SBF explains FTX’s missing money

One scoop to start: A US private equity group has resumed talks to buy Italy’s largest petroleum refinery from Russia’s Lukoil. Crossbridge Energy Partners, with the financial backing of commodity trader Vitol, is negotiating an agreement with Lukoil that would value the Sicily-based ISAB refinery at between €1bn-€1.5bn.

In today’s newsletter:

FTX: IOU’s are as good as money

For weeks, DD has been trying to conceptualise the spiralling mess at FTX.

Here’s where we’re at: it’s Dumb and Dumber meets Lord of the Flies.

Let us explain.

There’s a central problem for the creditors hoping for a recovery from the implosion of Sam Bankman-Fried’s FTX. The company’s young employees spent valuable resources like drunken sailors, but much of what’s left behind are speculative IOUs in the form of illiquid crypto tokens.

The FT’s Nikou Asgari and Joshua Oliver report on the culture inside FTX, where a lack of internal controls meant that spending went largely unchecked.

FTX’s employees paid hundreds of millions of dollars for property in the Bahamas where the firm was located, $135mn for naming rights to a Miami basketball stadium and even racked up a $55,319 tab at the Margaritaville Beach Resort in Nassau.

“[It was] kids leading kids,” said one former employee. “The entire operation was idiotically inefficient, but equally mesmerising,” they added. “I had never witnessed so much money in my life. I don’t think anybody had, including SBF.”

Ultimately, the company once valued at $32bn operated in a manner befitting of the children lampooned in William Golding’s Lord of the Flies, albeit with far more cash. “It just kinda went crazy,” said one employee.

After the spending binge, which included massive political contributions and billions spent on acquisitions and investments in venture funds and start-ups, there’s not much cash left.

FTX had less than $1bn in liquid assets against nearly $9bn in liabilities and a negative $8bn entry described as “hidden, poorly internally labled ‘fiat@’ account”, the FT reported in November.

Much of what remains are tokens such as Serum and FTT of questionable worth. One valuable asset is a 7.6 per cent stake in online trading company Robinhood.

The problem is bankrupt cryptocurrency lender BlockFi claims it is the rightful owner of the stake and is suing SBF to seize shares it says he pledged as collateral just days before his exchange collapsed.

SBF included the Robinhood shares on FTX balance sheets presented to potential rescue investors and even privately negotiated to sell the shares on Signal, according to messages seen by the FT.

The situation is reminiscent of the 1994 comedy Dumb and Dumber.

Characters played by Jim Carrey and Jeff Daniels find a suitcase filled with cash and go on a spending spree, buying Lamborghinis and ugly suits, as they try to return it. They credit their spending with IOUs. “That’s as good as money, sir. Those are IOUs. Go ahead and add it up, every cent’s accounted for,” says Carrey’s character Lloyd Christmas.

On Wednesday, SBF used the New York Times’ Dealbook conference to explain himself, stating he “never tried to commit fraud” while admitting he made “a lot of mistakes”.

Ultimately, SBF took the Lloyd Christmas approach. “There are a lot of assets that are on hand here, though many are not liquid . . . I think there is a shot for real value.”

One prominent onlooker found it convincing. “Call me crazy, but I think @sbf is telling the truth,” tweeted hedge fund billionaire Bill Ackman.

Dawn of the day traders

Trading in meme-stocks may have died down, but there’s a new casino game attracting interest on Wall Street.

Professional traders are diving into so-called zero-day options, derivative contracts that are bought or sold on the day they expire, DD’s Eric Platt and the FT’s Nicholas Megaw report.

The surging volumes — now accounting for more than two-fifths of daily trading in S&P 500 index options — have captured the attention of trading desks, not least because some believe the derivatives are contributing to recent wild swings in stock markets.

One thing to get out of the way before we go further: the name “zero-day options” can be confusing given the actual derivatives being traded are weekly contracts that are bought or sold on the day that they expire (ie there are “zero days” until they expire).

The trading shift was spurred by new products from exchange operator Cboe Global Markets. In an attempt to capitalise on the boom in options trading, it launched new weekly options on the S&P 500 index that expire on Tuesdays and Thursdays, joining the pre-existing products that expire on Mondays, Wednesdays and Fridays.

The new set of days means investors can trade large sums of options that mature each day of the week — including as zero-day options when they’re on the cusp of expiry.

So why does it matter? The jump in options trading could be contributing to the wild intraday market swings registered this year. Market makers that sell options contracts will hedge their positions to avoid making a bet on the market’s direction. But that hedging can, at times, accelerate broader shifts.

“As options activity goes up, this can create bigger swings,” said Garrett DeSimone, head of quantitative research at OptionMetrics. Recent studies have led to the theory that option sellers’ so-called gamma exposure could increase volatility, he added.

Nomura analyst Charlie McElligott posited that some financial institutions had been behaving like “full-tilt day traders”, trying to “weaponise” the phenomenon to “amplify and ‘juice’ the intended directional market move”.

Nestlé’s M&A regrets

It’s not often that the head of a large company publicly admits its dealmaking was a mistake. But Nestlé’s chief executive Mark Schneider is feeling frank. He has acknowledged two dealmaking missteps.

First, its $2.6bn purchase of Aimmune Therapeutics in 2020 — the company behind a medication aimed at combating the frequency and severity of allergic reactions to peanuts in children. It has received “slower than expected adoption by patients and healthcare professionals’‘, Nestlé said.

The company has launched a review of the peanut medication and said it will explore options, which could result in a partnership or a sale.

Second, Schneider expressed regret over a $950mn acquisition of meal kits start-up Freshly the same year, which will soon merge with Kettle Cuisine, a premium food manufacturer owned by LVMH-backed private equity group L Catterton.

Nestlé will be left with a minority stake in the group that delivers ready-to-cook meals, a business model that has slowed since widespread Covid-19 lockdowns ended.

The disappointing deals sting that much more given that inflation has taken a toll on the Swiss food company’s profitability, Lex notes.

Long referred to as the man who turned round Nestlé, Schneider is no doubt eager to reinforce his reputation. The company has had a net annual return on acquisitions between 11 and 13 per cent since 2018, “with a large majority of transactions at or above their business plans”, the company said.

The owner of two labradoodles, Schneider is now turning to pet food — as well as coffee — for growth. The idea is that, even as consumers re-evaluate everyday purchases, these won’t be hit as hard.

Some bankers might be quietly hoping the pet food growth isn’t M&A-driven. They have been known to eat pet food during deal pitches in order to show their enthusiasm for the product.

Job moves

• David Lipton, the international affairs counsellor to US Treasury secretary Janet Yellen, is stepping down, according to The New York Times.

• UBS veteran Mark Lewisohn is leaving the Swiss bank after 33 years, per Financial News.

• Law firm Dechert has appointed partners David Forti and Mark Thierfelder as co-chairs and partners Sabina Comis and Vincent Cohen Jr as its first global managing partners. The new leadership team will succeed chair Andy Levander and CEO Henry Nassau in July.

• Goldman Sachs’ global head of people science Julie Zide-Mandel has joined Morgan Stanley as head of people analytics.

• Credit Suisse’s West Coast US investment banking head Gregory Quilici has joined the boutique firm William Blair in San Francisco.

• Separately Oliver Isaac, the last remaining analyst on Credit Suisse’s high-yield team in London, has resigned, per eFinancialCareers.

Smart reads

Does anyone do due diligence anymore? FTX’s implosion, Theranos founder Elizabeth Holmes’ 11-year prison sentence, and the Spac boom suggest not. Investors need to ask more questions, writes the FT’s Brooke Masters.

Bumbling Brexiters City minister Andrew Griffith discussed grand plans for a “Big Bang 2.0” in Britain’s financial sector during the FT’s Global Banking Summit on Tuesday. Reuters’ Breakingviews reckons it’s going to be a big flop — which could actually be a blessing in disguise.

The new normal A year after Federal Reserve chair Jay Powell signalled an end to the cheap money era, fund managers are still getting used to the realities of higher interest rates.

News round-up

Yellen says she ‘misspoke’ in playing down chance of Twitter deal probe (FT)

UBS chair rules out more US acquisitions after aborted Wealthfront deal (FT)

HSBC to close a quarter of UK branches (FT)

Binance re-enters Japanese crypto market with deal for Sakura (FT)

Top Adidas executive rebuked in ‘final warning’ over comments on diversity (FT)

Eni in talks to buy Neptune Energy (FT)

Klarna says it has made progress towards profits as losses double (FT)

Saudi Arabia wealth fund secures $17bn loan for megaproject push (FT)

London’s financial sector told to tackle class prejudice (FT)

Kirkland & Ellis partners face nervous wait on pay, promotions (Financial News)

Corporate concentration: boardroom rosters plagued by same old faces (Lex)