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SBF’s clean-up man is still chasing the money

THE SCENE

When Sam Bankman-Fried appears in court today to be sentenced, one person who won’t be there is the man who’s spent the past 16 months sorting through what the crypto boy-king left behind.

“I’m too busy,” John Ray III told me this week.

As SBF’s successor as chief executive of what remains of FTX, Ray has been investigating the exchange’s collapse while pursuing billions of dollars in cash, tokens, venture investments, political donations, and Bahamian real estate — all to be divided between customers and other creditors who submitted claims with a face value of $23.6 quintillion.

That’s made it a complicated endeavor, undertaken under a public glare. Ray has drawn a chorus of critics, who have questioned the pace of recoveries, his decision not to reboot the crypto exchange, and his handling of the grab bag of venture investments assembled by Bankman-Fried.

So Ray, who performed the same job for Enron two decades ago, really wants you to know that he hasn’t screwed it up.

“This wasn’t a normal company that went into bankruptcy. This was a crime scene,” he said in an hour-long interview in which he defended his work and detailed the challenges of wading through the chaos left behind by Bankman-Fried, whose charges carry up to 110 years in prison. His lawyers are asking the court for a five-year term; the government wants at least 40 years.

Ray has recovered more than $2 billion and identified another $5 billion or so, which he says should be enough to fully repay customers. He’s still fighting with the IRS over its claim on $8 billion in unpaid taxes, and trying to negotiate down billions of dollars in penalties from financial regulators. FTX’s Silicon Valley investors will likely get nothing.

“We’re never going to be able to put Humpty Dumpty back together again, because Humpty Dumpty was never complete to begin with,” he said. “We’re doing our job and we’ll continue to do so as long as we think that the dollars that we’re investing can be translated into recoveries for victims.”

Ray has been in a strange position where his success diminishes, by degrees, the consequences of Bankman-Fried’s crimes and could result in a lighter sentence. His lawyers have asked the judge to consider that many creditors will be made whole. And Ray’s success in selling some FTX holdings, like a big stake in Anthropic that went for $500 million this week, has lent credibility to the idea, as Bloomberg’s Zeke Faux writes today, that customers’ funds “weren’t so much stolen as they were redirected into at least a few surprisingly good investments.”

Ray acknowledged that perception in a letter last week to the court: “That things that he stole… were successfully recovered … does not mean that things were not stolen,” he wrote. “What it means is that we got some of them back.”

Bankman-Fried was an earlier investor in Semafor, which replaced his money after charges were filed.

LIZ’S VIEW

The bankruptcy code is designed for companies with traditional assets that are easy enough to value, like factories and inventory, and traditional debts, like bonds and bank loans. FTX had neither.

Its assets were mostly what Michael Lewis, in his book about Bankman-Fried, called a “dragon’s hoard” of venture investments. And much of its debt wasn’t owed to bondholders or vendors but rather to millions of individual customers, which made this a uniquely hard clean-up job.

People are always going to be upset. Ray plans to pay customers only the snapshot value of their accounts as of Nov. 11, 2022, rather than the current value of those coins, many of which Bankman-Fried secretly sold before FTX collapsed. Given the increase in bitcoin’s price since then, customers understandably think they should be 400% richer.

His decision not to chase value in a pile of investments is defensible — and even if you’re less forgiving, it’s reversible. Many were of dubious value, and Bankman-Fried seemed not to even know exactly what he owned. The estate’s big prize, Anthropic, has gone from a virtually unknown startup to a leading contender in the AI race. It’s now worth $18 billion.

Given all that, I’ve been surprised at how normal the resolution of FTX has been. Ray has wrangled millions of individual claims, sifted through assets real and make-believe, and has a shot at recovering most of the $8 billion that was missing when FTX filed for bankruptcy.

Retail customers will be made whole, and institutional creditors will get some number of pennies on the dollar. FTX’s stockholders are wiped out, which is the right outcome in any bankruptcy and especially the right outcome in this one.

A year ago today, Alibaba announced the biggest restructuring in its history, a six-way split meant to juice the stock and help China’s one-time national champion gain back ground lost to rivals like PDD and ByteDance. Its founder, Jack Ma, had just reappeared the day before after a long and unexplained absence — the kind that’s become more common in Xi’s China — and Beijing had signaled an eagerness to work with private companies after two years of rolling Covid lockdowns had taken their economic toll.

None of those split-offs have happened. Yesterday, it scrapped plans to take its logistics unit public, following a decision last fall to abandon a listing of its cloud-computing arm. It hasn’t secured the outside financing it sought for its international ecommerce business, or listed its grocery arm, Freshippo. CEO Eddie Wu consolidated control late last year, taking direct oversight of both the cloud and Chinese shopping businesses.

Some of its problems appear outside its control; the company blamed uncertainty created by U.S. export curbs on AI chips for scuttling its cloud-unit spinoff, and broader concerns about China’s economy and its security crackdowns have sapped Hong Kong’s IPO market. The appetite for new listings “is just not there in this part of the world,” Alibaba’s chairman, Joe Tsai, said this week.

But there’s a growing sense that China’s national champion has lost its way. Even its decision in November to pay its first-ever dividend to investors clanged off the rim, with one analyst calling it a sign that the company had no better ideas.

Alibaba is still the hulking conglomerate it was a year ago, but less profitable and less richly valued by shareholders. In January, its stock dipped briefly below its 2014 IPO price of $68 a share — at the time, the largest new listing in history. Employees, too, are losing patience: Nikkei recently reported that starting in April, workers can sell their stock options every few months, rather than just once a year, and the company will add cash incentives to the mix.

We noted on Tuesday that BlackRock CEO Larry Fink’s choice of topic for his annual letter — the looming retirement crisis — was a politically safe one and a departure from the ESG topics that have animated him in the past. We mostly ignored his substantive points, so let’s dive into one of them here.

If you think America does a bad job planning for retirement (and it does), other countries do it worse. Europe’s public pensions are buckling. Most Japanese keep their wealth in bank savings, where it earns little interest. In China, people count on their homes to build wealth, which has created a property bubble that is now threatening to tank its entire economy.

Fink argues that’s because these countries essentially don’t have stock markets — or bond markets or convertible debt markets or mortgage markets. The U.S. accounts for a quarter of the world’s GDP but almost half its stock-market value.

That’s bad for both retirees, who miss out on higher returns, and for companies, which have to rely on banks for their funding.

Banks snap back more slowly after downturns than investors do. (Think about the billions in private funds being amassed now to scoop up beaten-down commercial real estate that banks won’t touch.) Fink blames Europe’s slow recovery after 2008 on its sickly banks, while America could tap a “more robust secondary pool of money – the capital markets.”

Even healthy banks are more likely to make loans if they know investors will buy them. Fink pioneered that pipeline in the 1980s, when as a young banker he helped design the first mortgage bond.

There’s a cost to the dynamism of the U.S. capital markets. Sometimes that exuberance gets away from us and we end up with the subprime mortgage bust and meme stocks. But Fink is arguing that the cost of not having them is higher, especially as populations age.

Exporting American-style markets “would create a virtuous economic cycle” in countries where growth is slow, he writes. (It would also, of course, create a lot of new customers for BlackRock, which manages nearly $5 trillion in retirement accounts.)

Europe has tried and failed before to create a capital-markets union to mirror its economic one. It’s trying again now, hoping that the needs for investment in renewable energy and defense might overcome parochial misgivings. It’s not going great.

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