FTX founder’s mega mea culpa

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This is an audio transcription of the FT press briefing podcast episode: ‘FTX founder’s mega mea culpa

Marc Filipino
Hello from the Financial Times. Today is Friday, November 11, and it’s your FT News Briefing.

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FTX founder Sam Bankman-Fried tweeted sorry for his company’s $32 billion meltdown. Additionally, a group of PwC associates in Cyprus resigned. They create a company that will take care of customers linked to Russia. We will see what this means for Western sanctions. But first, we’ll talk about yesterday’s stock market euphoria and the better-than-expected inflation report that caused it. I’m Marc Filippino, and here’s the news you need to start your day.

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Markets soared through the roof yesterday. The S&P 500 rose more than 5.5%. The Nasdaq flew more than 7% higher. The excitement came after the latest US inflation report. October consumer prices were lower than expected. And even though inflation is still quite high, it is cooling. This is Colby Smith from the FT.

Colby Smith
The market reaction was therefore quite spectacular. This was one of the biggest jumps in the S&P 500 we’ve seen in quite some time. And I think what that really reflects is how sensitive investors are to incoming economic data at this point and how that’s really going to be factored in by Federal Reserve officials who are actively trying to restrain the economy, preparing to raise rates higher than current levels. , and willing to keep them at these restrictive levels for a period of time.

Marc Filipino
Now, what do you hear from investors, Colby? Do they think the relief will last?

Colby Smith
One thing we heard from investors yesterday was a caveat that this rally could be premature in the sense that even if the Fed is slowing the pace of interest rate increases, that doesn’t mean it is backing off on its fight against inflation on the whole. So it’s a point that officials have been really trying to get across in their recent public appearances. You know, they say just because the Fed is slowing down, you know, they’re probably going to hit a higher interest rate level down the line, which will have a bigger impact on the economy and growth than a lot of people are expecting right now.

Marc Filipino
Colby Smith is the FT’s US economics editor.

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One of the most high-profile figures in the cryptocurrency world tweeted a dramatic apology yesterday. Sam Bankman-Fried founded FTX. It was the crypto exchange that crashed this week. Bankman-Fried attempted to sell his company to rival Binance, which collapsed. Now Bankman-Fried is scrambling to raise money to save FTX. In a lengthy mea culpa on Twitter, Bankman-Fried admitted that FTX didn’t have enough funds to handle a wave of client withdrawals. This is Josh Oliver from the FT.

Josh Oliver
So really, Sam apologizes to his customers. And whoever had money on the FTX exchange on Tuesday afternoon now has that money blocked. They are unable to withdraw their funds. And so Sam apologizes to his customers, his investors, his employees, saying that indeed, the collapse of the exchange is ultimately his fault. In this very long and quite remarkable mea culpa Twitter thread, he says he didn’t have an accurate understanding of the exchange’s leverage and liquidity positions. He says, again, it’s his fault. What they’re doing right now is trying to raise some extra cash that they can use to reimburse customers and try to save the business.

Marc Filipino
OK. So what’s next for FTX, Josh?

Josh Oliver
Well, that’s the $32 billion question. I mean, that was FTX’s valuation since its last fundraising. And, you know, the fate of the company is still at stake. Sam is trying. We know from reports from our colleagues, you know, to offer investors a, you know, a Hail Mary fundraiser that would allow her to, a) reimburse her clients and, b) potentially save the company. But that will be an extremely difficult argument for him to make, given what happened to FTX last week.

Marc Filipino
Now, there are also concerns about a contagion effect on the broader cryptocurrency market. Yesterday, investors withdrew $700 million from another major crypto company, Tether. What’s the link there?

Josh Oliver
I think these two things are linked by fear. Tether is really important because it is one of the reserve assets of the crypto world and also provides a very important nexus between crypto tokens and traditional currencies. It is therefore a real asset base for the crypto space. Now Tether says it’s business as usual, they’re processing redemptions without issue. But what you saw was that the price of Tether, which is still supposed to be $1, fell to 96.6 cents before coming back a bit. So that shows that, you know, there were signs of tension. But right now, you know, that tension hasn’t materialized into anything serious.

Marc Filipino
Joshua Oliver is the FT’s asset management reporter.

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A group of PwC associates in Cyprus have left to form an independent audit firm that will take on clients linked to Russia. The big four auditors avoid companies linked to Russia because of the sanctions. Here’s Michael O’Dwyer from the FT with more information on this independent company called Kiteserve.

Michael O’Dwyer
It is therefore a new company, as you say, which was created this summer by three former partners of PwC Cyprus. I don’t think it’s a complete surprise that Cyprus is where this problem has come to a head for PwC. I say this because the Cypriot economy has closer ties with the Russian economy than many others in the EU. These links therefore meant that there was a lot of work that was going to be completely abandoned for professional services companies in Cyprus or for which it was going to have to be assessed whether this work could still be done.

Marc Filipino
Now, how significant is this dissident enterprise and in light of all the Western efforts to sanction Russia?

Michael O’Dwyer
This is important because it shows that there is still a market for providing advice to individuals or companies who are sanctioned themselves or who do business with sanctioned entities and where there is perhaps a bit of a zone grey. Some professional services firms like PwC say we’re not going to do that work. But others say, well, hey, it’s legal and it’s maybe a big part of the business we’ve done throughout our careers. And so we want to continue to do this work provided that we can do it legally.

Marc Filipino
Does any of this undermine Western sanctions or the effect they are meant to have?

Michael O’Dwyer
On the one hand, it undermines sanctions in that there are clearly some vendors, such as Kiteserve, who are willing to work for companies or individuals in Cyprus in this case, which would not be legal under, for example, from Australia. or Canadian sanctions. However, these sanctions are not binding in Cyprus. They tend to bind only the countries that have established them. So from that perspective, what this actually reveals, perhaps, is the lack of consistency between different countries in the sanctions lists that they have created. And it allows for this type of sanctions arbitrage or jurisdictional arbitrage, if you will, between these different regimes that allow individual advisers, such as Kiteserve, to operate in areas where large international companies might be more reluctant to walk.

Marc Filipino
Now, Michael, does that make PwC look bad? They are all former PwC employees.

Michael O’Dwyer
You can see it in two ways. On the one hand, it is the result of a policy that PwC has implemented on a global scale, this idea of ​​sanctioned everywhere, sanctioned everywhere. And that meant that if a company or individual was on a sanctions list anywhere in the world, PwC would not serve them in any country. On the other hand, this deal slightly undermines that position because what they’ve done is they’ve completely severed ties with those partners who left and set up the nice Kiteserve. Upon their exit, these partners would normally be subject to fairly strict non-competition clauses which would prevent them from providing similar services to PwC such as auditing or tax advice, for example. And what PwC did in this case was say, well, okay, you can actually compete with us, provided you pay us for the privilege. And so PwC has received an economic gain from all of this, even though it is unwilling to continue to serve these customers on its own in the long term.

Marc Filipino
Michael O’Dwyer is the FT’s accounting correspondent. Thank you, Michael.

Michael O’Dwyer
Thanks Mark.

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Marc Filipino
You can read more about all these stories on FT.com. This has been your daily press briefing on FT. Be sure to check back next week for the latest trading news. The FT News Briefing is produced by Sonja Hutson, Fiona Symon and me, Marc Filippino. Our editor is Jess Smith. We had help this week from Michael Lello, David da Silva and Gavin Kallmann. Our executive producer is Topher Forhecz. Cheryl Brumley is the FT’s Global Head of Audio. And our theme song is from Metaphor Music.

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