Jane Street's Culture

wonderkin known to most people as SPF. Bank Man Freed has been arrested in the Bahamas and US authorities have unleashed some truly stunning charges against him, essentially accusing him of having run his entire crypto empire as a personal piggy bank and defrauding customers who put their money onto FTX.

Blank Man Freed himself has said it was all down to sloppy accounting and mismanagement, which is all the more surprising given that he spent three years at one of the Wall Street firms that's famous for his level of a caution and its attention to risk, namely Jane Street. Bloomberg. Hannah Miller has been reporting on this. This is just going to be a story that takes a long time to unfold and that there are many more new developments down the line, and she joins me now for this podcast, Hannah,

welcome to the podcast. Thank you so much for having me Phil. All Right, so this is obviously an extraordinary busy day when it comes to the topic at hand. But let's first start off with the big bombshell of the day. Um, Sam bank Man Freed has been a rested in Bahamas and the d o J, the SEC, and the CFTC have all gone after him. And this is obviously like there's stuff happening all the time. The

story is evolving. We don't know everything yet. But for the listener who's just coming fresh to this, what are the most serious allegations or how would you sum up the most serious allegations against um Sun Bakmin Freed and ft X. Yeah, well this is unfolding in real time right as a recording, which was pretty cool, um, but yeah, the charges are very very serious. Um. You know, there's allegations of fraud. Uh and a lot of this boils

down to misappropriation of customer funds. So did Sam Bankman Freed used customer deposits to cover Alima his debt and expenses Uh. Is there's also a question of whether he used customer funds too, you know, support his own personal expenses and those of his family and other employees. So there's a lot of there are a lot of questions here and uh, it's again just happening as we speak. So it's a it's a pretty exciting time for the industry, but it's not We're not just talking about a couple

of customers here. Hum. I mean, we're talking about hundreds of thousands of customers, including retail savers who put well probably there are lives pennies on this. Hum. Yeah, it could be up to a million customers. That was brought up in the in the house hearing, and yeah, it's been really stunning to see. Uh, you know, testimony from

the current CEO of fd X, John Jay Ray. The ft X groups collapse appears system from absolute concentration of control in the hands of a small group of grossly inexperienced, unsophisticated individuals. First, customer assets at ftx dot com we're commingled with assets from the Elemated trading platform. That much is Claire second Elmy to use client funds to engage in market. It's just sad to see that this is you know, people's personal funds, life savings, you know that

they might never get back. Speaking of John Ray, I mean, this guy has seen it all. He was running and Ron's bankruptcy, wasn't he. Yeah, he's very experienced in this area. You know, he's he's a respected name. I think it was pretty shocking when you know, he first took on the post and you know, just in the bankruptcy filings said that this was some of the most you know,

shocking things that he's seen at a company. Okay, so we're gonna rewind a little bit and we're gonna talk a little bit about where Sam bank Manfried came from and and we're actually a lot of his fellow um senior executives at FTX came from an anomeda um and that is a Wall Street firm called Jane Street, and he spent three years there. But can you tell us a little bit more about what is Jane Street? What

do they do exactly? Yeah, Jane Street is one of the most elite and respected quantitative trading firms in the industry. Their market maker, they create liquidity on markets. So Jane Streets incredibly respected the people who come there, you know, have incredible educational backgrounds. So yeah, this was this was a top notch firm that Sam BigMan Fried cut his teetha And what do they teach people about things like taking risks? For instance, when you work at Jane Street,

what did they drum into you? Yeah, they're risk obsessed, which is really interesting. You know, you're taught early on how to best prepare for a worst case scenario. Jane Street prides itself on being able to spot areas of risk other firms are unable to. So it's it's really interesting that this this firm which is so obsessed with preparing and seeking out what are the riskiest spots, that this is where Sam Bankman Free got to start. Yeah,

we're gonna get to that very soon. First, a little bit about because it's it's it's sort of a brainy culture. Would you say at Jane Street, it's not it's not really your kind of traditional Wall Street bro culture here. It's more I guess brainy is the word. Um, mathematical. Yeah, it's super nerdy, it's really nerdy. Um Yeah, I mean this is you know, it might not be like a name that you recognize right off, like like Goldman or

you know whatever. But the the people who do know about Jane Street, if they find out that you work there, you know, there's a certain level of respect attributed to you. All Right. So let's fast forward to ft X and you have this absolutely beautiful line in the story, um, and I'm going to quote it. Verbaton goes like this, the easiest way to describe the culture that Sambank Maun Freed created an f t X the opposite. Can you

explain that? Yeah? So f t X was all about risk and taking risk, and basically the culture was was very different as well. Um. So one of the one of the anecdotes that I love that I collected in gathering this reporting, um, was that an early f t X investor visited Sam in like this penthouse suite in the Peninsula Hotel in Hong Kong, which is super fancy, and she brought a government official was a friend with her. They walk in, everyone's playing beer pong, everyone's having good time.

You know, it's this party culture. And the government official turned to her and said, you invested in these kids, So it's just it's it's a really it's I think a pretty stark contrast and now with what's coming out about what Sam bank Manfred is allegedly done. You know, it's like he took every risk in the book allegedly, which is the most you know, just insane thing that you are not not just Sam man Freed, but but

several of the others that he started FDx with. Basically, they come from this firm that drills into you know, the risks, know exactly what they are prepared for the worst scenario, and they moved and they start their own company. And it's the entirely inverse of that. It's basically do whatever you feel like almost how how did the people that you interviewed for this story they have any good explanations for how it might have turned out that way? Is it just a sort of coincidence? Is it a

manifestation of what Sam bank man Freed is? Like? How does it go this way? Yeah, it's it's a it's tough to say that I shouldn't know to that. The most notable person who also came from Jane Street is Caroline Allison, who she joined She joined Alameda Research a few months after it got started. Uh she got promoted to co CEO and then was the soul CEO when all of this went down. So and she also was

romantically involved with Sam banking Freed. So it's it's very interesting that, you know, to the two biggest names coming out of this story came from Jean Street. And I think in talking to people, you know about what Sam was like, he was someone who, you know, I think I like to have a lot of control over what

he was doing. He made the shots. You know, I've spoken to early investors in FTX who said, you know, they were actually really struck by how casual he was about certain things, you know, um, and how willing he was to take risk. So it's it's hard to say, you know, I mean, clearly he wanted to do something

different because he left the industry after three years. And this is also a company that isn't very big on you know, you doing your own thing or building your own project, and you know, I think he definitely wanted to to branch out, and that's that's obvious. And look where it led him. Yeah, look where it led him. And and you know, we have to we would be amiss if we did not get into the bookkeeping at f d X or the what seems to be the absolute lack thereof It seems like this was an empire

where there was no real paper trail. They used QuickBooks. Multibillion dollar company using QuickBooks, quick books, quick books. Nothing against quick books, very nice tool. Yeah, I mean, I think it's been very hard for you know, John Jay Ray to untangle what happened here. One line struck me from the you know, congressional hearing, and it was a represent of Maxine Waters who said she couldn't believe how

easy it was to steal from the cookie jar. I'm so deeply troubled to learn how common it was for bank and Freed and FTX employees disteal from the cookie jar of customer funds to finance their lavish lifestyle. So there are serious questions about accountability here. This is just going to be a story that takes a long time to unfold, and that there are many more new developments down the line. We'll be right back with more from

Hannah Miller. You have a really interesting vantage point here because you cover the VC industry um and some of the best in the business got really badly burnt here. What are your thoughts around this and like in your reporting around the VC players that backed these guys. How is this possible because these are supposed to be people who know how to do due diligence or somebody. There's serious questions around how f t X and bank Man Freed were enabled two become as big a force in

the industry as they were. And I think there's there are a lot of questions around how early investors did do due diligence. You know, why weren't questions Why why weren't weren't difficult questions asked of people at f t X and why was there such a rush of funding that came to them. Um, I think it helped bank Man Free that you know was born and raised in the Bay Area and you know he knows Elicon Valley culture. I think investors kind of thought of him as one

of one of their own. I think also what was happening with the industry at the time. You know, crypto was really soaring, you know, the price of bitcoin is going up. People are getting really interested. You know, these startups were scoring massive valuations after only being you know, year two old. And I think for some vcs there was a serious fear of missing out and they saw FTX as a way to you know, get a taste

of crypto, get a taste of that success. And here you have Sam bankmun Freed who presents himself as this boy wonder who seems like the smartest person in the room, and people are willing to overlook things and trust him

for those reasons. Yeah, I do. I remember back in I think it must have been January and February, you were seeing you were seeing these funding round where you know, somebody had raised that evaluation of one billion in November and lo and behold in January they were doing five billion. So you're talking about valuations that went five x tech x in the scope of six months. Huh. It's really

remarkable looking back on it. And now it's you know, looking at how funding in the space has steeply, steeply declined, and that's going to be a drop that I think we'll see, you know, for the fourth quarter once that finishes. Um and moving forward, you know, vcs are having second thoughts about crypto. I mean, there are obviously some still very much committed to the industry who identified themselves as being crypto native venture capital firms, but I think more

traditional firms who maybe do more general tech investing. They're asking themselves whether they should continue betting on blockchain, and there we have seen a new reported on for instance, you know, Amber Group, which is kind of trying to raise money right now, um, but having to settle for evaluations that are more like in line with what they had six months or a year ago. So so you're

already seeing that kind of coutumes seep into evaluations, aren't you. Yeah, we've seen companies pursued down rounds um as well as flat rounds, you know, so down round would be at a lower evaluation, a flat round would be it in the same evaluation of a previous round. So it's it's a it's you know, it's a reality check for these companies,

you know, they know that the market has shifted. For some people I've spoken to, you know, they're like, Okay, this is this is where things should be, like, this is this is more realistic. You know, we can now kind of cut through the fluff around the industry and and really you know, just start to innovate. So it's it'll be interesting to see what happens down the line. Who's gonna who's gonna still be standing at the at the end of all this, absolutely and stay tuned for that. Hannah,

Thank you so much for coming on the podcast. Thank you for having me. That was Bloomberg reporter Hannah Miller. You can find more of her reporting on the Bloomberg Terminal and on Bloomberg dot com. For more, be sure to check out our twice weekly news letter, Bloomberg Crypto. This is Bloomberg Crypto, a daily podcast from Bloomberg and I Heart Radio. For more shows from I Heart Radio, visit the iHeart Radio app, Apple Podcasts, or wherever you

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