WEBVTT - Jane Street's Culture

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<v Speaker 1>This is Bloomberg Crypto Daily Bloomberg I heard podcast and

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<v Speaker 1>I'm Philip Blogger Crans there in today for Stacy Marie Ishmael.

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<v Speaker 1>It is Monday, December nine. It has now been just

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<v Speaker 1>over a month since former crypto exchange FTX filed for bankruptcy,

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<v Speaker 1>and it didn't take long for events to catch up

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<v Speaker 1>with its founder. Sam Bankman Freed, the one time crypto

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<v Speaker 1>wonderkin known to most people as SPF. Bank Man Freed

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<v Speaker 1>has been arrested in the Bahamas and US authorities have

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<v Speaker 1>unleashed some truly stunning charges against him, essentially accusing him

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<v Speaker 1>of having run his entire crypto empire as a personal

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<v Speaker 1>piggy bank and defrauding customers who put their money onto FTX.

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<v Speaker 1>Blank Man Freed himself has said it was all down

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<v Speaker 1>to sloppy accounting and mismanagement, which is all the more

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<v Speaker 1>surprising given that he spent three years at one of

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<v Speaker 1>the Wall Street firms that's famous for his level of

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<v Speaker 1>a caution and its attention to risk, namely Jane Street. Bloomberg.

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<v Speaker 1>Hannah Miller has been reporting on this. This is just

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<v Speaker 1>going to be a story that takes a long time

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<v Speaker 1>to unfold and that there are many more new developments

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<v Speaker 1>down the line, and she joins me now for this podcast, Hannah,

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<v Speaker 1>welcome to the podcast. Thank you so much for having

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<v Speaker 1>me Phil. All Right, so this is obviously an extraordinary

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<v Speaker 1>busy day when it comes to the topic at hand.

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<v Speaker 1>But let's first start off with the big bombshell of

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<v Speaker 1>the day. Um, Sam bank Man Freed has been a

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<v Speaker 1>rested in Bahamas and the d o J, the SEC,

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<v Speaker 1>and the CFTC have all gone after him. And this

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<v Speaker 1>is obviously like there's stuff happening all the time. The

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<v Speaker 1>story is evolving. We don't know everything yet. But for

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<v Speaker 1>the listener who's just coming fresh to this, what are

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<v Speaker 1>the most serious allegations or how would you sum up

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<v Speaker 1>the most serious allegations against um Sun Bakmin Freed and

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<v Speaker 1>ft X. Yeah, well this is unfolding in real time

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<v Speaker 1>right as a recording, which was pretty cool, um, but yeah,

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<v Speaker 1>the charges are very very serious. Um. You know, there's

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<v Speaker 1>allegations of fraud. Uh and a lot of this boils

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<v Speaker 1>down to misappropriation of customer funds. So did Sam Bankman

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<v Speaker 1>Freed used customer deposits to cover Alima his debt and

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<v Speaker 1>expenses Uh. Is there's also a question of whether he

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<v Speaker 1>used customer funds too, you know, support his own personal

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<v Speaker 1>expenses and those of his family and other employees. So

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<v Speaker 1>there's a lot of there are a lot of questions

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<v Speaker 1>here and uh, it's again just happening as we speak.

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<v Speaker 1>So it's a it's a pretty exciting time for the industry,

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<v Speaker 1>but it's not We're not just talking about a couple

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<v Speaker 1>of customers here. Hum. I mean, we're talking about hundreds

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<v Speaker 1>of thousands of customers, including retail savers who put well

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<v Speaker 1>probably there are lives pennies on this. Hum. Yeah, it

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<v Speaker 1>could be up to a million customers. That was brought

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<v Speaker 1>up in the in the house hearing, and yeah, it's

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<v Speaker 1>been really stunning to see. Uh, you know, testimony from

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<v Speaker 1>the current CEO of fd X, John Jay Ray. The

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<v Speaker 1>ft X groups collapse appears system from absolute concentration of

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<v Speaker 1>control in the hands of a small group of grossly inexperienced,

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<v Speaker 1>unsophisticated individuals. First, customer assets at ftx dot com we're

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<v Speaker 1>commingled with assets from the Elemated trading platform. That much

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<v Speaker 1>is Claire second Elmy to use client funds to engage

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<v Speaker 1>in market. It's just sad to see that this is

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<v Speaker 1>you know, people's personal funds, life savings, you know that

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<v Speaker 1>they might never get back. Speaking of John Ray, I mean,

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<v Speaker 1>this guy has seen it all. He was running and

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<v Speaker 1>Ron's bankruptcy, wasn't he. Yeah, he's very experienced in this area.

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<v Speaker 1>You know, he's he's a respected name. I think it

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<v Speaker 1>was pretty shocking when you know, he first took on

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<v Speaker 1>the post and you know, just in the bankruptcy filings

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<v Speaker 1>said that this was some of the most you know,

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<v Speaker 1>shocking things that he's seen at a company. Okay, so

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<v Speaker 1>we're gonna rewind a little bit and we're gonna talk

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<v Speaker 1>a little bit about where Sam bank Manfried came from

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<v Speaker 1>and and we're actually a lot of his fellow um

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<v Speaker 1>senior executives at FTX came from an anomeda um and

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<v Speaker 1>that is a Wall Street firm called Jane Street, and

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<v Speaker 1>he spent three years there. But can you tell us

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<v Speaker 1>a little bit more about what is Jane Street? What

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<v Speaker 1>do they do exactly? Yeah, Jane Street is one of

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<v Speaker 1>the most elite and respected quantitative trading firms in the industry.

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<v Speaker 1>Their market maker, they create liquidity on markets. So Jane

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<v Speaker 1>Streets incredibly respected the people who come there, you know,

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<v Speaker 1>have incredible educational backgrounds. So yeah, this was this was

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<v Speaker 1>a top notch firm that Sam BigMan Fried cut his

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<v Speaker 1>teetha And what do they teach people about things like

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<v Speaker 1>taking risks? For instance, when you work at Jane Street,

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<v Speaker 1>what did they drum into you? Yeah, they're risk obsessed,

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<v Speaker 1>which is really interesting. You know, you're taught early on

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<v Speaker 1>how to best prepare for a worst case scenario. Jane

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<v Speaker 1>Street prides itself on being able to spot areas of

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<v Speaker 1>risk other firms are unable to. So it's it's really

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<v Speaker 1>interesting that this this firm which is so obsessed with

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<v Speaker 1>preparing and seeking out what are the riskiest spots, that

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<v Speaker 1>this is where Sam Bankman Free got to start. Yeah,

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<v Speaker 1>we're gonna get to that very soon. First, a little

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<v Speaker 1>bit about because it's it's it's sort of a brainy culture.

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<v Speaker 1>Would you say at Jane Street, it's not it's not

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<v Speaker 1>really your kind of traditional Wall Street bro culture here.

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<v Speaker 1>It's more I guess brainy is the word. Um, mathematical. Yeah,

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<v Speaker 1>it's super nerdy, it's really nerdy. Um Yeah, I mean

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<v Speaker 1>this is you know, it might not be like a

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<v Speaker 1>name that you recognize right off, like like Goldman or

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<v Speaker 1>you know whatever. But the the people who do know

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<v Speaker 1>about Jane Street, if they find out that you work there,

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<v Speaker 1>you know, there's a certain level of respect attributed to you.

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<v Speaker 1>All Right. So let's fast forward to ft X and

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<v Speaker 1>you have this absolutely beautiful line in the story, um,

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<v Speaker 1>and I'm going to quote it. Verbaton goes like this,

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<v Speaker 1>the easiest way to describe the culture that Sambank Maun

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<v Speaker 1>Freed created an f t X the opposite. Can you

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<v Speaker 1>explain that? Yeah? So f t X was all about

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<v Speaker 1>risk and taking risk, and basically the culture was was

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<v Speaker 1>very different as well. Um. So one of the one

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<v Speaker 1>of the anecdotes that I love that I collected in

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<v Speaker 1>gathering this reporting, um, was that an early f t

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<v Speaker 1>X investor visited Sam in like this penthouse suite in

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<v Speaker 1>the Peninsula Hotel in Hong Kong, which is super fancy,

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<v Speaker 1>and she brought a government official was a friend with her.

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<v Speaker 1>They walk in, everyone's playing beer pong, everyone's having good time.

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<v Speaker 1>You know, it's this party culture. And the government official

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<v Speaker 1>turned to her and said, you invested in these kids,

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<v Speaker 1>So it's just it's it's a really it's I think

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<v Speaker 1>a pretty stark contrast and now with what's coming out

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<v Speaker 1>about what Sam bank Manfred is allegedly done. You know,

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<v Speaker 1>it's like he took every risk in the book allegedly,

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<v Speaker 1>which is the most you know, just insane thing that

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<v Speaker 1>you are not not just Sam man Freed, but but

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<v Speaker 1>several of the others that he started FDx with. Basically,

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<v Speaker 1>they come from this firm that drills into you know,

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<v Speaker 1>the risks, know exactly what they are prepared for the

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<v Speaker 1>worst scenario, and they moved and they start their own company.

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<v Speaker 1>And it's the entirely inverse of that. It's basically do

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<v Speaker 1>whatever you feel like almost how how did the people

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<v Speaker 1>that you interviewed for this story they have any good

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<v Speaker 1>explanations for how it might have turned out that way?

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<v Speaker 1>Is it just a sort of coincidence? Is it a

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<v Speaker 1>manifestation of what Sam bank man Freed is? Like? How

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<v Speaker 1>does it go this way? Yeah, it's it's a it's

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<v Speaker 1>tough to say that I shouldn't know to that. The

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<v Speaker 1>most notable person who also came from Jane Street is

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<v Speaker 1>Caroline Allison, who she joined She joined Alameda Research a

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<v Speaker 1>few months after it got started. Uh she got promoted

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<v Speaker 1>to co CEO and then was the soul CEO when

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<v Speaker 1>all of this went down. So and she also was

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<v Speaker 1>romantically involved with Sam banking Freed. So it's it's very

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<v Speaker 1>interesting that, you know, to the two biggest names coming

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<v Speaker 1>out of this story came from Jean Street. And I

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<v Speaker 1>think in talking to people, you know about what Sam

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<v Speaker 1>was like, he was someone who, you know, I think

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<v Speaker 1>I like to have a lot of control over what

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<v Speaker 1>he was doing. He made the shots. You know, I've

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<v Speaker 1>spoken to early investors in FTX who said, you know,

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<v Speaker 1>they were actually really struck by how casual he was

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<v Speaker 1>about certain things, you know, um, and how willing he

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<v Speaker 1>was to take risk. So it's it's hard to say,

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<v Speaker 1>you know, I mean, clearly he wanted to do something

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<v Speaker 1>different because he left the industry after three years. And

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<v Speaker 1>this is also a company that isn't very big on

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<v Speaker 1>you know, you doing your own thing or building your

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<v Speaker 1>own project, and you know, I think he definitely wanted

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<v Speaker 1>to to branch out, and that's that's obvious. And look

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<v Speaker 1>where it led him. Yeah, look where it led him.

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<v Speaker 1>And and you know, we have to we would be

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<v Speaker 1>amiss if we did not get into the bookkeeping at

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<v Speaker 1>f d X or the what seems to be the

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<v Speaker 1>absolute lack thereof It seems like this was an empire

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<v Speaker 1>where there was no real paper trail. They used QuickBooks.

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<v Speaker 1>Multibillion dollar company using QuickBooks, quick books, quick books. Nothing

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<v Speaker 1>against quick books, very nice tool. Yeah, I mean, I

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<v Speaker 1>think it's been very hard for you know, John Jay

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<v Speaker 1>Ray to untangle what happened here. One line struck me

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<v Speaker 1>from the you know, congressional hearing, and it was a

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<v Speaker 1>represent of Maxine Waters who said she couldn't believe how

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<v Speaker 1>easy it was to steal from the cookie jar. I'm

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<v Speaker 1>so deeply troubled to learn how common it was for

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<v Speaker 1>bank and Freed and FTX employees disteal from the cookie

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<v Speaker 1>jar of customer funds to finance their lavish lifestyle. So

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<v Speaker 1>there are serious questions about accountability here. This is just

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<v Speaker 1>going to be a story that takes a long time

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<v Speaker 1>to unfold, and that there are many more new developments

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<v Speaker 1>down the line. We'll be right back with more from

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<v Speaker 1>Hannah Miller. You have a really interesting vantage point here

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<v Speaker 1>because you cover the VC industry um and some of

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<v Speaker 1>the best in the business got really badly burnt here.

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<v Speaker 1>What are your thoughts around this and like in your

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<v Speaker 1>reporting around the VC players that backed these guys. How

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<v Speaker 1>is this possible because these are supposed to be people

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<v Speaker 1>who know how to do due diligence or somebody. There's

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<v Speaker 1>serious questions around how f t X and bank Man

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<v Speaker 1>Freed were enabled two become as big a force in

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<v Speaker 1>the industry as they were. And I think there's there

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<v Speaker 1>are a lot of questions around how early investors did

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<v Speaker 1>do due diligence. You know, why weren't questions Why why

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<v Speaker 1>weren't weren't difficult questions asked of people at f t

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<v Speaker 1>X and why was there such a rush of funding

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<v Speaker 1>that came to them. Um, I think it helped bank

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<v Speaker 1>Man Free that you know was born and raised in

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<v Speaker 1>the Bay Area and you know he knows Elicon Valley culture.

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<v Speaker 1>I think investors kind of thought of him as one

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<v Speaker 1>of one of their own. I think also what was

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<v Speaker 1>happening with the industry at the time. You know, crypto

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<v Speaker 1>was really soaring, you know, the price of bitcoin is

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<v Speaker 1>going up. People are getting really interested. You know, these

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<v Speaker 1>startups were scoring massive valuations after only being you know,

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<v Speaker 1>year two old. And I think for some vcs there

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<v Speaker 1>was a serious fear of missing out and they saw

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<v Speaker 1>FTX as a way to you know, get a taste

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<v Speaker 1>of crypto, get a taste of that success. And here

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<v Speaker 1>you have Sam bankmun Freed who presents himself as this

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<v Speaker 1>boy wonder who seems like the smartest person in the room,

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<v Speaker 1>and people are willing to overlook things and trust him

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<v Speaker 1>for those reasons. Yeah, I do. I remember back in

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<v Speaker 1>I think it must have been January and February, you

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<v Speaker 1>were seeing you were seeing these funding round where you know,

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<v Speaker 1>somebody had raised that evaluation of one billion in November

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<v Speaker 1>and lo and behold in January they were doing five billion.

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<v Speaker 1>So you're talking about valuations that went five x tech

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<v Speaker 1>x in the scope of six months. Huh. It's really

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<v Speaker 1>remarkable looking back on it. And now it's you know,

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<v Speaker 1>looking at how funding in the space has steeply, steeply declined,

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<v Speaker 1>and that's going to be a drop that I think

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<v Speaker 1>we'll see, you know, for the fourth quarter once that finishes.

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<v Speaker 1>Um and moving forward, you know, vcs are having second

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<v Speaker 1>thoughts about crypto. I mean, there are obviously some still

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<v Speaker 1>very much committed to the industry who identified themselves as

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<v Speaker 1>being crypto native venture capital firms, but I think more

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<v Speaker 1>traditional firms who maybe do more general tech investing. They're

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<v Speaker 1>asking themselves whether they should continue betting on blockchain, and

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<v Speaker 1>there we have seen a new reported on for instance,

0:15:04.160 --> 0:15:07.840
<v Speaker 1>you know, Amber Group, which is kind of trying to

0:15:07.920 --> 0:15:11.440
<v Speaker 1>raise money right now, um, but having to settle for

0:15:11.520 --> 0:15:16.760
<v Speaker 1>evaluations that are more like in line with what they

0:15:16.800 --> 0:15:20.240
<v Speaker 1>had six months or a year ago. So so you're

0:15:20.280 --> 0:15:25.280
<v Speaker 1>already seeing that kind of coutumes seep into evaluations, aren't you. Yeah,

0:15:25.280 --> 0:15:30.760
<v Speaker 1>we've seen companies pursued down rounds um as well as

0:15:30.760 --> 0:15:33.480
<v Speaker 1>flat rounds, you know, so down round would be at

0:15:33.480 --> 0:15:35.920
<v Speaker 1>a lower evaluation, a flat round would be it in

0:15:36.040 --> 0:15:40.960
<v Speaker 1>the same evaluation of a previous round. So it's it's

0:15:40.960 --> 0:15:44.200
<v Speaker 1>a it's you know, it's a reality check for these companies,

0:15:44.840 --> 0:15:49.600
<v Speaker 1>you know, they know that the market has shifted. For

0:15:49.680 --> 0:15:52.040
<v Speaker 1>some people I've spoken to, you know, they're like, Okay,

0:15:52.080 --> 0:15:54.640
<v Speaker 1>this is this is where things should be, like, this

0:15:54.680 --> 0:15:57.560
<v Speaker 1>is this is more realistic. You know, we can now

0:15:58.440 --> 0:16:03.720
<v Speaker 1>kind of cut through the fluff around the industry and

0:16:03.720 --> 0:16:08.440
<v Speaker 1>and really you know, just start to innovate. So it's

0:16:09.120 --> 0:16:11.800
<v Speaker 1>it'll be interesting to see what happens down the line.

0:16:11.840 --> 0:16:15.080
<v Speaker 1>Who's gonna who's gonna still be standing at the at

0:16:15.080 --> 0:16:19.720
<v Speaker 1>the end of all this, absolutely and stay tuned for that. Hannah,

0:16:19.760 --> 0:16:22.200
<v Speaker 1>Thank you so much for coming on the podcast. Thank

0:16:22.240 --> 0:16:25.920
<v Speaker 1>you for having me. That was Bloomberg reporter Hannah Miller.

0:16:26.240 --> 0:16:28.800
<v Speaker 1>You can find more of her reporting on the Bloomberg

0:16:28.880 --> 0:16:32.440
<v Speaker 1>Terminal and on Bloomberg dot com. For more, be sure

0:16:32.520 --> 0:16:35.760
<v Speaker 1>to check out our twice weekly news letter, Bloomberg Crypto.

0:16:40.640 --> 0:16:43.760
<v Speaker 1>This is Bloomberg Crypto, a daily podcast from Bloomberg and

0:16:43.800 --> 0:16:46.760
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<v Speaker 1>for the show to Crypto at Bloomberg dot net. The

0:17:00.120 --> 0:17:04.040
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0:17:04.040 --> 0:17:07.679
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