FTX founder’s mega mea culpa

This is an audio transcript of the FT News Briefing podcast episode: ‘FTX founder’s mega mea culpa’

Marc Filippino
Good morning from the Financial Times. Today is Friday, November 11th, and this is your FT News Briefing.

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FTX founder Sam Bankman-Fried tweeted sorry for his company’s $32bn collapse. Plus, a group of partners at PwC in Cyprus quit. They set up a firm that will take on clients linked to Russia. We’ll look at what that 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 yesterday through the roof. The S&P 500 was up more than five and a half per cent. The Nasdaq flew more than 7 per cent higher. The excitement came after the latest US inflation report. Consumer prices for October came in lower than expected. And while inflation is still pretty high, it’s cooling. Here’s the FT’s Colby Smith.

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

Marc Filippino
Now, what are you hearing from investors, Colby? Do they think the relief is going to last?

Colby Smith
One thing that we heard from investors yesterday was a word of caution, that this rally might be premature in the sense that even if the Fed slows the pace of interest rate increases, it doesn’t mean it’s backing off in its fight against inflation on the whole. So that’s a point that officials have really tried to drive home in their recent public appearances. You know, they say just because the Fed is slowing down the pace, you know, they’re probably going to reach a higher level of interest rates when all is said and done, which is going to have a larger impact on the economy and growth than many people expect at the current moment.

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

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One of the most high-profile personalities in the cryptocurrency world yesterday tweeted a dramatic apology. Sam Bankman-Fried founded FTX. That’s the crypto exchange that collapsed this week. Bankman-Fried tried to sell his company to a rival, Binance, that fell apart. Now Bankman-Fried is scrambling to raise funds to save FTX. In a lengthy mea culpa on Twitter, Bankman-Fried admitted that FTX did not have enough funds to meet a wave of customer withdrawals. Here’s the FT’s Josh Oliver.

Josh Oliver
So really, Sam is apologising to his clients. And anybody who had money on the FTX exchange on Tuesday afternoon has that money now stuck. They are unable to withdraw their funds. And so Sam is apologising to his clients, to his investors, to his employees, saying that effectively that the meltdown of the exchange is ultimately his fault. In this very long, quite remarkable mea culpa Twitter thread, he is saying that he did not have an accurate understanding of the exchange’s leverage and liquidity positions. He says, again, that’s his fault. What they’re doing right now is trying to raise extra liquid assets that they can use to pay back customers and attempt to save the business.

Marc Filippino
All right. So what’s next for FTX, Josh?

Josh Oliver
Well, that is the $32bn question. I mean, that was the valuation of FTX since its last fundraising round. And, you know, the fate of the company still hangs in the balance. Sam is trying. We know from reporting of our colleagues, you know, to pitch investors on basically a, you know, a Hail Mary fundraise that would allow him to, a) pay back his clients and, b) potentially salvage the business. But that is going to be an extremely difficult pitch for him to make, given what’s happened to FTX in the last week.

Marc Filippino
Now there’s also a concern about a contagion effect in the broader cryptocurrency market. Yesterday, investors pulled $700mn from another big crypto company, Tether. What’s the connection there?

Josh Oliver
I think those two things are connected by fear. Tether really matters because this is one of the, kind of, reserve assets of the crypto world and also provides a really important link between crypto tokens and traditional currencies. So this is a real kind of bedrock asset for the crypto space. Now Tether says this is business as usual, that they’re processing redemptions with no issues. But what you did see is that price of Tether, which is always supposed to be $1, fell to as low as 96.6 cents before coming back a little bit. So that does show that, you know, there were some signs of strain. But at the moment, you know, that strain has not materialised into anything serious.

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

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A group of partners at PwC in Cyprus have left to form a breakaway audit firm that will take on clients linked to Russia. The Big Four auditors are avoiding firms linked to Russia because of sanctions. Here’s the FT’s Michael O’Dwyer with more on this breakaway firm called Kiteserve.

Michael O’Dwyer
So this is a new firm, as you say, that was set up this summer by three former PwC Cyprus partners. I don’t think it’s a total surprise that Cyprus is the place where this issue has come to a head for PwC. I say that because the Cypriot economy has tighter links with the Russian one than many others in the EU. So those ties meant that there was a lot of work that either was going to be off the table completely for professional services firms in Cyprus or where there was going to have to be an assessment of whether this work could still be done.

Marc Filippino
Now, how significant is this breakaway firm and in light of all the efforts the west has put into sanctioning Russia?

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

Marc Filippino
Now, does this all undermine western sanctions or the effect they’re supposed to have?

Michael O’Dwyer
On one view, it does undermine the sanctions in the sense that there are clearly some providers, such as Kiteserve, that are willing to do work for businesses or individuals in Cyprus in this case, which would not be legal under, for example, Australian or Canadian sanctions. However, those sanctions don’t bind in Cyprus. They tend to only bind on the countries that set them. So from that perspective, what this actually exposes, maybe, is the lack of consistency between different countries in the sanctions lists that they’ve created. And it allows for this sort of sanctions arbitrage or jurisdictional arbitrage, if you like, between those different regimes which allow individual advisers, such as Kiteserve, to operate in areas where the large international firms might be more unwilling to tread.

Marc Filippino
Now, Michael, does this make PwC look bad? These are all former PwC employees.

Michael O’Dwyer
You can look at it two ways. On one level, this is a result of a policy that PwC implemented globally, this idea of sanctioned anywhere, sanctioned everywhere. And that meant that if a company or individual was on any sanctions list anywhere in the world, then PwC would not serve them in any country. On another view, this deal slightly undermines that stance because what they’ve done is they’ve cut ties completely with these partners that have gone off and set up kind Kiteserve. On their way out, those partners would normally be subject to quite strict non-compete provisions which would prevent them from providing similar services to PwC such as audit or tax advice, for example. And what PwC did in this instance is said, well, OK, you can actually compete with us, provided that you pay us for the privilege. And so PwC has received an economic gain from all of this, even though it’s not willing to carry on serving those clients itself in the long run.

Marc Filippino
Michael O’Dwyer is the FT’s accountancy correspondent. Thanks, Michael.

Michael O’Dwyer
Thanks, Marc.

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Marc Filippino
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. 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 by Metaphor Music.