Sam Bankman-Fried is due back in court today.Credit…Justin Lane/EPA, via Shutterstock
The truth about Bankman-Fried’s historic bail deal
Andrew here. Happy New Year and welcome back to DealBook. We’re looking forward to a big 2023.
One story line we’ll be following, of course, is the saga of Sam Bankman-Fried and FTX. The fallen crypto mogul is scheduled to be in court in New York on Tuesday, where he is expected to plead not guilty. We’ll bring you all the behind-the-scenes details tomorrow.
But one question that came up over the holidays — perhaps even at your own gathering — was: Why was Mr. Bankman-Fried granted bail, allowing him to stay out of prison and live at his parents’ home, before his trial? It was especially puzzling because his bail was set at $250 million, and he had told me at the DealBook Summit that he had only $100,000 to his name.
Over the break, I spoke with many involved in Mr. Bankman-Fried’s extradition from the Bahamas to the United States and with his bail arrangement. It’s a fascinating story of deal-making and negotiation, driven in large part by public perception.
First, it’s worth explaining how bail actually works. When a judge sets bail, the accused doesn’t have to put up that entire amount to stay out of prison. The figure is instead what the accused would have to pay if he or she doesn’t show up for court. Typically, the defendant posts bond, which is about 10 percent of bail — though that’s not a hard-and-fast rule. Bond could also be provided as collateral or as cash and can be posted by others, including friends or a bail bond agent.
For prosecutors, bail is meant to be a strong disincentive to flee, not to make a statement about justice. In fact, the legal system would prefer defendants who aren’t a danger to others to stay out of prison, reducing costs. (The annual cost of detaining an inmate in New York City, for example, is over $500,000.)
Mr. Bankman-Fried had another point of leverage: U.S. prosecutors had wanted to extradite him from the Bahamas quickly, to avoid both the perception of slow-moving justice and his getting hurt in a Bahamian jail before being moved to the U.S. If he had fought extradition, he would most likely have lost that fight, but it would have cost the U.S. time and money. In return, he wanted to stay out of prison before trial.
The Justice Department and Mr. Bankman-Fried’s lawyers ultimately negotiated over how to extradite him in exchange for letting him stay out of prison without posting a huge bond, given his lack of funds. So while prosecutors could herald a $250 million bail, one of the highest in history, he was ultimately released on something closer to his own recognizance, which is also a standard arrangement. Prosecutors did demand that his parents post their home as collateral and co-sign the bail deal, expecting that Mr. Bankman-Fried wouldn’t want to hurt his family.
Of course, many FTX customers remain furious about this arrangement, given how many poorer defendants are stuck in prison. What do you think? Let us know at firstname.lastname@example.org.
HERE’S WHAT’S HAPPENING
Tesla investors fret over missed sales goal. Shares in Tesla were down over 3 percent in premarket trading, after the carmaker disclosed sales growth in its most recent quarter that fell short of analysts’ expectations. The announcement will put more pressure on Elon Musk to focus on making cars rather than running Twitter.
Southwest Airlines’ travails continue. The embattled carrier canceled or delayed hundreds of flights on Monday, after saying it had resumed “normal” operations on Friday. It’s the latest setback for Southwest, which has faced criticism from customers, employees and government regulators for a huge number of flight disruptions over the holidays.
What to Know About the Collapse of FTX
What is FTX? FTX is a now bankrupt company that was one of the world’s largest cryptocurrency exchanges. It enabled customers to trade digital currencies for other digital currencies or traditional money; it also had a native cryptocurrency known as FTT. The company, based in the Bahamas, built its business on risky trading options that are not legal in the United States.
Who is Sam Bankman-Fried? He is the 30-year-old founder of FTX and the former chief executive of FTX. Once a golden boy of the crypto industry, he was a major donor to the Democratic Party and known for his commitment to effective altruism, a charitable movement that urges adherents to give away their wealth in efficient and logical ways.
How did FTX’s troubles begin? Last year, Changpeng Zhao, the chief executive of Binance, the world’s largest crypto exchange, sold the stake he held in FTX back to Mr. Bankman-Fried, receiving a number of FTT tokens in exchange. In November, Mr. Zhao said he would sell the tokens and expressed concerns about FTX’s financial stability. The move, which drove down the price of FTT, spooked investors.
What led to FTX’s collapse? Mr. Zhao’s announcement drove down the price and spooked investors. Traders rushed to withdraw from FTX, causing the company to have a $8 billion shortfall. Binance, FTX’s main rival, offered a loan to save the company but later pulled out, forcing FTX to file for bankruptcy on Nov. 11.
Why was Mr. Bankman-Fried arrested? FTX’s collapse kicked off investigations by the Justice Department and the Securities and Exchange Commission focused on whether FTX improperly used customer funds to prop up Alameda Research, a crypto trading platform that Mr. Bankman-Fried had helped start. On Dec. 12, Mr. Bankman-Fried was arrested in the Bahamas for lying to investors and committing fraud. The day after, the S.E.C. also filed civil fraud charges.
The Virgin Islands’ attorney general is ousted. Denise George, who struck a $105 million settlement with the estate of Jeffrey Epstein late last year, was removed from her job days after suing JPMorgan Chase in connection with her investigation into the late financier. According to news reports, Ms. George hadn’t notified Gov. Albert Bryan about the lawsuit before it was filed.
U.S. News & World Report plans changes to its law school rankings. The publication said on Monday that it would revamp its list of top schools, including by giving more credit to institutions whose students pursue advanced degrees, and less credit to surveys of their reputations. The move comes after top schools like Harvard and Yale said they would boycott the rankings.
The N.F.L. is criticized for delay in postponing play after Damar Hamlin’s collapse. Several commentators and former players said the league took too long to halt the game between the Buffalo Bills and the Cincinnati Bengals last night after Mr. Hamlin, a Bills safety, collapsed nine minutes in. (The Bills later said he had suffered from cardiac arrest.) Scores of supporters, including LeBron James and the Disney C.E.O. Bob Iger, offered public support for Mr. Hamlin.
Chaos greets House Republicans
The new year is off to a rocky start for House Republicans, with internal disarray and scandal threatening to delay the new majority’s stated agenda to challenge, among other things, the Biden administration’s new rules on E.S.G. investing. Before that, the chamber must vote on a speaker. Kevin McCarthy of California, the top Republican, is struggling to muster support, potentially putting the congressional session in peril.
The House leadership vote could go into overtime, as a small contingent of ultraconservative Republicans who oppose Mr. McCarthy may force more rounds of ballots. To secure the 218 votes to clinch victory, Mr. McCarthy has already made concessions, including a proposed rule change making it easier to remove the speaker. Still, he needs every vote he can get, which may explain why he has been silent about his problematic new colleague, Representative-elect George Santos of New York.
A Times investigation revealed that Mr. Santos had fabricated most of his résumé, including details about a career on Wall Street. (He has since admitted that much of his history was fiction.) Mr. Santos is facing scrutiny into his campaign finances and spending, and could face a congressional ethics inquiry once seated. Some Republican lawmakers have joined the chorus of Democrats who say that Santos should not assume office. But with the Republican majority so slim, Mr. McCarthy needs the support Mr. Santos has promised him.
The bumpy start doesn’t bode well for House business in 2023. The Republican strife has already delayed committee appointments and could soon leave staff members without pay. More critically, this initial acrimony signals the challenges a new Republican leader will have in keeping the party united over key issues.
The Aftermath of FTX’s Downfall
The sudden collapse of the crypto exchange has left the industry stunned.
- A Spectacular Rise and Fall: Who is Sam Bankman-Fried and how did he become the face of crypto? “The Daily” charted the spectacular rise and fall of the man behind FTX.
- How FTX Operated: FTX called itself an exchange. But it was vastly different from stock exchanges, which are highly regulated and barred from engaging in many of the activities that the crypto company pursued.
- Political Donations: Federal prosecutors are seeking information from Democrats and Republicans about donations from Mr. Bankman-Fried and two former FTX executives.
- Ryan Salame: The former FTX executive, who told regulators about wrongdoing at the exchange and was a big Republican donor, has emerged as a central player in the scandal.
At the state level, however, change is already afoot with new laws in effect for the new year:
California and Washington are requiring employers to post salary ranges on job listings; prospective bosses in Rhode Island must provide a range if requested. Some employers are already finding ways to sidestep new pay transparency rules.
There are minimum wage increases in 23 states, with Washington paying the top hourly rate at $15.74, and California at $15.50.
Massachusetts residents will pay a 4 percent tax surcharge on income over $1 million.
Winners and losers of 2022
Stock markets around the world are off to a decent start for 2023, with exchanges from Hong Kong to Paris in positive territory this morning. That’s little consolation for investors who endured a brutal 2022.
Here are some of the highlights and lowlights from last year:
The S&P 500 fell 18.1 percent on a total returns basis, its largest annual decline since 2008.
In crypto, Bitcoin tumbled 64.3 percent, while Ethereum plummeted 67.5 percent.
It wasn’t just stocks and crypto in the red: The global bond market “fell into a bear market for the first time in 70 years,” the research analysts Jim Reid and Henry Allen of Deutsche Bank wrote to investors this morning. One reason was that investors are concerned about a global recession.
Among those that did well were Brazil’s Bovespa, Greece’s Athex, India’s Nifty, the United Kingdom’s FTSE 100, the Dow Jones Stoxx 600 banks sector and the S&P 500’s energy sector. All finished the year higher.
“We expect one-third of the world economy to be in recession. Why? Because the three big economies — U.S., E.U., China — are all slowing down simultaneously.”
— Kristalina Georgieva, managing director of the International Monetary Fund, delivers a gloomy year-ahead outlook.
The week ahead
It may be a holiday-shortened week, but there will be a lot of economic data released, plus a smattering of corporate earnings. And get ready for plenty of headlines about new tech gadgets. Here’s what to look for:
Tuesday: After the New Year’s break, stock markets reopen in New York and London. At 7 a.m. Eastern, S&P 500 futures were 0.3 percent higher in premarket trading, and Britain’s FTSE 100 was up by nearly 1 percent.
Wednesday: Minutes from the December meeting of the Fed’s Open Market Committee will be published. Investors will look for clues into how the central bank might set interest rates this year.
Thursday: Earnings from Walgreen Boots Alliance, Conagra and Constellation Brands are on deck. CES, the annual consumer tech trade show, opens in Las Vegas and runs through Jan. 8.
Friday: The jobs report comes out before the opening bell. Economists expect December payrolls to rise by 200,000. Investors fear that a big increase could push the Fed to keep up its aggressive pace of interest rate increases.
THE SPEED READ
SpaceX has reportedly clinched $750 million in new funding at a $137 billion valuation, led by the venture firm Andreessen Horowitz. (CNBC)
The bankrupt movie theater operator Cineworld said it won’t sell individual assets and denied holding sales talks with its chief rival, AMC. (Reuters)
Funds at Fidelity marked down the value of their stakes in Twitter by over 50 percent. (Reuters)
Meta is reportedly set to decide soon whether to let Donald Trump back on Facebook and Instagram, after Elon Musk’s Twitter did so in November. (FT)
The European Parliament’s president moved to start the process for waiving legal immunity for lawmakers accused of participating in a bribery scheme allegedly run by Qatar. (Bloomberg)
Talk of banning TikTok in the U.S. has moved from Washington to a city council in South Dakota. (WSJ)
Best of the rest
With stocks and bonds languishing, a wave of retail investors have found a new market to tap: commodities trading. (FT)
Looking to bolster tourism and overseas business, Dubai scrapped a 30 percent tax on the sale of alcohol. (NYT)
Twitter’s San Francisco landlord is suing the company for $136,260 in unpaid rent. (WSJ)
Britain faces the deepest recession among G7 nations. (FT)
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