Finance

IT TOOK A jury just four hours to deliberate on the seven, complicated charges of financial fraud facing Sam Bankman-Fried, the founder of FTX, a cryptocurrency exchange. They had to parse what would make him guilty of defrauding his customers and his lenders; and of conspiring with others to commit securities fraud, commodities fraud and money-laundering. After 15 days of testimony they had clearly heard enough. They convicted him of each and every count. He faces a maximum sentence of 110 years in jail.Only a year has elapsed since ftx imploded. In its heyday the exchange was one of the world’s largest, with millions of customers and billions of dollars in customer funds. It was seen as the future of crypto—a high-tech offering from a brilliant wunderkind who wanted to play nice with regulators and usher in an era in which the industry went mainstream. But on November 2nd 2022 CoinDesk, a crypto news outlet, published a leaked balance-sheet. It showed that Alameda, ftx’s sister hedge fund also founded by Mr Bankman-Fried, held few assets apart from a handful of illiquid tokens he had invented. Spooked customers began to pull holdings from the exchange. Within days it had become an all-out run and ftx had stopped meeting withdrawal requests. Customers still had $8bn deposited on the exchange. After frantically trying to raise funds, Mr Bankman-Fried placed ftx into bankruptcy.Various accounts of what went wrong have emerged since. Many came from Mr Bankman-Fried himself, who spoke with dozens of journalists in the weeks following FTX’s collapse. Michael Lewis, an author who was “embedded” with Mr Bankman-Fried for weeks before and after it failed, has published a book about him. Snippets have come from people tracing the movement of tokens on blockchains. The government revealed its theory of the case in several indictments. But little compares with the reams of evidence that were divulged during the trial by former FTX insiders, some of whom were testifying in co-operation with the government, having pleaded guilty to fraud already.Some of the story remains the same regardless of the narrator. Mr Bankman-Fried was a gifted mathematician, who graduated from the Massachusetts Institute of Technology (MIT) in 2014 before taking a job as a trader at Jane Street Capital, a prestigious quantitative hedge fund. In 2017 he spied an opportunity to set up a fund that would take advantage of arbitrage opportunities in illiquid and fragmented cryptocurrency markets, which were, per his telling, “a thousand times as large” than those in traditional markets. He enlisted an old friend, Gary Wang, a coder he had met at maths camp, to help set up the fund, which he named Alameda Research. He hired Nishad Singh, another coder and friend, as well as Caroline Ellison, a trader he had met at Jane Street.The tales begin to diverge from here. Ms Ellison, Mr Singh and Mr Wang all testified for the prosecution in the trial, speaking for hours about their version of the dizzying ascent and devastating collapse of Alameda and FTX.The way Ms Ellison described it, Mr Bankman-Fried was frustrated by how little capital Alameda had. He was “very ambitious”. In 2019 he described FTX to Ms Ellison as “a good source of capital” for Alameda. Mr Wang testified that he wrote code that allowed Alameda to have a negative balance on FTX—to withdraw more than the value of its assets—as early as 2019. Alameda was given a line of credit, which started small but ultimately increased to $65bn. Mr Wang also said that he overheard a conversation in which a trader asked Mr Bankman-Fried if Alameda could keep withdrawing money from the firm. Fine, as long as withdrawals were less than FTX’s trading revenues, came the reply. But less than a year after FTX was founded, when Mr Wang went to check its balance, Alameda had already withdrawn more than that.Customer deposits are supposed to be sacred, able to be withdrawn at any time. But even months in, Alameda already seemed to be borrowing that money for its own purposes. Mr Bankman-Fried said that he set up FTX because he thought he could create an excellent futures exchange, rather than to satisfy a desire for capital. He explained away Alameda’s privileges by saying he was only vaguely aware of them and had thought them necessary for FTX to function, especially in the early days when Alameda was by far the largest marketmaker on the exchange and there were sometimes bugs in the code that liquidated accounts. If Alameda was liquidated it would be catastrophic. Mr Bankman-Fried did not want this to happen, and he wanted the fund to be able to make markets.This might have been an excuse a jury could have swallowed, even though, by last year, Alameda was just one of perhaps 15 major marketmakers on the exchange and the others did not get such benefits. But two lines of argument undermined it. The first is how the privileges were used. The second is how Mr Bankman-Fried described FTX and its relationship with Alameda.Start with how Alameda used its privileges. Ms Ellison, whom Mr Bankman-Fried made co-chief executive of Alameda in 2021, when he stepped back to focus on his exchange, described the many times Alameda withdrew serious money from FTX. The first was when Mr Bankman-Fried wanted to buy a stake in FTX that Binance, a rival, owned. His relationship with the boss of Binance had soured and he was worried that regulators would not like its involvement. It was going to cost around $1bn to buy the stake, around the same amount of capital FTX was raising from investors. Ms Ellison said she told Mr Bankman-Fried “we don’t really have the money” and that Alameda would need to borrow from FTX to make the purchase. He told her to do it—“that’s okay, I think this is really important.”Borrowing to cover venture investments that were illiquid made the hole deeper. By late 2021 Mr Bankman-Fried nevertheless wanted to make another $3bn of investments. He asked Ms Ellison what would happen if the value of stocks, cryptocurrencies and venture investments collapsed and, in addition, FTX and Alameda struggled to secure more funds. She calculated that it would be “almost impossible” for Alameda to pay back what they had borrowed. Still, he told her to go ahead with the investment. By the next summer, Ms Ellison had been proved right.Mr Singh testified at length about “excessive” spending. Around $1bn went on marketing, including Super Bowl adverts and endorsements from the likes of Tom Brady, an American footballer—around the same as FTX’s revenue in 2021. By the end, Alameda had made some $5bn in “related party” loans to Mr Bankman-Fried, Mr Wang and Mr Singh to cover venture investments, property purchases and personal expenses. At one point, under cross examination, Danielle Sassoon, the prosecutor, asked Mr Bankman-Fried to confirm whether he had flown to the Super Bowl on a private jet. When he said he was unsure, she pulled up a picture of him reclining in the plush interior of a small plane. “It was a chartered plane, at least,” he shrugged.The prosecution often used Mr Bankman-Fried’s own words against him. Ms Sassoon would get Mr Bankman-Fried to say whether he agreed with a statement, such as whether he was walled off from trading decisions at Alameda. Mr Bankman-Fried would obfuscate, but eventually she would pin him down. “I was not generally making trading decisions, but I was not walled off from information from Alameda,” he admitted. Ms Sassoon then played a clip of him claiming he “was totally walled off from trading at Alameda”. Ms Sassoon did this over and over. Like an archer she would string her bow by asking a question, then release the arrow of evidence to prove a lie. At one point his lawyer slowed the pace of evidence by interrupting and asking if a document was being offered for its truth. “Your honour, it’s the defendant’s own statements,” the prosecutor said. “No, it’s not being offered for its truth.”Perhaps the most convincing moments of the trial were emotional ones. Ms Ellison was in tears as she told how, in the week of FTX’s collapse, “one of the feelings I had was an overwhelming feeling of relief.” Meanwhile, Mr Singh described a cinematic confrontation with Mr Bankman-Fried in September last year, when he realised how big “the hole” was. He described pacing the balcony of the penthouse (cost: $35m) where many FTX employees lived, expressing horror that some $13bn of customer money had been borrowed, much of which could not be paid back. In response, Mr Bankman-Fried, lounging on a deck chair, replied: “Right, that. We are a little short on deliverables.”As customers rushed to take their money in the week that FTX collapsed, employees resigned en masse. Adam Yedidia, one of Mr Bankman-Fried’s friends and employees, who has not been charged with any crimes and appears to have been in the dark, texted him: “I love you Sam, I am not going anywhere.” Days later, when he had learned the reality of what had gone on, he was gone. Many of those who were close to Mr Bankman-Fried and knew what was going on foresaw how this would end—those who did not were horrified when they found out. So was the jury. ■ More

Block reported a top- and bottom-line beat powered by strong revenue growth in Cash App and Square revenue.
The company saw $5.62 billion in revenue for the third quarter.

Jack Dorsey creator, co-founder, and Chairman of Twitter and co-founder & CEO of Square arrives on stage at the Bitcoin 2021 Convention, a crypto-currency conference held at the Mana Convention Center in Wynwood on June 04, 2021 in Miami, Florida.
Joe Raedle | Getty Images

Shares of fintech firm Block surged as much as 19% in after-hours trading Thursday, after the company reported third-quarter earnings that beat analyst estimates on the top and bottom line and showed strong growth in both Cash App and Square revenue.
Here’s how the company did, compared to an analyst consensus from LSEG, formerly Refinitiv:

Earnings per share: 55 cents, adjusted, vs. 47 cents expected
Revenue: $5.62 billion vs. $5.44 billion expected

Block also hiked its guidance.
The company had previously guided to $1.5 billion in full-year adjusted EBITDA but now expects adjusted EBITDA to come in between $1.66 billion and $1.68 billion.
Block is guiding to adjusted full-year operating income of $205 million to $225 million, a sharp increase from prior guidance of $25 million. Analysts surveyed by LSEG had expected full-year revenue guidance to come in at $21.54 billion. The company didn’t provide full-year revenue guidance but did guide to $875 million in adjusted operating income for 2024.
Additionally, Block now expects 2023 gross profit ranging from $7.44 billion to $7.46 billion.
“In 2024 we expect a significant improvement in Adjusted Operating Income margin on a year-over-year basis in 2024 compared to 2023. Our outlook does not assume any additional macroeconomic deterioration, which could impact our results,” the company said in its shareholder letter.

Third-quarter net revenue grew 24% to $5.62 billion from $4.52 billion in the year-earlier period, with bitcoin revenue jumping to $2.42 billion from $1.76 billion. Gross profit climbed 21% to $1.9 billion from $1.57 billion.
Adjusted EBITDA came in at $477 million, compared to $327 million in the year-ago period. There was particularly strong growth in Block’s payment platform, Cash App, and its point-of-sale suite, Square. Cash App revenue soared $3.58 billion 34% year over year, while Square revenue grew 12% to $1.98 billion.
“We’ve been quiet lately because we’ve been focused,” Block co-founder Jack Dorsey said in a letter to shareholders. Block was the subject of a short seller report earlier this year that alleged its Cash App product facilitated fraud. “We want to thank all of you for your trust and continued belief in our work. We will work to balance that trust with accountability, some of which I hope this letter provides,” Dorsey’s letter concluded.
Dorsey said the company would focus on its go-to-market strategy, targeting local restaurants and services businesses to grow, and would refocus engineering talent using artificial intelligence technology.
On a conference call with analysts, Dorsey said he intends “to lead Square until we hit some milestones.”
“I want to see a significant return to growth, number one,” he said. “I want to see us be a lot more innovative and inventive and I want to see us connect our ecosystems better.”
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The need for second — and often third — incomes is mounting, according to a top digital bank executive.
Current CEO Stuart Sopp finds almost half of the firm’s payment customers have more than one job.

“If you’re having a paycheck over the past year, 20, 25% of paycheck depositors have at least one extra job. A further 20% incremental from there have two jobs,” Sopp told CNBC’s “Fast Money” on Thursday. “They’re trying to make that money go further because of inflation.”
From DoorDash to Shopify to side businesses, Sopp finds the number is higher than prior years because money doesn’t go as far.
“Wage inflation is moderating quite substantially,” he said. “America has a sort of tail of two cities right now. Two groups: The wealthy and less affluent.”
Sopp launched Current, which provides mobile banking without monthly fees and offers secured credit cards, in 2015. It originally focused on helping medium to lower income customers. His company Current reports almost five million members.
He’s particularly concerned about less affluent consumers spiraling into debt to pay for basic necessities.

“They’re being forced into risks like risky credit cards,” noted Sopp, a former Morgan Stanley trader. “Unsecured credit cards… are not suitable for everyone.”
The Federal Reserve Bank of New York found credit card debt topped $1 trillion for the first time ever in the second quarter.
“It’s going to be way bigger this year,” Sopp said.
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Bank of England Governor Andrew Bailey said Thursday that the ongoing Israel-Hamas war poses a potential risk to the bank’s efforts to bring down inflation.
Bailey told CNBC that the now almost four-week conflict could have significant knock-on effects for energy markets, which could ultimately push prices higher again.
“It obviously is a risk going forward,” he told Joumanna Bercetche.

Bank of England Governor Andrew Bailey said Thursday that the ongoing Israel-Hamas war poses a potential risk to the bank’s efforts to bring down inflation.
Bailey told CNBC that aside from the immense human tragedy brought about by the now almost four-week conflict, the possible knock-on effects for energy markets were significant, risking a resurgence in price rises.

“So far, I would say, we haven’t seen a marked increase in energy prices, and that’s obviously good,” Bailey told CNBC’s Joumanna Bercetche.
“But it is a risk. It obviously is a risk going forward,” he said.
Oil prices have fluctuated over recent weeks as investors have eyed developments in the Middle East amid concerns that the fighting could spill over into a wider conflict in the energy-rich region.
The World Bank warned in a quarterly update Monday that crude oil prices could rise to more than $150 a barrel if the conflict escalates. As of Thursday 3:30 p.m. London time, Brent crude was trading up just over 1% at $85.65 a barrel.
Bailey said that, should energy prices push significantly higher, the central bank’s response would depend on the wider economic circumstances and how persistent policymakers expect the price rises to be.

The Bank of England has been steadfast in its efforts to bring down inflation, only ending its run of 14 consecutive interest rate hikes in September after data showed inflation running below expectations.
On Thursday, the bank held interest rates steady once again but said that monetary policy would need to remain tight for an “extended period of time.”
The Monetary Policy Committee voted 6-3 in favor of keeping the main bank rate at 5.25%, with three members preferring another 25 basis point hike to 5.5%.
“We’re going to have to hold them [interest rates] in restrictive territory for some time,” Bailey said.
“The risks are still on the upside,” he continued. “It’s really just too soon to start talking about cutting interest rates.”
U.K. inflation came in at 6.7% in September, slightly ahead of expectations and unchanged from the previous month.
The bank now expects the consumer price index to average around 4.75% in the fourth quarter of 2023 before dropping to around 4.5% in the first quarter of next year and 3.75% in the second quarter of 2024. More

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Amazon is rolling out its first buy now, pay later checkout option for the millions of small business owners that use its online store, CNBC learned exclusively.
The tech giant plans to announce Thursday that its partnership with Affirm is expanding to include Amazon Business, the e-commerce platform for companies.
The move is a boost in a crucial relationship for Affirm, which has had to search for revenue growth after demand for expensive Peloton bikes collapsed.

Alain Jocard | AFP | Getty Images

Amazon is unveiling its first buy now, pay later checkout option for the millions of small business owners that use its online store, CNBC learned exclusively.
The tech giant plans to announce Thursday that its partnership with Affirm is expanding to include Amazon Business, the e-commerce platform that caters to companies, according to executives of both firms.

Affirm shares jumped more than 10% in premarket trading following the news.
The service, with loans ranging from $100 to $20,000, will be available to all eligible customers by Black Friday, or Nov. 24. It is specifically for sole proprietors, or small businesses owned by a single person, the most common form of business ownership in the U.S.
It’s the latest sign of the widening adoption of a fintech feature that exploded in popularity early in the pandemic, along with the valuations of leading players Affirm and Klarna. When boom turned to bust in 2021, and valuations in the industry dropped steeply, skeptics pointed to rising interest rates and borrower defaults as hurdles for growth and profitability.
But for users, the option is touted as being more transparent than credit cards because customers know how much interest they will owe up front. That’s made its appeal durable for households and businesses coming under increasing strain as excess cash from pandemic stimulus programs have dwindled.
“We constantly hear from small businesses that say they need payment solutions to manage their cash flow,” Todd Heimes, director of Amazon Business Worldwide, said in an interview. “We offer the ability to use credit cards and to pay by invoice; this is another option available to small business customers to pay over time.”

Amazon Business was launched in 2015 after the company realized businesses were using its popular retail website for office supplies and bulk purchases. The division reached $35 billion in sales this year and has more than 6 million customers globally.

Amazon customer with access to a buy now, pay later option at checkout from Affirm.
Courtesy: Amazon Inc.

If approved, users can pay for Amazon purchases in equal installments over three to 48 months. They are charged an annualized interest rate between 10% and 36%, based on the perceived risk of the transaction, according to Affirm Chief Revenue Officer Wayne Pommen. There are no late or hidden fees, the companies said.
“The financial industry is not great at providing credit to really small businesses,” Pommen said. “They can’t walk into a bank branch and get a loan until they reach a certain scale. So us being able to provide this for purchases” helps business grow and manage their cash flows, he said.
The move is a boost in a crucial relationship for Affirm, which has had to search for revenue growth after demand for expensive Peloton bikes collapsed. Affirm first began offering installment loans to Amazon’s retail customers in 2021, then was added to Amazon Pay earlier this year.
Affirm decided to target sole proprietors first because they make up most small businesses in the country, with 28 million registered in the U.S., according to Pommen.
“We’ll see how the product performs and if it makes sense to expand it to a wider universe of businesses,” he said. “Our assessment is that we can underwrite this very successfully and have the strong performance that we need.” More

A month ago, on the eve of Hamas’s attack on Israel, there were reasons to be hopeful about the Middle East. Gulf states were ploughing billions of dollars of oil profits into flashy investments, building everything from sports teams and desert cities to entire manufacturing sectors. Perhaps, optimists thought, the wealth would even trickle down to the region’s poorer countries.What prompted such hope was the longest period of calm since the Arab spring in 2011. Gnarly conflicts, such as civil wars in Libya and Yemen, as well as organised Palestinian resistance to Israel, appeared to have frozen. Violent clashes were rare, which some believed a precursor to them disappearing altogether. The region’s great rivals were inching towards warmer relations. International investors flocked to the Gulf to get in on the action.Hamas’s attack and Israel’s response suggest that the region will now be laden with a bloody, destructive conflict for months to come, if not longer. Under pressure from their populations, Arab leaders have blamed Israel for the situation, even if they have been careful in their language. Overnight, their focus has shifted from economic growth to containing and shortening the war. Countries across the region, including Egypt and Qatar, are pulling out all the diplomatic stops to stop the spread of fighting.Even if the conflict remains between just Hamas and Israel, there will be costs. Analysts had been upbeat about the prospects for economic integration. In 2020 the United Arab Emirates (uae) and Bahrain normalised relations with Israel, opening the door to deeper commercial ties. Although many other Arab countries refused to recognise Israel, many were increasingly willing to do business with it on the quiet. Even Saudi Arabian firms surreptitiously traded with and invested in their Israeli counterparts, whose workers are among the region’s most productive; the two countries were working on a deal to formalise relations.How long the pause in such negotiations lasts remains to be seen, but the greater the destruction in Gaza, the harder it will be for Arab leaders to cosy up to Israel in future, given their pro-Palestinian populations and pressure from neighbours. Although Thani al-Zeyoudi, the uae’s trade minister, has promised to keep business and politics separate, others are unsure that will be possible. A Turkish investment banker, who draws up contracts for firms in the Gulf, reports that most of his clients considering Israel as an investment destination are waiting to see what happens next.For the Middle East’s poorer countries, the consequences will be worse—and nowhere more so than in Egypt. The country was already struggling, with annual inflation at 38% and the government living between payments on its mountain of dollar debts by borrowing deposits from Gulf central banks. Now it has lost out on the gas that flowed from Israel. On November 1st officials in Cairo allowed across the border a handful of injured Gazans, as well as those with dual nationalities. Some diplomats hope that a larger influx might follow, perhaps even on the scale seen by Jordan when it welcomed Palestinians in the 1940s and Syrians in the 2010s, if Egypt were given the right financial incentives. In 2016 looking after 650,000 Syrian refugees cost Jordan’s state $2.6bn, much more than the $1.3bn it received in foreign aid. There are twice as many internally displaced people in Gaza.What if the conflict escalates? In the worst case, the region descends into war—perhaps including direct confrontation between Iran and Israel—and economies are turned upside down. Any such war is likely to see a sharp rise in oil prices. Arab oil producers might even restrict supplies to the West, as they did during the Yom Kippur war in 1973, which the World Bank reckons could push up prices by 70%, to $157 per barrel. Even though the world economy is less energy-intensive today, the Gulf’s oil producers would benefit. All-out war, however, would hinder efforts to diversify their economies. Migrant workers would leave. Manufacturing industries would be hard to get off the ground without secure transport. Futuristic malls and hotels would lack the tourists to fill them. And for the region’s energy importers, which include Egypt and Jordan, a spike in oil prices would be a disaster.There is another, more plausible escalation scenario. So far Iran has declined to turn threats and errant missiles into a direct attack. Israel’s ground invasion—smaller and slower than expected—is helping keep a lid on things. Nevertheless, conflict could still spill across Gaza’s borders. Imagine, say, fighting in the West Bank or greater involvement from Hizbullah. In this scenario, investing in the Middle East would look much riskier. If fighting flashed in neighbouring countries, leaders in the Gulf would find themselves working harder to convince investors that a return to calm and closer ties with Israel might happen soon.In need of a parachuteIn such a world, Egypt would not be the only country exposed. Lebanon’s economic free fall—now in its third year, as inflation rages above 100%—would accelerate with clashes between Israel and Hizbullah, which is based in the country. Fighting in the West Bank, where tensions are high, would spell trouble for Jordan, which sits next door. Like Egypt, the country is almost broke. It took out a $1.2bn loan from the imf last year, and was recently told by the fund that its annual growth of 2.6% was insufficient to fix its problems. Refugees could leave the state unable to repay debts. Unrest along its borders could deter creditors.If either Egypt or Jordan were to run out of cash the results would be destabilising for the region. Both countries border a Palestinian territory, feeding it with supplies and providing allies with information. Both have the ear of the Palestinian Authority. And both have a young, unhappy population. The Arab spring showed how easily unrest in one Arab country can spread to another. Even Gulf officials, relatively insulated though they may be, would rather avoid such instability. ■Read more from Free exchange, our column on economics:Israel’s war economy is working—for the time being (Oct 26th)Do Amazon and Google lock out competition? (Oct 19th)To beat populists, sensible policymakers must up their game (Oct 12th)For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newslett More

When the Federal Reserve began to raise interest rates more than a year ago, American banks enjoyed a nice little boost. They increased the interest they charged on loans, while keeping the rates they offered on deposits steady. In other countries this move attracted public opprobrium and politicians floated measures to ensure that customers were not swindled. Americans were happy to rely on a more American solution: competition.It has done its job. Average yields on interest-bearing bank deposits have soared to more than 2.9%, up from 0.1% when the Fed began to raise interest rates. The extent to which higher rates have been passed on to customers—known as the “deposit beta”—has been a popular subject on recent quarterly earnings calls. Despite assurances by bank bosses that they have peaked, betas are likely to keep rising in the coming months, pinching profits.image: The EconomistThe process is being driven by customers shifting their money from low-yielding products to higher-yielding ones. Data from quarterly filings show that the share of bank deposits held in interest-free accounts has fallen from 29% at the end of 2021 to 20%. Had this figure remained constant, bank interest costs would be roughly 10% lower than they are now. Quarterly filings also show that banks which have lost more than 5% of their deposits since the start of the year have increased the average rate on interest-bearing deposits by 2.7 percentage points, compared with a more miserly 2.1 percentage points at those institutions with more secure deposits.This much is familiar from past Fed tightening cycles. Historically, however, big banks have enjoyed an advantage over smaller peers, owing to their pricing power—something that now appears to be dwindling. America’s “big four” banks (JPMorgan Chase, Bank of America, Wells Fargo and Citigroup) reported average deposit costs of 2.5% in the third quarter of the year, identical to the median rate across all the country’s banks. And the funding gap between the biggest and smallest institutions has flipped since the last tightening cycle. In 2015-19 banks with assets of at least $250bn paid 0.3 percentage points less on their deposits than banks with less than $100m in assets; today they are paying 0.8 points more.Brian Foran of Autonomous Research, an advisory firm, suggests that this may reflect greater competition among big banks for corporate and high-net-worth clients, who are most likely to be aware of other, higher-yielding places to stash their cash. When rates were at zero, competition for such deposits was non-existent, notes Mr Foran. Now, with money-market funds offering 5%, the competition is much fiercer.How much longer will the squeeze continue? Chris McGratty of kbw, an investment bank, says that banks have felt most of the pain, but that costs have a bit further to rise and are likely to stay elevated, given that the Fed has signalled it will keep rates higher for longer than previously expected. Even if the Fed’s policymakers are done raising rates and banks keep yields steady, customers will continue to shift deposits from lower-earning to high-earning products, pushing up costs for banks. This will put pressure on deposits, forcing banks to slow their lending. While savers will benefit from higher rates of return, borrowers are another story altogether. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More