Happy hump day to the smartest corner of the web. I’m Phil Rosen, writing to you from Los Angeles.
This morning I’m thinking about just how wild, deep, and strange the FTX drama has become.
More details are sure to emerge, but there’s already enough fodder for a spectacular thriller novel on par with “The Big Short.” In fact, Michael Lewis is already working on a book.
Today, I’m breaking down the latest and weirdest developments surrounding Sam Bankman-Fried and company — and also sharing details from a conversation I had with one FTX user who’s been left in a six-figure hole.
1. The SEC has alleged that Sam Bankman-Fried orchestrated a years-long fraud scheme. A closer scrutiny of court documents reveal an underlying theme of commingled funds, overlapping and mixed finances, and inexcusable, messy bookkeeping.
Bankman-Fried’s entire enterprise — counting FTX, his hedge fund Alameda Research, as well as scores of smaller entities — were steeped in one another’s funds.
It’s hard to tell where one company’s cash ended and another’s began.
For example, earlier this year Bankman-Fried and FTX co-founder Gary Wang borrowed $546 million in promissory notes from Alameda to fund purchases of Robinhood stock, court documents showed.
Later, Alameda took out a loan and pledged those same shares as collateral, per CoinDesk.
Now, Bankman-Fried is stuck in a four-way legal battle for ownership of that nearly half-a-billion stake in Robinhood.
Then, consider a separate SEC complaint that alleged FTX customers were told to wire money to an obscure, fake electronics retailer with a website full of misspelled words and unusually priced items.
This subsidiary, North Dimension, played a key role in putting user’s funds in the coffers of Alameda to use in trading.
The website, which has now been deactivated, would list a laptop or cell phone at a “sale” price of $899, compared to its “normal” price of $410.
I certainly think so. But look at this: FTX execs reportedly hid $8 billion in liabilities in a customer account that Bankman-Fried referred to as “our Korean friend’s account,” according to CFTC prosecutors.
The whole notion of “where did the money go” seems to be getting more muddled by the day.
There’s a chance that those who end up in the most financial pain will be everyday investors who, like some institutional investors, trusted their funds to FTX.
I spoke to a California-based father of three who lost access to $120,000 as FTX collapsed. Nauman, a 48-year-old software developer who asked to be identified by first name only, isn’t holding out much hope to get his money back.
In a phone call, he told me he’d planned to use those funds for his childrens’ college education.
A bear market is one thing, he said, because that’s something you can stomach as a veteran investor. But when there’s malice and thievery it becomes much harder to handle.
“If this turns out that Bankman-Fried is locked up in jail, and all the lenders and big creditors get taken care of, but retail customers get left empty, then that doesn’t do much,” Nauman told me.
“Everyday investors are the bottom of the barrel when it comes to pecking order, but there has to be some type of recourse for unsecured individuals.”
In other news:
2. US stock futures rise early Wednesday, after China announced it will end quarantine for inbound travelers from Jan. 8. Here are the latest market moves.
3. Earnings on deck: Cal-Maine Foods, Toshico, and more, all reporting.
4. These books can help you build wealth in 2023. Real estate investors, “super savers,” and finance experts broke down their top reads that can help you spend less and save more as the calendar turns. See all eight books.
5. Russia’s finance minister said the oil price cap is hitting the Kremlin’s export revenue. It could also widen its budget deficit, Anton Siluanov said, adding that if export volumes decrease, Russia could turn to both loans and the National Wealth Fund.
6. The biggest losers in the S&P 500 this year have erased $1.6 trillion in market value. Meta, Tesla, and PayPal sit among the top 10 worst performing stocks in the index that, like the rest of the market, have endured a brutal year. Here’s the full list.
7. Tech stocks are at “great entry levels” for long-term investors right now. That’s according to Wedbush, which pointed out that Apple, Amazon, and other behemoths are trading at a low price that could be seen as an opportunity. With the Fed in the “7th inning” of rate hikes, it could set up a choppy but upside path for tech shares.
8. The CIO of a top-performing fund said 2023’s stock market will present a tale of two halves. He believes the S&P 500 will retest its 2022 lows in the coming months, but could see a change in course later in the year. These are the sectors he thinks will outperform.
9. These 50 stocks are trading at steep discounts that make them low-risk and high-reward, according to Goldman Sachs. Certain names are set to deliver outsized returns next year, and pose only a little more risk than the S&P 500. Get all the stock names.
10. Southwest Airlines stock tumbled Tuesday. The airliner canceled thousands of flights over the holiday weekend, and expects more cancellations to spill over into the rest of the week. One figure estimated Southwest’s cancellation rate at 62%.
Edited by Jason Ma in Los Angeles and Hallam Bullock (@hallam_bullock) in London.