflation has come for the turkey too, making Thanksgiving a far pricier holiday this year, The Times Roe D’Angelo and Zachary Bickel calculate.


China’s confusing Covid strategy thumps the global economy

Almost three years after the start of the pandemic, the world may have to wait even longer for China to open up. New lockdowns have been imposed over vast swaths of the world’s second-biggest economy as Covid cases surge.

Anti-lockdown protests, including at the world’s biggest iPhone factory, have erupted in recent days. Videos published on Chinese social media on Wednesday showed hundreds of workers at a Foxconn plant in Zhengzhou clashing with security personnel after weeks of severe restrictions — near-isolation, limited access to food and medication — to deal with a local Covid outbreak.

More than 95 percent of iPhones are produced in China, and Apple has warned of delays in deliveries of its latest high-end devices just ahead of the crucial holiday shopping season. Some workers have fled the facility, forcing Chinese authorities to recruit villagers and bus them in to work on the assembly lines.

China is sowing confusion after signaling it would ease Covid restrictions. Beijing said this month they would soften some of the harshest Covid restrictions, boosting investor hopes that the world’s second largest economy could be set to reopen. But in recent weeks, officials have reinstated partial of full lockdowns on more than 49 Chinese cities representing about a third of the country’s population and two-fifths of total economic output, according to Nomura. This includes the northern city of Shijiazhuang that was seen as a test case for shifting approach. “It’s maybe 10 steps forward and nine steps back,” Chen Long, a policy analyst at the Beijing consulting firm Plenum, told the New York Times.

Lockdowns could extend to even bigger manufacturing centers. A big worry is that the southern manufacturing hub of Guangzhou, the epicenter of the latest surge of cases, could be next. Everything from electronics and cars to telecom equipment and steel is produced in Guangzhou, so a lockdown there could have severe consequences for global supply chains and hit the share prices of companies with a heavy presence in China. Tesla’s stock, for example, is down more than 11 percent over the past five days.

THE SPEED READ

Deals

  • Independent Franchise Partners, one of the biggest outside shareholders in Rupert Murdoch’s News Corp and Fox, opposes the mogul’s plan to combine the businesses. (WSJ)

  • “As Elon Musk Cuts Costs at Twitter, Some Bills Are Going Unpaid” (NYT)

  • Goldman Sachs will pay $4 million to settle a dispute with the S.E.C. over how it marketed E.S.G. funds. (WSJ)

Policy

  • The Labor Department unveiled new rules that open up investment in environmental, social and governance funds via 401(k) plans, reversing a Trump administration policy.

  • An ethics watchdog group seeks new investigations into lawmakers’ buying and trading of securities. (WSJ)

  • The White House said it would hold off on collecting student loan payments, following lawsuits that aim to stop Biden’s plan to cancel up to $20,000 in debt for many borrowers. (NYT)

  • A Senate antitrust panel plans to schedule hearings on the lack of competition in the ticketing industry following the chaos that erupted over Taylor Swift concert tickets. (NYT)

Best of the rest

  • Bob Dylan gets tangled up in controversy over supposedly autographed books. (NYT)

  • Continuing a practice that began early in the pandemic, large retailers including Home Depot, Lowe’s, Macy’s, Target and Walmart will close for Thanksgiving. (NYT)

  • More than two-thirds of the world’s soccer balls are made in one city in Pakistan. (Bloomberg)

Thanks for reading! We’ll see you Friday.

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