Washington’s new crypto shocker: Sam Bankman-Fried’s arrest

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Dec 13, 2022 View in browser   By Zachary Warmbrodt and Sam Sutton Presented by American Bankers Association Editor's note: Morning Money is a free version of POLITICO Pro Financial Services morning newsletter, which is delivered to our subscribers each morning at 5:15 a.m. The POLITICO Pro platform combines the news you need with tools you can use to take action on the day's biggest stories.  Act on the news with POLITICO Pro . FTX founder Sam Bankman-Fried's day of reckoning has arrived. Here's what we know. The U.S. attorney's office for the Southern District of New York announced Monday evening that Bahamian authorities arrested the former crypto exchange executive at the request of the U.S. Federal prosecutors plan to unseal their indictment Tuesday morning. The charges include wire fraud, securities fraud and money laundering, according to the New York Times . The SEC early Tuesday charged Bankman-Fried with orchestrating a "years-long fraud" to conceal from investors the misuse of FTX customer money. SEC Chair Gary Gensler said the former FTX CEO "built a house of cards on a foundation of deception while telling investors that it was one of the safest buildings in crypto." The arrest and planned extradition was announced on the eve of Bankman-Fried's previously scheduled appearance at Tuesday morning's House Financial Services Committee hearing on FTX's disastrous collapse. Financial Services Chair Maxine Waters said in a statement that she was disappointed he would not testify but that she remained committed to getting to the bottom of what happened at the company. Bankman-Fried's absence may not ultimately derail lawmakers' fact-finding mission, as SBF had already warned that his answers would be "frustrating and underwhelming." Rep. Bill Huizenga (R-Mich.) told MM before the arrest that Bankman-Fried's testimony would be a "complete goat rodeo." The headlines from the hearing will now be dominated by what are likely to be damning revelations from John Ray III, the corporate wind-down specialist who took the helm of FTX upon its bankruptcy and will be the sole witness fielding questions from lawmakers Ray will blame "the absolute concentration of control in the hands of a very small group of grossly inexperienced and unsophisticated individuals," according to prepared testimony . He will cite not only problematic handling of customer funds but also a recent $5 billion "spending binge" on "a myriad of businesses and investments, many of which may be worth only a fraction of what was paid for them." Ray will describe his internal investigation of FTX as "enormous" in scope, involving the tracking of money flows from the time of the company's founding. He is crafting findings to make it useful for government officials in the U.S. and around the world. What lawmakers want to know — Look for members to try to nail down not just what went wrong at FTX but to also take shots at regulators. The committee is rife with crypto-friendly lawmakers who want the SEC to back off regulation of digital assets, and they want to use the FTX collapse to showcase how the agency is ineffective. (A hearing memo from Waters' staff focuses on the public tick-tock of FTX's demise and the SEC's role in crypto.) Huizenga: "I am very curious to know how current operations are and what's sort of being uncovered. Everybody's trying to figure out what ratio of incompetence versus fraud this might be. Is it more Enron, or is it more Bernie Madoff?" Rep. Stephen Lynch (D-Mass.): "We're going to try to get a sense of [Bankman-Fried's] deliberate conduct to avoid regulation that's in place right now." Rep. Josh Gottheimer (D-N.J.): "Where was the SEC? What kind of oversight was there? What should the SEC be doing? What proposed regulations would he suggest?" Rep. French Hill (R-Ark.): "We hope to take the bankruptcy filing, along with John Ray's testimony and all the public comments that Bankman-Fried has made recently — and in the past — and pose questions to him around those issues to elicit the best responses we can." Key context: SBF's political groundwork — Bankman-Fried spent about $40 million on the last election, according to Open Secrets, with some of his campaign contributions going to Financial Services Committee members. Bloomberg reports that $73 million of the overall political donations tied to FTX and its executives may be at risk of being clawed back in bankruptcy. "There's a lot of hype, there's a lot of misinformation and this industry is really pumping money into Congress," Lynch said. "That's a real concern because I think members might be influenced by that." It's Tuesday — All we want for the holidays are more scoops. Please send tips to zwarmbrodt@politico.com and ssutton@politico.com . A message from American Bankers Association: Don't let big grocery chains and mega-retailers pressure Congress into passing misguided credit card legislation that will put your airline miles and personal data at risk. They want to pad their profits, as consumers struggle with sky high prices. Tell your lawmaker to oppose S. 4674.   Driving the Day Driving the day … FOMC's two-day meeting begins … Peterson Institute discussion on whether regulation can save crypto at 9 a.m. … House Financial Services FTX hearing at 10 a.m. … Senate Banking votes on FDIC nominees at 2:15 p.m. … Senate Banking holds a hearing on how capital markets can serve diverse entrepreneurs and investors at 2:30 p.m. … Senate Republicans want Tim Scott to run — From POLITICO's Marianne LeVine on what may occupy the South Carolina Republican's time beyond the Banking Committee: "Scott's not personally chatty about the prospect of a 2024 presidential run, declining to talk and directing questions to his staff. But his Republican colleagues are buzzing about his massive reelection victory this year, rising national profile, substantial fundraising hauls and cross-country travels for other candidates. And they're happy to talk him up." Sen. Kevin Cramer (R-N.D.): "He just looks like a person who is making all the right moves to be a candidate." Fed officials split on future rate hikes – WSJ: "Some expect inflation to cool steadily next year and want to stop raising rates soon. Others worry inflation won't ease enough next year, a scenario that calls for raising rates higher or holding them at that level for longer, boosting the chance of a sharp downturn." FTC aims for more control of Microsoft and Meta — POLITICO's Josh Sisco: "Buried in court filings for both cases — a lawsuit to block Microsoft's takeover of video game company Activision Blizzard, and a trial against Meta's takeover of Within , maker of the virtual reality fitness app Supernatural — [Lina] Khan's push for new authorities shows how much more aggressive the agency is under her watch. "If the FTC can score a victory in either proceeding — though there's likely a long way to go before either reaches that point — Khan and her team would do more than just block these deals, they'd be arming themselves with broad investigative authority over future acquisitions at Meta and Microsoft." China challenges U.S. chip rules at WTO — Our Gavin Bade: "China has initiated a World Trade Organization challenge to U.S. actions to constrain its microchip industry, arguing that the Biden administration's actions to curtail trade in chip manufacturing equipment violate the global trade rules, the U.S. government confirmed on Monday."   POLITICO AT CES 2023 : We are bringing a special edition of our Digital Future Daily newsletter to Las Vegas to cover CES 2023. The newsletter will take you inside the largest and most influential technology event on the planet, featuring every major and emerging industry in the technology ecosystem gathered in one place. The newsletter runs from Jan. 5-7 and will focus on the public policy related aspects of the event. Sign up today to receive exclusive coverage of CES 2023.     Crypto DOJ officials split on charging Binance – Reuters: "Splits between U.S. Department of Justice prosecutors are delaying the conclusion of a long-running criminal investigation into the world's largest cryptocurrency exchange Binance, four people familiar with the matter have told Reuters. … "Binance's defense attorneys at U.S. law firm Gibson Dunn have held meetings in recent months with Justice Department officials, the four people said. Among Binance's arguments: A criminal prosecution would wreak havoc on a crypto market already in a prolonged downturn. The discussions included potential plea deals, according to three of the sources." FIRST IN MM: Gensler's allies come to his defense – The American Economic Liberties Project has a new report defending SEC Chair Gary Gensler from the crypto industry's claims that the regulator failed to crack down on FTX before it collapsed into bankruptcy last month. According to Matt Stoller, the group's director of research, Gensler's enforcement strategy and anti-crypto stance helped keep the FTX contagion from infecting traditional markets. "There's a remarkable level of chutzpah going on here," Stoller told MM. "The crypto people, they're the kid that murdered his parents and then asked for mercy because [he's] an orphan." Is the crypto crash good for banks? — A Consumer Bankers Association poll conducted in early December found that 49 percent of Americans said the crypto crash made them more likely to choose a traditional bank. About 35 percent said the meltdown had not impacted their decision, and 16 percent didn't know.   A message from American Bankers Association:   Regulatory Corner FDIC nominations vote delayed — Senate Banking on Monday night postponed a vote on three FDIC nominees until Tuesday at 2:15 p.m. ECB warns banks on the end of easy money — POLITICO's Hannah Brenton in Brussels: "The European Central Bank on Monday said it will step up its scrutiny of the euro zone's biggest banks' plans to exit from cheap central bank funding. … "Kerstin af Jochnick, a member of the ECB's Supervisory Board, and Mario Quagliariello, director of supervisory strategy and risk, said banks and supervisors need to 'remain cautious of undercurrents' despite strong capital ratios and improving bank profits from rising interest rates."   A NEW POLITICO PODCAST: POLITICO Tech is an authoritative insider briefing on the politics and policy of technology. From crypto and the metaverse to cybersecurity and AI, we explore the who, what and how of policy shaping future industries. We're kicking off with a series exploring darknet marketplaces, the virtual platforms that enable actors from all corners of the online world to traffic illicit goods. As malware and cybercrime attacks become increasingly frequent, regulators and law enforcement agencies work different angles to shut these platforms down, but new, often more unassailable marketplaces pop up. SUBSCRIBE AND START LISTENING TODAY .     Fly Around Meet The Wall Street Journal's new editor — WSJ: "News Corp named veteran U.K. journalist Emma Tucker as the next editor in chief of The Wall Street Journal, succeeding Matt Murray, who oversaw significant digital growth and guided the news organization through the Covid-19 pandemic." Goldman Sachs to cut jobs — Bloomberg: "The bank is drafting plans that could eliminate at least 400 positions from its loss-making retail banking operations, according to people familiar with the matter." Microsoft buys stake in London Stock Exchange — Reuters: "Microsoft will buy a 4% stake worth $2 billion in the London Stock Exchange Group, in the latest sign of blurring boundaries between Big Tech and financial firms which have raised some concerns among regulators." A message from American Bankers Association: Big grocery chains and mega-retailers are pressuring Congress to pass legislation that will harm consumers. These businesses enjoy record profits on record prices. Now they're demanding all the benefits of our modern payments system without helping pay for it. Their so-called Credit Card Competition Act would in fact reduce choices for consumers, jeopardize the security of their sensitive data, and eliminate popular credit card reward programs like travel points that drive the nation's tourism industry. Recent survey data show that 94% of consumers value the convenience of their credit cards and 90% value their credit card rewards. Ask your lawmaker to stand up for American consumers and oppose this misguided legislation.     Follow us on Twitter Mark McQuillian @mcqdc Ben White @morningmoneyben Victoria Guida @vtg2 Katy O'Donnell @katyodonnell_ Zachary Warmbrodt @Zachary Sam Sutton @samjsutton   Follow us

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