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SBF Denies Steering Alameda Bets; Early Alameda Staff Quit in Droves Over Risk Concerns
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Good day and welcome to WSJ Pro Bankruptcy's Daily Briefing. It's Thursday, Dec. 1. Sam Bankman-Fried denied knowing the full scope of Alameda's bets but admitted to making mistakes, in his first known appearance since FTX's collapse. Years before FTX collapsed, a group of employees quit after becoming concerned about what they say was his cavalier approach to risk, compliance and accounting. And crypto exchange Kraken said it plans to lay off about 1,100 workers, 30% of its staff.
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Sam Bankman-Fried acknowledged in documents he wrote that Alameda’s lack of accounting and risk controls led to trading losses.
PHOTO: TING SHEN/BLOOMBERG NEWS
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SBF says he didn’t know about scale of Alameda bets. Sam Bankman-Fried said that he didn’t intend to commit any fraud or use customer funds to back leveraged bets that went wrong at Alameda Research, a crypto hedge fund attached to FTX that pushed the exchange to bankruptcy.
“I didn’t knowingly commingle funds,” Mr. Bankman-Fried said via live stream at the DealBook Summit in New York on Wednesday. He also was surprised at the size of Alameda’s bets that went wrong, “which points to another failure of oversight on my part,” Mr. Bankman-Fried said.
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“I didn’t know exactly what was going on.”
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— Sam Bankman-Fried, co-founder at FTX
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Other interesting tidbits SBF said during his first known interview since FTX's collapse:
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What does SBF think of FTX customers' recovery potential:
Mr. Bankman-Fried said he wants to assist government regulators in an attempt to make customers whole. He doesn't know what will happen to FTX because it’s no longer his decision to make.
“I want to be helpful wherever I can on anything that can help bring a lot more value to customers,” Mr. Bankman-Fried said. “I don’t know where that will lead.”
He said there had been interest in providing the platform with billions of dollars of financing prior to FTX’s chapter 11 filing.
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Was he advised against speaking publicly?
What are your lawyers telling you right now? Are they suggesting this is a good idea for you to be speaking?” Andrew Ross Sorkin asked.
“No, they are very much not,” Mr. Bankman Fried said. But he said, "I have a duty to talk to people. I have a duty to explain what happened and I think I have a duty to do everything I can to try and do what’s right.”
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How did his parents, who are law professors, respond to news of FTX’s collapse?
“It’s been a hard period for anyone who was close to me and none of them deserved that,” Mr. Bankman-Fried said. “The largest number of people hurt here were customers and I feel incredibly bad about that.” —Jonathan Randles
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Alameda staff quit after battling Sam. Years before Sam Bankman-Fried’s crypto empire collapsed, a group of employees quit in a power struggle—after becoming concerned about what they say was his cavalier approach to risk, compliance and accounting.
The employees worked at his trading firm, Alameda Research, and were some of his earliest colleagues, including Alameda’s co-founder, Tara Mac Aulay. They left in 2018, well before the crypto exchange FTX grew out of Alameda. Both FTX and Alameda are now bankrupt.
Mr. Bankman-Fried placed huge bets on crypto assets but paid little heed to the risk of those bets, brushing off the staffers’ concerns, according to people familiar with the matter. The firm commingled trading capital with operating cash and had poor record-keeping that left its profits and losses unclear, they said.
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“He didn’t want to feel constrained.”
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— Naia Bouscal, former software engineer at Alameda
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The Tether logo on a smartphone. Gabby Jones/Bloomberg
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Tether's loans add risk to stablecoin. The company behind the tether stablecoin has increasingly been lending its own coins to customers, rather than selling them for hard currency upfront. The shift adds to risks that the company may not have enough liquid assets to pay redemptions in a crisis.
Tether Holdings Ltd. says it lends only to eligible customers and requires that borrowers post lots of “extremely liquid” collateral, which could be sold for dollars if borrowers default.
These loans have appeared for several quarters in the financial reports Tether shows on its website. In the most recent report, they reached $6.1 billion as of Sept. 30, or 9% of the company’s total assets. They were $4.1 billion, or 5% of total assets, at the end of 2021.
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Kraken's Jesse Powell in a file photo from 2014.DAVID PAUL MORRIS/BLOOMBERG NEWS
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Kraken to lay off 30% of staff. The crypto exchange Kraken plans to lay off about 1,100 workers, 30% of its staff, the company said Wednesday.
The layoffs are a result of the crash in crypto prices and the overall economic condition, co-founder and Chief Executive Jesse Powell said in a blog post.
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Investors withdrew $20 billion from crypto funds in November. As FTX plunged into chaos and bankruptcy in November, crypto investors were pulling money out from wherever they could. Crypto-fund asset managers like Grayscale Investments, CoinShares International Ltd. and others saw investors withdraw $19.6 billion in November, according to research firm CryptoCompare. That represented 14.5% of the fund managers’ total assets under management, and it brought their collective AUM to its lowest point since December 2020.
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Treasury Secretary Janet Yellen in Washington on Nov. 18.CHRIS KLEPONIS/ZUMA PRESS
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"I think everything we've lived through over the last couple of weeks, but earlier as well, says this is an industry that really needs to have adequate regulation and it doesn't," Ms. Yellen said on Wednesday at the New York Times DealBook Summit in New York City.
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FTX among topic of Senate hearing. Senators with a plan to regulate cryptocurrencies will question the Commodity Futures Trading Commission’s leader about the failure of digital-asset exchange FTX and legislation that would give that agency more power over the volatile market.
CFTC Chairman Rostin Behnam is scheduled to testify at Thursday morning’s hearing of the Senate Agriculture Committee. The committee’s leadership, Sen. Debbie Stabenow (D., Mich.) and Sen. John Boozman (R., Ark.), introduced a bill that would regulate trading in bitcoin, ether and some other cryptocurrencies through the commission. Giving the CFTC, a relatively small agency, authority to police trading in the most valuable crypto assets would mark a substantial expansion of the regulator’s authority.
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Reverse Mortgage is at least the second real-estate lender to file for bankruptcy this year.
PHOTO: BRENDAN MCDERMID/REUTERS
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Reverse Mortgage files for bankruptcy. Reverse Mortgage Investment Trust Inc., one of the nation’s largest mortgage lenders that enables people to tap the equity built up in their homes, has filed for chapter 11 bankruptcy protection.
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The Bloomfield, N.J.-based company partly attributed rising interest rates to the disruption of its business. Reverse Mortgage said it faced a liquidity crunch and stopped mortgage origination in early November as it had to increase the capital to support the origination of new loans and to service portfolios. Reverse mortgages are typically made to seniors looking to tap the value built up in their homes.
Backed by investment firm Starwood Capital Group, the company lists both assets and liabilities of $10 billion to $50 billion, according to a court filing.
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Chemical business reorg plan approved. TPC Group Inc. received approval for a bankruptcy plan that will help settle roughly 11,000 claims related to a 2019 explosion at a Texas chemical plant.
The chapter 11 reorganization eventually gained overwhelming support from senior creditors and from individuals and businesses affected by the explosion and subsequent fires.
Edan Lisovicz, a lawyer for unsecured creditors, said “hard-fought negotiations” ultimately resulted in a roughly $30 million settlement for his group. Initially, those junior creditors could have potentially received nothing.
Mr. Lisovicz called it a “bittersweet outcome” because they are “far from being made whole” but now can receive proceeds from a trust and potentially from parties that didn’t get legal immunity in the bankruptcy.
After the hearing Wednesday in the U.S. Bankruptcy Court in Wilmington, Del., TPC said it expects to emerge from bankruptcy soon with less debt and better positioned for growth. New owners will include bondholders. —Becky Yerak
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Fed Chairman Jerome Powell
PHOTO: ELIZABETH FRANTZ/REUTERS
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Fed to slow rate hikes. Federal Reserve Chair Jerome Powell indicated the central bank is on track to raise interest rates by a half percentage point at its next meeting, stepping down from an unprecedented series of four 0.75-point rate rises aimed at combating high inflation.
Mr. Powell, in a speech Wednesday, said an overheated labor market needed to cool more for the Fed to be confident that inflation would make durable downward progress toward its 2% goal.
Because the Fed has raised rates rapidly and it takes time for those moves to influence the economy, it would make sense for officials to slow rate increases, he said in remarks prepared for delivery at the Brookings Institution.
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“The time for moderating the pace of rate increases may come as soon as the December meeting.”
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— Jerome Powell, Federal Reserve Chair
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U.S. economic growth slowed this fall with business activity in some parts of the country stalling or declining, the Federal Reserve said in a Wednesday report.
Businesses also expressed greater uncertainty and increased pessimism for the U.S. economy as prices and interest rates continue to rise, according to the central bank’s latest compilation of economic anecdotes from around the country, known as the Beige Book. U.S. economic activity was “about flat or up slightly,” compared with a moderate average pace of growth cited in the prior report.
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What layoffs? Every day it feels like another big U.S. company is announcing layoffs. But even if you squint, it is hard to find those layoffs showing up in job-market statistics. The Labor Department on Wednesday reported that a seasonally adjusted 1.39 million people were laid off or discharged from their jobs in October. That was up a tad from Sep.’s 1.33 million but still extremely low. In the two decades of available data—a period that includes years with smaller U.S. population and workforce—it never fell below 1.59 million.
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