Livetweets of the December 13, 2022 House Financial Services Committee hearing on FTX

by Molly White on

Here's an easier-to-follow version of my tweet thread of the December 13, 2022 House Financial Services Committee hearing on the FTX collapse.

I also recapped this hearing in an issue of my newsletter.

The FTX hearing by the House Committee on Financial Services starts in about twenty minutes. I'll be livetweeting it here, and will be publishing a recap of it in my newsletter later.

Hearing stream

Rep. Patrick McHenry (R-NC, recipient of FTX donations) says he is disappointed to not have Sam Bankman-Fried testifying today, because he wanted to "hear his lies here, on the record, under oath".
McHenry parroting the "a few bad apples" crypto industry talking point: "We have to separate out the bad actions of an individual from the good created by an industry and an innovation."
New FTX CEO John J. Ray III is giving his statement. This was published online last night, and I have a thread on it here.

Rep. Waters (D-CA) asks Ray if there is evidence that SBF tried to hide links between Alameda and FTX, and if there was any independent governance.

Ray says there was no segregation or independent governance, and Alameda, FTX, etc. were operated "as one company".
Ray answers a question about loans to SBF: poor documentation of loans, "in one instance he signed as both the issuer of the loan as well as the recipient of the loan". They have no information as to the purpose of use of the loaned funds at this point.

McHenry questioning Ray on distinctions between FTX​.com and FTX​.us.

"There was a public distinction between the two," but crypto assets were stored together.
Ray says he's not concerned about the cross-jurisdictional nature of this bankruptcy, and confident that various jurisdictions will cooperate.
Ray just said that FTX used QuickBooks for recordkeeping. "A multibillion dollar using QuickBooks!"

Rep. Sherman's (D-CA) turn. He has not been quiet in the past about his distaste for crypto.

"My fear is that we'll view Sam Bankman-Fried as just one big snake in a crypto garden of Eden. The fact is, crypto is a garden of snakes."

Sherman urges his colleagues, "don't trash Mr. Bankman-Fried and then pass his bill!" and points to significant crypto lobbying influence on the House. Sherman is referring to the DCCPA.

Sherman also introduces into the record the letter from his colleagues to the SEC earlier this year, in which they urged the SEC to back off on crypto.

(see "The Eight Congressmen Subverting the SEC’s Crypto Investigation", The American Prospect.)
Sherman asks if Ray will turn over evidence of loans from the FTX businesses that may have been used for disguised campaign finance contributions. Ray confirms he will.

Rep. Green (D-TX) points to SBF's academic background, and asks if it's possible that "all of this is just one big mistake", as SBF has been trying to portray it.

Ray says he is hesitant to cast judgment at this time, while they are still digging through records.

"Others will judge him by his actions," says Ray.

Green thinks this is "more than sincere ignorance and conscientious stupidity".

Indeed.
Rep. Sessions (R-TX) is asking about whether the SEC was engaged with FTX, and is inquiring about information submitted to the IRS.

Rep. Cleaver (D-MO) describes SBF's submitted statement as "so disrespectful."

He reads, "'I would like to start out by formally stating under oath...' I can't even say it publicly. Absolutely insulting."

SBF was going to say "fuckup" in Congress, huh

(SBF's draft statement was leaked to press. A correction to the above tweet: it was never formally submitted to Congress.)
"The bank situation should have been a real red flag," says Ray, in response to Rep. Luetkemeyer's (R-MO) question about FTX's early inability to get bank accounts.

Leutkemeyer is the first to ask about Moonstone Bank (fka Farmington State Bank), a bank with $5.7M net worth, into which Alameda invested $11.5M to acquire ~10% ownership.

Good question!

Ray is looking into it, but doesn't seem to have much to say on it at this point.

See Protos' reporting for more on this very weird situation.

Leutkemeyer asks if there could be money laundering going on, or if FTX execs were using it to hide money.

Ray again doesn't say anything specific, but acknowledges "It's highly irregular".
Rep. Perlmutter (D-CO) asks if dogecoin is pronounced "doe-gee-coin" or "doggycoin". Someone helps him out. "Oh, dohj-coin!"
Rep. Waters enters into the record the three criminal filings against SBF, from the DOJ (SDNY), SEC, and CFTC.

Rep. Huizenga (R-MI) asks if Ray has been sharing findings with the SDNY or the SEC.

Ray confirms he has.

Huizenga asks about possible US users of FTX​.com.

(US citizens are not supposed to be able to use FTX.com, and are instead relegated to FTX.us, which offers far fewer tokens for trading, has stricter limits on leverage, and has generally fewer features than its non-US regulated .com counterpart.)

Ray says there are somewhere on the order of hundreds. He says that those customers having billions of dollars on FTX.com is probably an overly high estimate.
Ray says they haven't yet seen evidence of direct transfer of funds from FTX.us to Alameda, but they are very concerned about possible commingling of funds between FTX.com and FTX.us.

Huizenga now asking about the possible involvement of SBF's parents in FTX.

Huizenga talks of a meeting he had with SBF last year, noting SBF was "at least fifteen minutes late" and accompanied by his father.

Rep. Beatty (D-OH) asks how Alameda accessed client funds in direct violation of their own terms.

"There was no oversight," and executives could "move money around undetected" said Ray.

Rep. Barr (R-KY) asks about an ESG ratings firm that gave FTX a higher rating for governance than Exxon-Mobil. He asks Ray, given his assessment of FTX governance, what would he say about that?

Ray: "I'd get my money back"

Barr asks Ray to elaborate on why he doesn't think FTX's audits were reliable.

"Well, we've lost $8 billion, so by definition, I don't trust a single piece of paper in this organization."

Rep. Vargas (D-CA) is repeatedly firing shots at his Republican colleagues for promoting crypto.

He tried to get Ray to say which regulatory agency he thinks should regulate crypto, but Ray declined to answer.
Ray distinguishes the "sophisticated" crimes he observed at Enron, and the "old-fashioned embezzlement" that he has observed at FTX.
Rep. San Nicolas (D-Guam) has two Dunkin iced coffee cups next to him. This Bostonian approves.
Rep. San Nicolas, sitting in Congress and speaking, with two plastic Dunkin iced coffee cups next to him

Ray confirms FTX has lost "in excess of $7 billion".

He outlines how funds were taken from FTX and used by Alameda, who incurred trading losses.

Ray also describes how investments were made without any pro forma or valuation. "I'm really not quite sure how some of the purchase price numbers were derived, so it gives you a worry obviously that the purchases were overvalued."
Rep. San Nicolas explains his line of questioning: "The FTX collapse right now is just FTX. But are these lack of controls, and are these environments that resulted in the FTX collapse still existing today? And could the same thing happen in similar operations, such as Binance for example? Could they also engage in the same activities under the current regulatory regime and, if things go wrong, have the same outcome?"

Rep. Hill (R-AR) is a noted crypto advocate with an "A" rating from the "Crypto Action Network".

He repeats McHenry's "bad apples" description, and makes the tired argument about how "we don't throw out railroads" because of fraud in the 1800s.

Rep. Himes (D-CT) describes "a 30-year-old gazillionaire who raised billions of dollars living in some condo with a bunch of young people."

Pleased to report that the world "polycule" has not been yet been uttered in Congress today.

Ray: "Crypto assets have inherently some difficulties. The assets can be taken or lost. We have assets that are in what are called hot wallets and those that are in cold wallets. Hot wallets are very vulnerable to hacking. If you've done any looking on the Internet you'll find that hacking is almost ordinary course in this business sector. Lots of vulnerability to the wallets."

If any Representative wants to know where to look on the Internet, have I got a site for you 😁
Ray speaks of specific failures at FTX: "Our keys aren't stored in a centralized location. We don't know where all of our wallets are. Passwords were sometimes kept in just plaintext format."
Rep. Emmer (R-MN, member of the blockchain eight, recipient of SBF-linked funds) is up. He's a huge crypto advocate, and is one of the "blockchain eight" who signed the letter urging the SEC to back off. He's recently been trying to pin the FTX collapse on SEC chair Gary Gensler.
Emmer is now accusing Gensler of refusing to answer questions or testify before the House FSC, and wants Ray to share any communications he has between FTX and Gensler. Ray confirms he will.
Emmer takes a moment to advertise crypto, and blame the collapse on centralization rather than crypto as a whole. 🙄

Emmer asked if there was a compliance department at FTX.

Ray: "There were people with titles."
Ray: "Alameda had almost a complete ability to lose money beyond their collateral."

Rep. Meeks (D-NY) pushing the "financial inclusion" promise he sees in crypto 😮‍💨

I would direct people to Tonantzin Carmona's report: "Debunking the narratives about cryptocurrency and financial inclusion", The Brookings Institution.
Forbes has obtained and leaked a copy of SBF's planned testimony.

Rep. Loudermilk (R-GA): "Summarizing, there's not evidence right now that his statement would be true that FTX US is completely solvent."

Ray: "Clearly not."
Rep. Gottheimer (D-NJ, member of the blockchain eight, recipient of SBF-linked funds), also a part of the blockchain eight, spending a significant portion of his time talking up his own record in trying to regulate crypto, and denigrating the SEC and Gary Gensler.

Gottheimer: "Do you believe Mr. Bankman-Fried when he says that all US users will receive a dollar on the dollar return of funds at the end of these bankruptcy proceedings?"

Ray: "That's very speculative at this point."

Rep. Davidson (R-OH, member of the blockchain eight), also part of the blockchain eight: "Based on your review of the records, is the transfer of customer funds from FTX​.com to Alameda research in conflict with the FTX​.com terms of service?"

Ray: "Yes, that's my view."

Rep. Budd (R-NC, part of the blockchain eight, recipient of hundreds of thousands of dollars of SBF-linked funds): "What happened at FTX was fraud on a massive scale... the head of FTX should be dealt with in the same way that other disgraced leaders of Enron were prosecuted to the fullest extent of the law... What I want to protect is innovation, and we want to see it flourish..."

Blames SEC for regulation by enforcement, says they've forced crypto companies offshore. Talks up his own attempts to regulate crypto.

Rep. Torres (D-NY, part of the blockchain eight, recipient of FTX donations) asks if SBF was lying when he tweeted on Nov. 7 that "FTX has enough to cover all client holdings".

Ray: "I don't want to give the dignity to his comments. He also said he had $10 billion to invest in the company that day, so..."

Torres: "At that time when he sent out the tweet... did FTX actually have enough assets to cover their liabilities?"

Ray: "Absolutely not."

Gonzalez (R-OH): "To your knowledge, were customer funds transferred to Alameda for the purposes of paying off called loans?"

Ray: "That's certainly possible. We need to investigate that further, but that's certainly one of the paths that we would potentially find."

Gonzalez asks about the backdoor between FTX and Alameda, which SBF has denied knowing about. "In your eyes, is there any way that SBF or senior management wouldn't know about this sort of thing?"

Ray: "No."

Gonzalez addresses claims in SBF's testimony, where he blames FTX's collapse on Binance, and says the company would have been fine otherwise.

Gonzalez: "Prior to that episode, is your belief that FTX was solvent?"

Ray: "No."
Gonzalez on SBF's statement: "There's some accountability... but then there's a lot of excuse-making and some complaining. Like, 'in fact, many of us are still missing access to our own personal data, which is being held hostage by the Chapter 11 team's leadership'. I would note that that's what happens in life when you perpetrate a massive fraud and steal billions of dollars from your customers."
Rep. Tlaib (D-MI): "The idea that cryptocurrency can be a solution for financial conclusion is not only laughable, it's dangerous. These get-rich-quick kind of ads and targeting of my residents? It's predatory."
Rep. Rose (R-TN) wonders about the timing of the charges: "The timing of the events of the last twelve hours is certainly interesting... [I] wonder why a prosecutor wouldn't want to potentially add 'lying to Congress' to accompany the list of charges against Mr. Bankman-Fried... It also makes me wonder why the SEC waited until today to file its own charges. Chair Gensler has failed at his job... Similarly, while he has been asleep at the wheel, the Democratic majority has failed to have him testify before this Committee for over fourteen months."

Rose: "FTX and Alameda hold.. more than $30B of Tether. Can you describe the efforts you are taking to ensure that unwinding FTX and the bankruptcy proceedings won't cause unnecessary impacts to these digital asset markets?"

not where I would've taken that question lol

Rep. Adams (D-NC): "Do you genuinely believe that these customers are ever going to get their money back?"

Ray: "It's a massive loss... it's too early to tell what the ultimate recovery will be to each customer."

Adams: "It doesn't like you really think they're going to get their money back..."

Steil (R-WI) on the movement of funds out of FTX at direction of Bahamian authorities: "Do you have indication as to why Bahamian authorities made that request?"

Ray: "It wasn't a request. They just took it."

Steil: "There was no action required by FTX employees?"

Ray: "They were aided by the ex-employees. Mr. Wang and Mr. Fried."

Steil: "Is it in the eyes of Bahamian authorities that they did this to protect creditors? Do you have insight into the motivation behind this action?"

Ray: "Unlike Chapter 11, there's no transparency in the process in The Bahamas. We repeatedly asked them for clarity on what they've been doing and we've been shut down on that."

Steil: "They did not reply or it was unsatisfactory?"

Ray: "They put out statements that it was in the interest of Bahamian creditors, although our view is that it violated the automatic stay in bankruptcy."

Steil: "Do you believe that at that time Mr. Bankman-Fried was attempting to undermine Chapter 11 by expanding the scope, by moving assets to accounts under the control of Bahamian authorities?"

Ray: "It appears so."

Steil: "So it appears that he may be working to undermine the scope of US federal bankruptcy law."

Ray: "That's what it appears, yes."
Ray: "The process in The Bahamian islands is not a transparent process. We have opened up the ability to share everything we have with the Bahamian government, similar to how we share with other liquidators around the world not only in this case but in other cases. It's meant to be a very cooperative situation. The pushback that we've gotten is sort of extraordinary in the context of bankruptcy. It raises questions, it seems irregular to me, there's lots of questions on our part, and obviously we're investigating."
Ray: "There is a general truth that users of the FTX US exchange will suffer less purely because of the siphoning off of cash and assets from FTX.com to Alameda."
Rep. Lynch (D-MA) asks if advertising to US citizens is what drew victims in to this disaster. Ray declines to answer ("I don't have a professional view on that").
Ray confirms to Rep. Dean (D-PA) that they have information that both SBF and Gary Wang were involved in minting new FTT and transferring it to control of the Bahamian authorities.
Ray: "What we don't know is whether the founders could have taken crypto and put it in a cold wallet that we just don't have awareness of."
Rep. Ocasio-Cortez (D-NY) seems very well-briefed, mentions the CoinDesk leak of Alameda balance sheets that precipitated a lot of this.
AOC asks about the request by Bahamian regulators to recognize Bahamian bankruptcy proceedings as primary. "Would that additional control be of any potential value to Mr. Bankman-Fried?"

AOC wants to know if FTX opened Bahamian withdrawals in exchange for the ability to remain in control/influence of FTX.

Ray: "We intend to investigate that very thing."
AOC seems to suggest that SBF's arrest in The Bahamas may have been as a direct result of Ray's testimony being published.

Rep. Timmons (R-SC) asks why the SDNY would have issued an arrest warrant "to facilitate [SBF's] arrest, to preclude his testimony which would have been incredibly helpful in the prosecution of SBF".

Ray, obviously, can't answer that question.
Ray confirms that they will pursue clawing back any withdrawals made in The Bahamas during the period during which withdrawals were re-enabled.
On working with Bahamian provisional liquidators: "We work with liquidators all the time on a cooperative basis, so this is a little bit unprecedented."
Rep. Garcia (D-IL, recipient of SBF donation): "FTX isn't an anomaly. It isn't just a case of one corrupt guy stealing money, it's about an entire industry that refuses to comply with existing regulation that thinks it's above the law."
Garcia lists active investigations:
  • DOJ investigation into Binance
  • DOJ investigation into Tether
  • SEC investigation of Do Kwon (Terra/Luna)
Garcia: "These companies are making money using one thing: hype. And when the hype runs out, and ordinary investors—especially latecomers who are disproportionately low-income, Black, and Latino—lose."
Rep. Auchincloss (D-MA, part of the blockchain eight, recipient of SBF donation) thanks Ray for his time and care in answering questions. "You haven't played any video games while talking to us, so that's terrific," he says, in direct reference to my question of SBF yesterday.

Auchincloss asks for Ray's opinion of SBF's claims that, were he allowed to restart FTX, he could raise the financing and make customers whole.

Ray: "In my history of doing corporate restructurings, I don't find that remotely believable because the first thing an investor would have to do is pay several billion dollars just to have the company back to the position it was in."
Auchincloss directly states that SBF's arrest is "quite convenient" for SBF's counsel, suggests there may have been "improper collusion" between SBF and Bahamian authorities.
Auchincloss, who is labeled as "very supportive" of crypto in Coinbase's rankings, says "My patience with the crypto bulls is wearing thin. It's been 14 years and the American public has heard lots of promises but has seen lots of ponzi schemes. For crypto, it's time to put up or shut up. It's worth noting that Ark, the innovation investor, several years ago identified five general-purpose technologies of the future: DNA sequencing, artificial intelligence, robotics, energy storage, and blockchain. And yet those first four 'disruptive technologies' have already delivered gamechanging innovation that affects my constituents in daily life. Blockchain has thus far delivered whitepapers and podcasts about Bitcoin and DAOs and NFTs, defi, and more, and it's all interesting—it's exciting even—but none of it has achieved product-market fit at scale. It's time for the blockchain investors and entrepreneurs to build things that matter, or to lose more credibility."
Rep. Waters goes to give closing statement, is interrupted by Rep. Gooden (R-TX) who says he was not given a chance to question. Waters gets annoyed, "if you would like to miss the votes on the floor..." He blames Waters for not calling a recess. She lets him speak.

Gooden asks if Ray knows if any third-party exchanges that received funds from Alameda were affiliated with FTX co-founders or their family members.

Ray says they are "certainly investigating that".
That's a wrap for today.