Read It And Eat 03/04

Welcome to ‘Read it and Eat’ — your go-to for bite-sized updates on corporate actions in finance, AI and anything I consider newsworthy. Join me twice a week for quick reads, where I serve up the latest insights that matter in the world of business.

Major Headlines

• McKinsey does a Pseudo-Layoff:

• The Consulting company McKinsey and Co. is the largest, by employee headcount, and most popular of the Big 3 consulting companies, also known as the MBB (McKinsey & Co, Bain & Co. and Boston Consulting Group (BCG)). The consulting industry, like many other industries such as Tech, Finance and Accounting is facing a downturn and is in the midst of a rising number of layoffs. However, in order to keep with its values and traditions, rather than instituting layoffs and paying the statutory minimum in severance, which is usually three months, the firm has opted for a pseudo-layoff or a more generous landing for their managers and consultants. Their offer is for their managers and consultants to look for jobs elsewhere but to however, remain on the payroll of the company for 9 months, in addition to career coaching services, resume assistance and other administrative assistance. The fact is being laid off is a horrible thing no matter how it is packaged, however, rather than the cold and brutalist method the tech, finance, auditing and other industries are adopting, McKinsey, who prides itself in thinking differently has opted for a relatively fairer and more considerate method of delivering the terrible blow. This is especially brilliant as Gen-Z has begun to document and post their employers as they are laid off without empathy nor consideration for the well-being and work put in, as evidenced by them either being laid off via a Zoom call where they are unable to unmute themselves or through an email or a letter in the mail. A McKinsey spokesperson said that its unusual approach to layoffs is all part of the company’s core mission to help people “learn and grow into leaders, whether they stay at McKinsey or continue their careers elsewhere.” [Bloomberg]
  

• “Mark Zuckerberg slid in my DMs”:

• Imagine waking up one day, puffy-eyed, coffee in one hand and phone in the other checking your emails, and you see an email from Zuckerberg himself addressed to you. This scenario is actually happened to a few engineers who work at Google’s DeepMind, Google’s AI research arm. According to a report from The Information, at least two individuals have seen emails authored by Zuckerberg himself, sent to the AI researchers. In the emails, Zuckerberg reportedly explains the importance of AI to Meta and implores them to join Meta to work with him on the company’s AI projects. Meta’s outlandish acquisition strategy doesn’t stop with the personal touch. The Information reports Meta is defying typical recruitment standards by making offers to candidates without conducting any interviews. The tech giant is not just rewriting the recruitment rulebook. It’s also revoking historic retention policies, attempting to keep candidates with job offers from other AI firms by counter-offering higher pay packages. Zuckerberg has been bullish about Meta’s ambition to be a key player in the AI space. Whilst the company will continue to focus on its metaverse projects, it will also invest heavily in AI. Zuckerberg is pouring endless buckets of cash into his AI division in a bid to race against Microsoft and its partner OpenAI, which so far have maintained an early lead. Meta is aiming to accumulate more than 340,000 of Nvidia’s H100 GPUs, all to drive AI into its popular apps: Facebook, Instagram and WhatsApp, whether we want them or not. [The Information]
  

• Air-Peace begins Lagos to London Flight:

• The beautiful thing about competition is that it disrupts and forces the monopoly or in this case duopoly to adapt or die. For almost a decade Nigerians have been forced to cough up thousands of Dollars or Pounds, or millions of Naira to be able to afford an economy ticket to fly to the UK with airlines like Virgin and British Airways. It was not uncommon to be charged over 1550GBP for a BA economy class ticket on a plane that is a decade old and doesn’t even offer in-flight Wifi and subpar services and meals. With business class seats that, compared to other business class tickets in the same price range, are worse than average. Also things like having their passengers walk on the tarmac rather than providing a Passenger Boarding Bridge. It is also not uncommon to have a wonderful and newer plane that flies to the airline’s connecting port and then be downgraded to an uglier and more rickety plane for the route from that connecting port to the Nigerian destination for about twice the average price with carriers like Air France and Turkish Airlines. With the entrance and subsequent disruption of Air Peace, a Nigerian-owned and operated carrier, and their aggressively priced tickets on their Lagos to London route, other carriers such as BA and Virgin have halved their ticket prices just to compete. Air Peace has entered the market with updated planes and in-flight meals that cater more closely to the Nigerian palettes that are the majority of their customer base. [Channels]
  

• IDF strategically murders Foreign Aid workers in Gaza,:

• When researching on this topic, we stumbled on something particularly grim, to say the least, which I suggest try to do, we must also issue a warning before you do. Go to Google and type in the search bar “The IDF bomb” and you will be horrified by the suggestions that come out to be searched. That aside, the IDF has bombed and killed seven foreign aid workers who were amongst the World Central Kitchen a humanitarian group, which delivers food aid to war and disaster zones. A spokesman said the seven were returning from coordinating an aid shipment in central Gaza when they were killed. WCK said the following individuals died when the IDF struck their three-car convoy: Saifeddin Issam Ayab Abutaha, 25, of Palestine; Lalzawmi Frankcom, 43, of Australia; Damian Soból, 35, of Poland; Jacob Flickinger, 33, a US-Canadian dual citizen; along with UK citizens John Chapman, 57, James Henderson, 33, and James Kirby, 47. The killings have prompted international condemnation, with UK Prime Minister Rishi Sunak demanding a “thorough and transparent investigation” from Israel. It is without a doubt that this response is pathetic and shows the spineless nature of the response that the Western world shows towards Israel. Aside from the fact that asking Israel to investigate the IDF is akin to asking a corrupt police force to investigate themselves, a toothless endeavour, the strike itself is strategic not only in the literal sense that they targeted a three-car convoy. The strategic and more sinister reason for this killing is a threat to other aid workers and ships from coming to Gaza, in essence, they are saying “If you even attempt to aid the Palestinians, this too would be your fate” and the message was clearly passed as aid ships with over 200 tonnes of aid from Cyprus have turned back after the strike. Again, this is not about eliminating Hamas, it is for the complete destruction and annihilation of the Palestinians in Gaza. [The Telegraph]
  

MINOR NEWS

• Binance names its first Board of Directors [Bloomberg]

• Disney wins proxy fight against activist investor Nelson Peltz. [CNBC]

• Tesla finally delves into advertising after great resistance from Elon [CNN]

• Gen-Z rethinks the college path for the blue-collar skilled labour path. [Wall Street Journal]

• Taiwan hit by the strongest earthquake since 1999. [The Guardian]

• Tesla quarterly deliveries fall for the first time since 2020. [NBC]

• WeWork to emerge from bankruptcy in May-end after restructuring $8Bn in leases. [ABC News]

• The World Bank is seeking to issue $1Bn in a debut hybrid note this year. [Reuters]
  

NEWS OF THE DAY

Sam Bankman-Fried, A.K.A. the Millenial Bernie Madoff:

There is a possibility that even though you are an avid reader of this newsletter, you have only heard of Sam Bankman-Fried and don’t really know who he is and what he did. As you consider this newsletter your go-to source for your financial news to keep you updated, it is only right I give you a breakdown that is sufficiently but not exhaustively detailed about who this man is so that you too can be informed, and you can always refer to this newsletter whenever HBO, Netflix or Disney+ releases their Docu-series or Documentary about him.

Samuel Benjamin Bankman-Fried (SBF) was born on March 5th 1992 to Joseph Bankman, an American legal scholar, psychologist and Professor of Law and Business at Stanford Law School, and Barbara Fried, an American lawyer and retired professor of law at Stanford Law School. He grew up in California’s wealthy San Francisco Bay area, where he attended a $56,000-a-year school. He studied at the Massachusetts Institute of Technology (MIT) where he lived in a group house called Epsilon Theta, which promotes itself as an alcohol-free community “known for liking beanbags, board games, puzzles, and rubber ducks”. He graduated in 2014 with a major in physics and a minor in maths.

Imagine there is a box that you tell someone that if you put money into it, it would multiply tenfold, from 2012–2021 that box was cryptocurrency, the mentality and hype around crypto was that people became millionaires by getting into crypto early. It seemed like everyone and their grandmother who did not know the first thing about finance or investing was suddenly putting their entire life savings into crypto, and thus the phrase “going to the moon” was reshaped, which meant that it had an infinite possibility for growth. It seemed unstoppable as Bitcoin went to an all-time high of $68,000+ and was rising as fast as 400% per month. This spurred the introduction of “Meme Coins” such as Shiba Inu and Dogecoin which had no inherent value but were still minting millionaires because everyone wanted to be a part of the crypto boom, and everyone wanted in. How does this relate with FTX? Most people in order to purchase crypto would have to buy their crypto through an exchange platform like Binance, Coinbase or, at the time, FTX, think of it like a Bank that you put your fiat money into, GBP/USD/NGN etc, and you place orders to purchase and or sell cryptocurrency such and store said purchased crypto on that platform, the exchange’s job is to match you with those who wish to sell the crypto and payout to you your fiat currency when you request a withdrawal of funds.

How does this time in with SBF? After three years at Jane Street, SBF quit with his eye on taking more risks to make more money. He landed on crypto as the best way of getting rich quickly. It started with Bitcoin. He realised it was selling for more in Asia than it was in the US — and figured if he could buy it in one place and sell it in another he could turn an easy profit. “I got involved in crypto without any idea what crypto was,” he told Forbes. “It just seemed like there was a lot of good trading to do.” In 2017 he co-founded cryptocurrency trading firm Alameda Research, bringing in other recruits from the effective altruism community and reportedly donating half of the company’s profits to charity. At its peak, the company was moving $25m in Bitcoin each day. Two years later, he founded FTX, an exchange which allowed users to buy and sell buy cryptocurrencies, and moved to Hong Kong.

The thing about SBF is that from the onset he had a carefully crafted public image as this quirky, nerdy, unassuming, idealistic yet pragmatic whizz-kid full of nervous charm. Who was called many things, “The crypto king”, and “The most generous Billionaire in the world” Forbes even said, “Save for Mark Zuckerberg, no one in history has ever gotten so rich so young”. He had dishevelled hair, loosely fitting T-shirts and cargo shorts with sandals, he slept on bean bags in his office and even though he had a net worth of $22.5 billion at his peak, he drove a Toyota Camry. Even when pictured with the likes of Tom Brady at the Super Bowl or politicians Bill Clinton and Tony Blair he maintained this persona. The media ate this up, without questioning it they believed his act. This persona of a Billionaire who wasn’t in it for the money but who was dedicated to philanthropic ideals and giving it all away, on every podcast, interview and YouTube video just perpetuated this carefully crafted image. In addition to the prestige that came from being white, an MIT alumnus and having parents who are Stanford professors, he used all of these to his advantage. Sam Bankman-Fried was once caught playing “League of Legends,” during a meeting with investors from Sequoia Capital and was “absolutely fantastic” while answering questions from the Sequoia partners during a Zoom meeting when FTX was raising its Series B, according to a since-removed profile of the founder on the firm’s website.

Beyond SBF, FTX was everywhere, from financing a Super Bowl Ad, which costs an average of $4m for a 30-second spot, to having the Miami Heat Arena stadium named after it after singing an 18-year $135 million deal which is now renamed the Kaseya Center. The popular E-Sports organisation known for their League of Legends team was renamed TSMFTX after a 10-year $210 million deal. Tom Brady, the greatest quarterback in NFL history and his wife were official ambassadors of the company. The entirety of the Major League Baseball was sponsored by FTX having every single umpire had the FTX the logo embodied on their uniforms. Formula 1 teams, the International Cricket Council, the Golden State Warriors, Kevin O’Leary and YouTubers who dominated the finance space on YouTube and generally gave decent financial advice like Graham Stephen and Andrei Jikh were all paid promoters and were used as ad space for the company. They were everywhere. The company also donated politically, over $100 million, $24 million of which went to Republican candidates and $40 million went to Democratic candidates and causes in the 2022 election cycle. This bought him power and influence in Washington to be able to lobby for laws that benefited him personally and FTX as a company.

All good things must come to an end, but it must be said that SBF’s rise and fall has to be a contender for not only the largest fraud to fail; but the fastest rise and fall of a fraud in history. He founded Alameda in November of 2017, but his real claim to fame was FTX which was founded in May of 2019 and collapsed in November of 2022. In November 2017, SBF co-founded Alameda Research as a quantitative trading firm, after he left his job at Jane Street Capital. The firm was based in Berkeley, California, where SBF moved that same year. He had recruited about 20 young effective altruists, most of whom had no experience trading in financial markets nor were aware of cryptocurrencies. Per a 2021 interview, the term ‘research’ was included in the name to avoid scrutiny, with Bankman-Fried saying, “if you named your company like We Do Cryptocurrency Bitcoin Arbitrage Multinational Stuff, no one’s going to give you a bank account”. One of those people was Caroline Ellison whom he had an on-and-off romantic relationship. She and the FTT token were amongst the things that cause the house of cards that was fix to crumble. With your understanding of how an exchange platform works, FTX operated and made revenue by charging a fee for all those transactions, they, however, gave a discount to their users who, instead of withdrawing their funds or storing it in another cryptocurrency token like Bitcoin, stored it on their platform in the form of FTT token which was the crypto coin that was made and operated by FTX. What Alameda Research did was essentially a crypto hedge fund, they’d carry out trades, matched buyers and sellers and give investors an alleged return of 15% to their investors and claim that there was no downside. Now even though the returns are skeptical and too good to be true the problem wasn’t the returns, the problem was the fact that FTX would give Alameda customers funds as a loan to make those trades, in total, FTX gave Alameda $10 billion of customers funds without the customer’s consent which was not only illegal but in clear violation of FTX’s own guidelines. “I absolutely could pull it off without my math degree” said Caroline in a podcast when discussing what she does and how she trades at Alameda. “We use very little math, we use a lot of elementary school math” she proceeds, “We don’t use stop losses as they are not great risk management tools.” This is obviously not what you would want to hear from someone who was essentially gambling with billions of dollars of other people’s money. So, to clarify, customers put their money with FTX in fiat, crypto or FTT token, and this money is then hauled, without the knowledge nor consent of said customers by the truckload to Alameda research who then trades this money using elementary school math if any at all and no risk management systems, what could go wrong?

In the second half of 2022 was the beginning of the end for SBF and FTX. This is because inflation began to rise, which led the Federal Reserve to lift interest rates, which led to more expensive loans and an overall more cautious economy causing a dive of the investments into riskier assets such as crypto. This led to a cascade of failures of crypto firms that were bailed or bought out by SBF giving him access to the crypto on their books for a massive discount. This tactic wasn’t necessarily bad as everyone thought that FTX and Alameda had a good stockpile of cash from the profitable trades at Alameda, however wasn’t the truth as Alameda was making millions in losses from bad trades and was haemorrhaging so much cash that SBF shifted $4 billion in customer’s funds to help stabilise Alameda and he publicly stated that he was moving the money around within the FTX group of companies. This bailout was a loan given to Alameda from FTX and in return, the collateral for the loan would be the FTT token given to FTX by Alameda, a token that was created by FTX.

“It’s fascinating to see that the majority of the net equity in the Alameda business is actually FTX’S own centrally controlled and printed-out-of-thin-air token” Swan Bitcoin CEO.

On November 2nd the News broke by CoinDesk that showed that in essence the token created by SBF was artificially inflated in worth and that artificial inflation was then used to finance his projects, this was ok when people bought into crypto and it was on the rise but when those assets started to decline, those tokens and thus the $14 Billion worth of them on Alameda’s balance sheet became illiquid and without the liquid cash backing these assets (thus allowing people to sell their FTT tokens for actual money) the company began free falling. It is time to introduce another character CZ the founder and CEO of Binance the second-largest trading platform at the time which was FTX’s main rival. CZ bought a 20% stake in FTX for $100 million 6 months after its launch, which SBF bought back for $2 billion which was paid in part with the FTT token. This relationship was strained as SBF was lobbying against Binance in Congress by requesting a brokerage-like licensing system for decentralised finance, a direct attack on the reach and customers of Binance. The thing is SBF did not really think it through, remember the $14 Billion worth of FTT tokens that were on the balance sheet of Alameda, $2 Billion of that was in the possession of CZ and a sale of that magnitude on the open market could trigger a bank run, and that is exactly what CZ did after the scathing report was published, not only did he sell all $2 billion worth of his shares, he tweeted about it.

SBF obviously had to respond and rather than own up and mitigate the disaster he chose to lie and implicate himself further on Twitter.

A bank run occurs when people upon hearing that a bank is about to collapse run to the bank to withdraw whatever funds they have within the said bank, and that’s what happened here, within 72 hours FTX saw a withdrawal of over $6 billion This caused price of the FTT token to fall by 80% in 2 days, this was disastrous as FTX did not even have the funds to pay out these withdrawals. With $9 billion in liabilities and only $900 million in liquid assets. It gets worse, SBF calls CZ to organise a deal to buy SBF [permit all the acronyms] within the same day of putting the “FTX is fine tweet” meant that things were considerably much worse than he was portraying. CZ after considering the deal of buying out their competitor ‘for a song’ for two days backed out of the deal and decided to let it collapse. This was because they had been given the company’s books and realised it wasn’t worth saving. On top of this, the US DoJ began investigating the $10 billion of the customer’s funds that were given as a loan to Alameda. Thus with no Liquidity and no plan B FTX halted withdrawals on their platform and from rumours of bankruptcy of the company to fact, SBF resigned and FTX filed for bankruptcy, a $32 billion collapse. This caused the entire crypto market and industry to implode on itself, wiping out $2 Trillion worth of people’s funds, it was dubbed the crypto contagion. It was reported that 1–2 billion dollars of the transferred customer funds went missing and $600 million was syphoned from the FTX platform.

Aside from the broader market contagion, the fallout that was directly linked to FTX was monumental, Sequoia Capital wrote down the $210 million in investment to FTX, SoftBank wrote down $100 million, Crypto VC Multicoin Capital had assets frozen and subsequently obliterated by FTX, so was Galois Capital who had half of their capital stuck in FTX’s exchange. BlockFi had to halt withdrawals and they too are heading for bankruptcy, the Ontario Teacher’s Pension fund invested and lost $95 million of their pensioner’s funds which had nothing to do with crypto was also affected. Estimates peg the liabilities to $50 billion.

All of this would give you an understanding of why after the trial the prosecutors were seeking a jail term of 50 years. Unfortunately, he was only given 25 years without Parole. With every bubble, there is a company that is the scapegoat for its bursting and it collapses with the bursting of the Bubble. Lehman Brothers with the housing bubble, WeWork with the startup bubble, and FTX with the crypto bubble. They are always touted as the darling of the era, and if you look closely, we are in two other bubbles, the private equity bubble with the likes of KKR and TPG capital, and the AI bubble with companies like OpenAi and Nvidia. For legal reasons I have to state that this is not financial advice, this is just a statement of facts as they stand at the time of writing. [ABC News]

Gen-Z Word Of The Day

Based

A word used when you agree with something; or when you want to recognize someone for being themselves, i.e. courageous and unique or not caring what others think. Especially common in online political slang.