A congressional TikTok smackdown

This is an audio transcript of the FT News Briefing podcast episode: ‘A congressional TikTok smackdown’

Marc Filippino
Good morning from the Financial Times. Today is Friday, March 24th, and this is your FT News Briefing.

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TikTok’s CEO got clobbered by US lawmakers at a congressional hearing. Hindenburg Research is at it again with another high profile short. And the fallout from the UBS-Credit Suisse deal hit investors in Asia particularly hard.

Kaye Wiggins
Spoke to one private banker who said they hadn’t slept in days because they were just fielding calls from people who were asking, “What’s going on here?”

Marc Filippino
I’m Marc Filippino. And here’s the news you need to start your day.

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US lawmakers grilled the CEO of TikTok during a congressional hearing yesterday. They’re concerned that the social media platform’s link to its Chinese parent company, ByteDance, could be a danger to national security. Here’s TikTok chief executive, Shou Zi Chew.

Shou Zi Chew
Our approach has never been to dismiss or trivialise any of these concerns. We have addressed them with real action, building what amounts to a firewall.

Marc Filippino
The hearing comes as US authorities are asking ByteDance to sell its stake in the US arm of the company. Here’s the FT’s Hannah Murphy on what Shou Zi Chew told lawmakers.

Hannah Murphy
So, look, he tried to reassure them repeatedly that their fears that TikTok might be weaponised by the Chinese Communist party for espionage purposes, for propaganda purposes, were unwarranted. That, in fact, ByteDance and TikTok are very separate entities, and that he stressed repeatedly: TikTok has invested in this new partnership with Oracle called Project Texas, which will sort of ensure that American user data is kept in the US, stored in the US, safe in the US, and away from any potential Chinese interference.

Marc Filippino
So did any of the lawmakers buy it?

Hannah Murphy
Not at all, really. None of the congress people seemed convinced. Many of them pushed back and said so quite bluntly. I think they still think that Beijing’s hold over TikTok is all pervasive, all invasive, and that whatever TikTok says it’s doing, there will be back doors and ways in which China can still compel the company to hand over US user data.

Marc Filippino
And what has the Chinese government said, Hannah?

Hannah Murphy
They’ve come out and said they would firmly oppose a forced sale of TikTok, the US arm. Beijing has certain export laws that it can wield to try to prevent a sale, in particular of TikTok’s coveted algorithm technology. You know, that automatically serves the videos that users want to see. That’s really sort of the gold, the treasure that China wants to keep and protect. So that leaves TikTok, obviously, between a rock and a hard place. You have US authorities calling for divestment. At the same time, there’s China saying, no, we won’t allow it. And then between that stalemate, you now have many US politicians calling for a ban in the US where it has 150mn users.

Marc Filippino
That’s the FT’s technology correspondent, Hannah Murphy.

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Hindenburg Research is going after its next big target. The New York-based firm announced that it’s been investigating the payments group Block and has shorted the company’s stock. Basically, they bet the company’s share price would fall. This comes just two months after it did the same thing to Indian conglomerate Adani Group. The FT’s Ortenca Aliaj is with me to unpack why Hindenburg is targeting Block now. Hi, Ortenca.

Ortenca Aliaj
Hi.

Marc Filippino
OK, so Hindenburg’s short on Block worked. It came out with this report yesterday, and Block’s share price dropped 14 per cent over the course of the day. But what exactly is Hindenburg alleging?

Ortenca Aliaj
Hindenburg Research has made the allegation that Block, which is the payments group founded by the Twitter co-founder Jack Dorsey, of artificially inflating its user numbers and facilitating fraudulent transactions. It claims in the report that Cash App, which is one of the sort of key growth areas for Block, has been used by criminal gangs to make payments. And one of the sort of things that it cites in support of this is this two-minute compilation video it has made where rappers rap about using the Cash App to pay for drugs or to offer people.

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Rapper 1
 . . . a move without Cash App. Cash App. Cash App.

Rapper 2
My Cash App because I send a thousand transactions. I just bought another phone and made a cash app. The ATM limit was to 50. I got a cash back . . . 

Rapper 3
And now junkie with it . . . 

Ortenca Aliaj
It’s an interesting way. You know, most short sellers will, will put out a report and it has sort of gone the extra mile on this one.

Marc Filippino
OK. So how has Block responded to all this?

Ortenca Aliaj
Block has denied the allegations, and they have said that they are going to work with the Securities and Exchange Commission to pursue legal action against Hindenburg.

Marc Filippino
What would that look like, Ortenca?

Ortenca Aliaj
The SEC has, of course, been looking at short seller actions. I don’t think Hindenburg has publicly been named as part of the investigation that is being conducted by regulators. But there’s always this weird dynamic in being a short seller because you kind of already know what’s gonna happen in the market after you release your report. And nine times out of 10, if you’re a well-respected short seller like Hindenburg is, the share price will go down and you can close that position and you know that you will have a material effect on a company’s share price. So a lot of people who don’t like short sellers, namely shareholders and CEOs of public companies, often say this is market manipulation because you can effectively, quote unquote, “front-run” what’s going to happen. I think that has been something that the SEC has been looking at from reports that we’ve seen. But I’m not sure that Jack Dorsey or that Block itself can push the SEC to look into this.

Marc Filippino
Ortenca Aliaj is the FT’s mergers and acquisitions correspondent. Thanks, Ortenca.

Ortenca Aliaj
Thank you.

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Marc Filippino
There are a lot of different angles to the UBS-Credit Suisse deal that are being uncovered. Some details are mundane, others are completely out of left field, like how Bear Grylls is involved in all this.

Kaye Wiggins
For people who haven’t heard of him, I guess he’s a kind of explorer adventurer who’s become pretty famous through his TV shows that he’s been on, why he’s sort of surviving in difficult environments.

Marc Filippino
Bear Grylls of the TV show Running Wild with Bear Grylls is speaking at a Credit Suisse conference this week in Hong Kong about navigating harsh environments. Kaye couldn’t go because Credit Suisse cut off media access, but her sources told her some pretty juicy details about it.

Kaye Wiggins
The very same weekend that their bosses were in crisis talks about the bank’s very existence. This group of Credit Suisse executives in Hong Kong, you know, they were camping and they were filming their exploits as part of this programme of events that Bear Grylls was involved with at the conference.

Marc Filippino
Not a great look, especially because the conference is being held in Hong Kong. Investors in Asia lost big when UBS agreed to buy Credit Suisse’s $17bn of AT1, or additional tier 1, bonds were wiped out when the deal hit. And a lot of AT1 investors are based in Asia.

Kaye Wiggins
In other parts of the world, retail investors either just don’t tend to go for these types of instruments or in some places, including in the UK, they’re actually barred from holding them. So, you know, in the US and in Europe, these bonds are often owned by institutional investors rather than retail or kind of high-net-worth individuals. So yeah, it’s kind of a feature of how things work in parts of Asia that actually retail investors or rich individuals and wealthy families tend to hold these.

Marc Filippino
So when people found out that the UBS-Credit Suisse deal would render their AT1 bonds worthless, it was a real punch to the gut.

Kaye Wiggins
Spoke to one private banker who said they hadn’t slept in days because they were just fielding calls from people who were asking, “What’s going on here?” They said the people that they had been talking to were completely gobsmacked about how these instruments could turn out to be so risky.

Marc Filippino
In the wake of all this, sources told the FT that major banks in Japan, Singapore and Hong Kong are placing new AT1 bond deals on hold until market conditions stabilise. But if that hold lifts, will there still be an appetite for them?

Kaye Wiggins
I think it will certainly have an effect on these AT1s, on sentiment towards them more generally, which isn’t necessarily the right response because the thing with these bonds is it all depends on how regulators would act in a crisis. And several other regulators have said that the way that things played out with Credit Suisse wouldn’t happen in other jurisdictions. So it’s not necessarily the case that if a different bank went bust in a different jurisdiction, then the equity holders would get some money back and the AT1 holders wouldn’t. But still, I think it has made people a lot more cautious about this and a lot more potentially a bit more predisposed to read the small print of the documents that explains what they’re actually investing in.

Marc Filippino
Kaye Wiggins is the FT’s Asia financial correspondent.

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Before we go, the notorious crypto entrepreneur Do Kwon, has been on the run ever since his terraUSD coin collapsed last year. Kwon was charged with fraud and sparked an international manhunt. Well, he was arrested yesterday in Montenegro. The country’s interior minister said he was detained at an airport with falsified documents. Now he is being indicted by prosecutors in the US.

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You can read more on all of these stories at FT.com This has been your daily FT News Briefing. Make sure you check back next week for the latest business news. The FT News Briefing is produced by Sonja Hutson, Fiona Symon and me, Marc Filippino. Our editor is Jess Smith, with help this week from David da Silva, Michael Lello and Gavin Kallmann. Our executive producer is Topher Forhecz. Cheryl Brumley is the FT’s global head of audio, and our theme song is by Metaphor Music.

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