Power Lunch - The U.S. vs Sam Bankman-Fried 12/13/22

Episode Date: December 13, 2022

Prosecutors unveil criminal charges against FTX founder Sam Bankman-Fried. He faces eight counts, including wire fraud and conspiring to defraud the U.S. U.S. Attorney Damian Williams calling it one of the biggest frauds in American history. What happens next as the FTX saga enters a new chapter? Hosted by Simplecast, an AdsWizz company. See https://pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome to Power Lunch. I'm Dominic Chewin for Tyler Matheson today. Here is what's ahead on the show. Federal prosecutors, minutes away from discussing the charges brought against Sam Bankman-F-SbF, eight criminal counts including securities fraud and money laundering, the SEC, the CFTC, filing separate complaints on their own, as lawmakers on Capitol Hill call it quote-unquote old-school fraud. Plus, peak inflation. A key inflation gauge posts, its smallest monthly advance in a year. What that means for the stock market, the Fed and rates ahead of the central bank's big policy meeting tomorrow. Kelly, I'm going to walk backwards. Thank you very much, Tom.

Hi, everybody, the strong rally on Wall Street evaporating. The Dow was up 707 at the highs. We're up 83 now. The S&P's up 25 and the NASDAQ. It's up almost 1% for its part. Huge reaction to that inflation report. The CPI rose only 7.1% from a year ago. less than what people had been expecting, used car prices fell nearly 3% for the fifth straight

monthly drop, energy prices down 1.6%. But shelter costs, which make up about a third of the CPI, continued to rise of 0.6%. Let's get right to Bob Bassani. He's got a look at the fizzling rally, Bob, and why this report didn't do more to spark a sustainable rally. Well, there certainly was a lot of people buying at the open. Let me just show you those major indices again. The high print for today was the open. We hit 4,100 on the S&P 500, and essentially just dribbled lower from there. We're still on the upside here, but we were, again, 80 points higher. That has been weighed down by defensive names like United Health, McDonald's, Procter, and Gamble. Nasdaq's been helped by a very strong day for the big cap tech names. Let me show you some of them. So we've had Nvidia. The chip names have

been stronger. Meta's bouncing back. Amazon's been strong. Alphabet's been strong. Lamb Research. Some of the other chips have been strong today. What's weighing down things? Travel is tough. JetBlue had a very interesting comment saying that demand may be waning a little bit, and that's really hitting the airlines and some of the other travel names like Norwegian Cruise Line. Those are the biggest decliners in the S&P 500 right now. Another new low also, a big name, Tesla.

Been cut in half this year, essentially. Now, this is a two-year low for Tesla. We know all about those problems with the Shanghai plant reducing some production there. So what about that rally? What happened? Here's where we are right now. Here's the good news, and Kelly laid it out for you. The important thing is we've got falling inflation, bond yields are down,

and the dollars at six-month low. This is all where the market wants those indices to go. The focus was on inflation in 2022. I'm getting all sorts of bearish comments about an earnings decline in 2023. And guys, I think that's really what's going on here. The focus is on the extent of the recession. People are reducing their earnings estimates. And so it's hard to buy into the inflation is coming down story,

if you're worried about the earning situation. Guys, back to you. Bob Pisani, thank you very much. We appreciate it. All right, high-yield bonds having the opposite reaction as stocks right now falling after the CPI report and now climbing back.

Rick Santelli is tracking the bond market action for us, Rick. Yeah, they fell to the sub-basement and they're climbing back, all right? They made it up to just the basement. Come on, two-year note yields are down. 15 basis points. Let's look at an intraday of two-year note yields.

Boy, look at that drop that we had. And certainly they're crawling back. But as I said, even at 423, its current level, it's down over 14 basis points. And if you look at the chart, it looks like we're on pace to close at the lowest yield since the 5th of October. Let's call it nearly a little over two months. And we all know that today's inflation numbers were definitely cooler than expectations. But who's kidding who here? 7.1 and then core year over year 6.0, warm to history. Fed meeting tomorrow. Gee, I wonder why

stocks gave up ground. And believe me, warm to history is important. But ultimately, the Fed's going to do less and less, and they'll have the ability to see how its movements, its rate increases, will affect markets and financial conditions. Not a bad way to go. And if you look at Fed Fund Futures, boy, did they rally. Here's an intraday of May. of next year I pick May because that's the last contract where the prices keep going down. So that's the fulcrum. And if you open that chart up to the end of October, it's on pace for the best close, highest close in one and a half months, which implies its rate is well under 5%.

And finally, 30-year bond auction today tailed three basis points. Ten-year auction yesterday tailed four basis points. As you see on that two-day chart of 30-year bond yields, If you're looking to investor interest in showing up to these long-dated auctions, boy, has it changed? They showed up in droves. Not so much anymore. Kelly, back to you. No, Rick, could I follow up?

You mentioned those Fed Fund futures right now. Earlier today, on the heels of that CPI data, we did see a movement that would imply that so-called terminal rate, right, that the finishing rate at which the Fed ends its hiking cycle this time around. closer to that four and three quarters to 4.8-ish percent, right? That's lower than it was before. Can you take us through the machinations there? Because if, in fact, tomorrow they raised by half a percent, that implies not much left in the first half of the year with regard to rate hikes.

Yeah, in the near term, there's very little change with regard to, obviously, tomorrow's meeting. But what the market is trying to grapple with is investors by buying Fed Fund futures and speculating, they believe that we're going to continue to see the fulcrum or the pivot, where contracts and Fed Fund futures keep going down in price, which means more Fed, to start moving back up. And it's been rolling. It rolled from July to June. Now it's back to May.

And what I ultimately see is not that the markets are going to tell you exactly where inflation is going to go down. What the markets are telling you is, is that investors don't believe it's going to go as far as the Fed does. bingo. Thank you, Rick, Rick Santelli. Our next guest says the CPI report won't impact the Fed's decision tomorrow, but he expects smaller rate hikes in the months ahead. Mark Smith is portfolio manager at Wells Fargo Advise. It's great to see you again, Mark. That's pretty consensus, wouldn't you say,

or do you think they're going to have to slam the brakes even harder? Hey, good to see you again, Kelly. I know you have small kids, and if you ever go on a road trip, one question you're going to get is, are we there yet? Are we there yet? Are we there yet? Well, listen, we're not there yet. look at the CPI, even though we had, you know, we're going in the right direction to where we're going on our trip. We're not there yet. And when I look at it, and where do I find that? I found that on a CNBC.com website.

I saw a chart from 2020 to see where CPI was before the pandemic at around 2%. We're at 7. We're not there yet. And so the Fed's going to have to continue to act. And I don't think that there's going to be a slowdown until we get these CPI numbers and more normal range around that 2%. That's their goal, right? To make sure unemployment's you get. Yeah, no, and I take, you know, obviously no one wants them to stop before they're done here. But CPI is going to be the last place. I mean, it's so lagging.

Once the data shows up, you're already several months behind the trend. Monetary policy works with a 12 to 18 month lag oftentimes. So if the market's telling you it thinks CPI is going to be already be 3% by next fall, then can't the Fed, shouldn't the Fed look at that with some confidence and say, maybe all the tightening in the system already is going to get us to that goal. And if we keep going, we're going to go too far. That's a great point. But unfortunately, Jerome Powell has to make sure that we're there.

And he can't try to have any guessing games here because what is he going to do? He's going to lose a lot of confidence. He lost a lot of confidence when he said that interest where we were with inflation was transitory, right? So he got that wrong once. It was a little late to the party there. He doesn't want to make another mistake there. So I think he's going to continue to go and have race. rates go up. I think he has a mandate there based upon all the numbers that have to do with

inflation regarding to rent and energy. It's down, but it's still nowhere where we were 2020. Don't mean to interrupt you, sir, but we've got some breaking news on FTX. If we can jump for just a moment, the Southern District of New York is holding a news conference right now, I believe outlining some of their charges. Let's take a listen in. The dedicated prosecutors of this office and our partners at the FBI, SEC, and CFTC have been working around the clock to figure out what happened and to begin the process of seeking justice. This morning we unsealed an eight-count indictment charging Samuel Bankman-Fried, FTCS's founder, with a series of interrelated fraud schemes that contributed to

FTC's collapse. I authorized these charges last week Wednesday. A grand jury here in Manhattan indicted Mr. Bankman-Fried last week Friday. We obtained a warrant for his arrest, and that arrest was executed yesterday in the Bahamas. Let me be clear. My remarks today are going to be limited. That is by design. This investigation is very much ongoing,

and it is moving very quickly. But I also want to be clear about something else. While this is our first public announcement, it will not be our last. The indictment has eight counts, but effectively, it outlines four different areas of misconduct. First, we allege that Bankman Freed,

defrauded customers at FtX.com, the cryptocurrency exchange that he founded. Second, we alleged he defrauded lender to Alameda Research, his proprietary hedge fund. Third, we allege that he defrauded investors in FTX. And lastly, we allege that he alleged

that he violated campaign finance laws. Now, let me say a little bit more about what we allege in the indictment. First, we charged up from 2019 until earlier this year, Bankman Freed and his co-conspirators stole billions of dollars from FTX customers. He used that money for his personal benefit, including to make personal investments and to cover expenses and debts of his hedge fund Alameda Research. Secondly, and relatedly, we charged that Bankman Freed lied to Alameda's lenders about the source of the money that he was using to pay those debts.

Third, we charged that earlier this year in the midst of the crypto crisis, Bankman Freed lied to investors in FTCS about the fact that he had sent billions of dollars in FTC's customer money to Alameda. And fourth, we charged that Bankman Freed violated federal campaign finance laws by causing tens of millions of dollars in a legal campaign contributions to be made to candidates and committees associated with both Democrats and Republicans. These contributions were disguised to look like they were coming from wealthy co-conspirators, when in fact the contributions were funded by Alameda Research with stolen customer money. And all of this dirty money was used in service of Bankman Freed's desire to buy bipartisan influence and impact the direction of public policy. Washington.

To anyone who was watching this or hears about this prosecution, if you believe that you have been a victim of these schemes or you have information about the conduct that we've alleged in our indictment that we've been sealed today, please let us know. To any person, entity, or political campaign that has received stolen customer money, we ask that you work with us to return that money to the innocent victims.

And to anyone who participated in wrongs doing at FTX or Alameda research and who has not yet come forward. I would strongly encourage you to come see us before we come see you. Now let me say a word about our partners at the FBI, the SEC, and the CFTC. The women and men of the FBI are some of the finest public servants in this country and they had been with us since day one in this investigation and there is no one, no one better to work with. I want to thank the brilliant lawyers at the SEC and the CFTC. This investigation is complex and it's sprawling.

We embrace that kind of challenge here in the Southern District of New York. And we always want the CFTC and the SEC by our side when we're doing that. And finally, I want to thank the career prosecutors from my office handling this case. Nicholas Rose and Danielle Sassoon and their supervisors, Scott Hartman and Matthew Podolsky, the Chiefs of our Securities and Commodities Fraud Task Force. I want to acknowledge the contributions and hard work of the prosecutors from our money laundering in Transnational Criminal Enterprises Unit,

including Samuel Raymond and Thane Wren and their chiefs Jessica Feinstein and Tara Lamort. And I want to acknowledge the contributions from the chief of our public corruption unit, Rebecca Donaleski. This should be very clear, but it's an all-hands-on-deck investigation here in SDNY.

and I couldn't be prouder of the team that I'm privileged to lead. I now want to invite up to the podium, FBI assistant director in charge, Michael Driscoll. Thank you, Damien. So thank you all for joining us this afternoon for this important announcement. This case came together at great speed in such that it's only possible to be standing here today through tremendous coordination and cooperation from many people and agencies. As the indictment today alleges, Bankman-Fried, knowingly defraud. customers of FTX through the misappropriation of customer deposits to pay expenses and debts of a different company.

In addition, Bankman Freed executed deliberate transactions designed to obscure and disguise the misuse of customer funds. He prayed on his customers, the victims of this case, abusing the trust placed not only in his company, but in himself as the lead of that company. We are determined to help the victims of this case get a sense of justice, and we will continue to make every attempt to recover as much of their funds as possible. If you're willing to deceive customers and attempt to hide your actions, we will be persistent in pursuing you and ensuring you are brought to justice. I want to thank Damien Williams and his team at the Southern District for their cooperation and partnership on this case. I also want to thank our partners at the SECC and the CFTC for their outstanding work. A word of thanks to DEA's Aviation Division and their Foreign Operations Group for their logistics and resource assistance over the past few days.

Our field offices in Boston, Miami, Washington, D.C., and our LEGAT office in Bridgetown. FBI headquarters components that fed and worked on this case from Criminal Investigative Division, our SIRG team crisis incident response group, and our international operations division. And of course, the special agents from and forensic accountants from our securities fraud squad, as well as the money laundering squad. The Justice Department Office of International Affairs has been an important partner in this. And of course, as Damien noted before, his team in securities and commodities fraud, money laundering, and transnational criminal enterprise unit has been a true partner in this case. I also want to thank our international

law enforcement partners. These kind of cases do not happen without that kind of coordination, and I specifically want to note the assistance provided by the Royal Bahamas Police Force. And I want to be clear. This case is about fraud. Fraud is fraud. It does not matter the complexity of the investment scheme. It does not matter the amount of money involved. If you mislead and deceive to take what does not belong to you, we will hold you accountable. And I'd like to thank everyone who's been working on this case for helping us adhere to that principle today. Thank you. Good afternoon, everyone. I'm Grebeer Graywell, the director of the SEC's Division of Enforcement. Today, in a parallel civil complaint, the SEC filed charges against Sam Bankman-Fried,

alleging that he orchestrated a year's long scheme to defraud equity investors in FTX Trading Limited, a company that he co-founded and led as CEO until its collapse last month. As alleged in our complaint starting in 2019 and continuing through November 22, Bankman Freed raised more than $1.8 billion from equity investors on the basis of lives. You see, FTX operated behind a veneer of legitimacy that Bankman Freed created by, among other things, repeatedly touting to investors, FTX's top-notch automated risk controls that he claimed protected. customer assets and by repeatedly claiming that those assets were at all times safe, segregated, and secure. But as we allege in our complaint, that veneer wasn't just thin, it was also fraudulent. Because in reality, from FTX's inception in 2019, Bankman Freed began secretly and improperly diverting FTCS customer funds to his crypto hedge fund, Alameda Research. And as alleged in our complaint, he then misuse those funds to make undisclosed venture investments, lavish real estate

purchases, and large political donations. Bankman Freed's claims about FTC's sophisticated risk controls and other customer protections were simply bogus. Similarly, his representations to FTX investors and trading customers concerning Alameda were also part of that carefully crafted veneer and were similarly false and misleading. He frequently claimed that Alameda was just another customer with no special privileges at FTX. But in truth, Bankman Freed directed that Alameda be exempt from the very risk management measures that he touted to FTX investors and to its customers.

He also provided Alameda a virtually unlimited line of credit funded by FTC's customers. And he also diversed. billions of dollars in customer funds from FTX to Alameda. Bankman Freed's entire House of Cards started to crumble as crypto asset prices plummeted in May of 2022, and as Alameda's lenders demanded repayment on billions of dollars in loans. But to continue propping up his empire, we allege that Bankman Freed diverted billions more in FTX customer assets to Alameda, even as it was increasingly clear that Alameda and and FTX could not make those customers whole.

In fact, through the summer of 2022, he diverted hundreds of millions more in FTX customer funds, Talamita, which he then used for additional venture investments and for loans to himself and to other FTCS executives. All the while, he continued to make misleading statements to investors about FTX's financial condition and about its risk management. And even in November 2022,

faced with billions of dollars in customer withdrawal requests that FTX could not fulfill, Bankman-Fried misled investors from whom he sought still more money to plug the multi-billion dollar holes that he had created. His brazen multi-year scheme finally came to an end when FTX, Alameda, and their tangled web of affiliates filed for bankruptcy on November 11, 2022. That collapse has had far-reaching consequences for FTC's customers. for its investors and for its counterparties. And our investigation into those consequences, into those individuals and entities involved, remains ongoing.

But one immediate takeaway from today's announcement should be that non-compliant trading platforms pose dramatic risks to both their investors and to their customers. Among other things, they don't provide them with the same robust level of disclosures and protections against fraud and conflicts of interest. That's what traditional U.S. registered securities exchanges provide. So it's imperative that non-compliant platforms come into compliance.

But as Chair Gensler has made clear, the runway is getting shorter for them to come in and to register with us. And for those who do not, the enforcement division stands ready to take action. I'd like to recognize the incredible team from our crypto assets and cyber unit and from cross our division responsible for today's action. Devin Sue, Ivan Snyder, David Brown, Brian Huckro, Pasha Salimi, investigated this matter under the supervision of Amy Hartman, Michael Brennan, Jorge Tenrero, and David Hirsch. Amy Burkart and David Daugher, will lead the litigation against Bank Bin Freed under the supervision of Ladin Stewart and Olivia Che. Finally, I want to commend our partners here at the Southern District of New York

under the leadership of U.S. Attorney Damien Williams, and our partners, at the FBI and the CFTC. This is yet another strong example of the collaboration that you see before you this afternoon. With that, I'll turn it back to U.S. Attorney Williams. Thank you. I'd like to welcome up Gretchen Lowe from the CFTC. Good afternoon. I'm Acting Director, Gretchen Lowe, acting director of the Division of Forceman at the CFTC, Gretchen Lowe. Thank you so much for the opportunity to speak today. Today, the CFTC filed a complaint against Sam Bankman-Fried and his company's FTCS and Alameda, charging a fraudulent scheme that dates back to the launch of FTCX.com Exchange in May 2019. The CFTC's complaint specifically charges defendants with fraud by misappropriation of customer funds, as well as false statements to the public customers, investors, and Congress about the handling and security of those funds.

As alleged, there are over 8 billion in customer losses that we have ascertained as of today. The rippling consequences of defendants' fraud are vast and have done significant damage to the integrity of the evolving digital asset market. The CFTC charges that at Bankman Freed's direction, FTC customers, customer deposits, intended to be used to trade digital asset commodity futures, swaps, and other products, were not appropriately segregated by FTX. Instead, customer funds were held in Alameda accounts where they were commingled and misappropriated for a variety of unauthorized purposes, such as use in high-risk investments

and other digital asset enterprises, political contributions, and to purchase luxury real estate. As charged, the fraudulent use of customer funds by Bankman Freed and his companies were inconsistent with the touted FTCS, terms of service and contrary to numerous statements made by public statements made by Bankman Fried. The CFDC also charges that defendants created features in the underlying code for FTCs that

allowed Elamida to have essentially an unlimited line of credit on the exchange. Defendants also provided Elamita with unfair trading advantages, including quicker execution times and an exemption from FTCS's auto liquidation risk management process. This massive and costly fraud was in the connection with commodities interstate commerce and as alleged including Bitcoin, Ether, and Tether, which are the most widely traded digital assets in the world. Bitcoin and Ether also underlie derivatives contracts on CFTC designated exchanges. Lastly, standing here today with the U.S.

U.S. Attorney's Office at the Southern District, FBI, and the SEC represents yet another stellar example of the importance of federal regulators and federal criminal authorities working collaboratively and effectively with each other to achieve justice. The teams work quickly and tirelessly to obtain compelling evidence and to begin to hold those responsible for the FTX collapse accountable, all within a very short time frame. Thank you to all at the SDINY, FBI, and SEC for your cooperation. And thank you to the CFTC team. Nina Ruvinsky, Karlin Metzker,

Brian Sue, Ben Jackman, Yusef Tepar, supervised by Deputy Director Robert Howell and Chief Trial Elizabeth Pendleton, and many, many others at the Commission who supported the work. I am proud of your hard work, your dedication to the mission of the Commission,

and for always acting in the public interest. Thank you. All right, happy to take some questions. Well, you didn't fit the fraud in who you would think would be behind this. I don't know what the profile is typically, but he wore shorts and a t-shirt, he was incredibly bright. Do you address the fact that he didn't fit the profile and that's part of the way he was able to fool so many people? Well, you can commit fraud in shorts and t-shirts in the sun. I mean, that's possible too.

So I think that addresses the last question. In terms of whether we're going to bring charges against anyone else, look, I can only only say it this clearly, but we are not done. Extradition is ongoing in the Bahamas. I don't have anything to add on that. Next question. All right, that was Damien Williams, the U.S. Attorney for the Southern District of New York, holding a press conference on Sam Bankman-Fried, leading a team that includes the FBI, the Securities and Exchange Commission, also the Commoddity Futures Trading Commission. For more, let's bring out our own Kate Rooney, who's been reporting extensively on this, along with Michael Zwebeck, a criminal defense attorney at FZZZ.

F-Z-F-Z-Law and a former federal prosecutor himself. Michael, I'd like to start the conversation with you. This was a very big team effort, as it often is in high-profile cases like this. I wonder if you might take your expertise as a former prosecutor and kind of break down for us in our audience. What exactly the role each of these people plays, the SEC, CFTC, DOJ, FBI, all of them, and how they're going to move forward in this kind of of the case? Well, there's certainly collaboration amongst the regulatory entities, that is the CFTC and the SEC with the United States Attorney's Office for the Southern District.

However, the Southern District really takes the lead because they have the access and the ability to use the grand jury, which allows them the opportunity to hold proceedings secretly. In fact, this ultimately was a sealed indictment, and I expect they'll be on- ongoing portions of the investigation that will remain outside of the public's view. So the CFTC and the SEC play a very important role. However, it's the U.S. Attorney's Office that takes the lead in these types of cases. Okay. So, Kate, it was just in this hour 24 hours ago that we were asking you about why San Bankman-Fried was appearing virtually in front of what was supposed to be his appearance

before the House Committee involving the investigation into FTX. And we kind of know why, because we understand that he's going through an extradition process right now in the Bahamas. Can you take us through what the movements have been like so far and what exactly has been said in today's hearings with the current FTX CEO who's in charge of kind of reorganizing everything? Sure. So we just heard, Dom, from the acting SEC director, essentially that this started last Wednesday.

the charges were approved. It's a longer process. Sam Beckman-Fried was eventually arrested last night in the Bahamas, so that was in coordination with U.S. law enforcement. So it makes the idea that he may have been nervous about an arrest if he had come back here on U.S. soil, especially relevant. And that's what we were hearing from legal experts for the reasoning behind a Zoom hearing testimony versus appearing in front of Congress in person, which we did not see today, San Bengen-Fried, for obvious reasons now, did not testify. We did hear from John Ray, who is now the CEO of FTX and is in charge of restructuring.

He took a very calm, intense tone, really did not parse his words at all. He said that, you know, talked about mismanagement, talked about some of the issues that went on at FTX, and it really did align with what we just heard from those multiple agencies who seemed to be working quite closely in coordinating on this effort. We also just heard essentially that,

They haven't said if they're going to bring charges against anyone else, but they say they're not done. So it was sort of a call to action if anybody had information, if anybody wanted to go and work with law enforcement, or they said if you were a part of this and you haven't reached out to us yet, make sure you do before we reach out to you. So there was a little bit of a warning shot there and a shot across the bow for those who may be involved and may have not spoken to federal prosecutors yet. Michael, there are some reports he might fight extradition. What are his odds of success? His odds of success are absolutely none. He will ultimately be extradited, but the process does allow for delay.

It's a process that can take anywhere from 12 months up to three years because there are numerous appeals that are built into the extradition procedures that just are rampant with delay. So unless he agrees to be extradited and waives his extradited, rights. He's not going to be on U.S. soil for a while. Michael, we know that he has not waived those rights, so he is going to fight this in court in the Bahamas right now. And so if this really is a one to three year process, what exactly does that do to the momentum of the investigation, or does this give law enforcement in the U.S. even more time, more, more time to build up a very solid case against SBF?

Well, first of all, he can waive his extradition rights at any point, so we'll just have to see how that plays out. But ultimately slowing down a case like this where you expect at some point there will be other pleas that will be reached and other people will come forward and be charged is going to be a benefit for the prosecution. A benefit for the prosecution. So do you think he'd be a flight risk? I think any judge is going to look at him as a flight risk, given the fact that there are, billions of dollars of assets that are still unaccounted for that could be anywhere in the world there's really going to be no bond condition absent placing him in custody that's going to assure that he is going to reasonably appear in Manhattan uh kate one of the other complicating

factors in this and it's something that cnbc has been reporting on is the relationship between the bahamas uh law enforcement the courts there versus ours here uh there's a great story up on cnbc com right now detailing the near quarter billion dollars worth of real estate that Sam Bankman-Fried and FTS had amassed in the Bahamas and how there's a battle brewing between the Bahamas courts and Delaware courts here in the U.S. with regard to the banks of bankruptcy of FTX. How complicated does even the cross-border and cross-legal system process become, given what's happening right now with SPF and this particular slate, if you will, of charges? So in the beginning when this bankruptcy filing started, that was one of the big battles was whether it was going to be Chapter 15 in New York, which would have allowed and acknowledged more of a global structure and more oversight in Bahamas for unwinding this versus Chapter 11, which ended up being the outcome. It's all happening in Delaware. But we have had a little bit of pushback from Bahamas. They challenged what John Ray said earlier when,

he was testifying, they do seem to want some sort of oversight, including, like you mentioned, real estate clawbacks. And they have said, you know, we're cooperating on the arrest, but they do want some sort of ownership over this. He may very well have violated laws in the Bahamas as well. So you have these sort of dueling jurisdictions here that makes it way more complicated and legal experts I've spoken to. You talk about the analogies of either Madoff or a Theranos situation where, or even an Enron that John Ray has worked on himself, that those are complicated, but they don't have the cross-border aspect. They don't have the cryptocurrency aspect. So that muddies the water a little bit in terms of unwinding all this. The fact that

it's not only in Bahamas, it's Antigua, and then there's 130 or so affiliated entities, many of which are global. They're all over the world, Europe, Africa, you name it. This company had tentacles really in every jurisdiction you can think of. Michael, what did you think of his strategy to try to use this kind of media apology tour to go? some public support or forgiveness. And what do you think is likely to happen from here if we are no longer perhaps going to hear from him the way that we have or maybe we will? Well, first of all, what I thought of it was it's kind of the, you know, the emperor has no

close. I mean, it was a fictional attempt at some form of contrition. But as we know, these cases are built not only on the ridiculous statements of the individuals who are the targets, but also upon evidence of the actual criminal acts. And as Mr. Ray outlined this morning before the committee, this was a company that had no true governance. There were lies and deceit that I'm sure multiple witnesses and electronic emails are going to detail. And despite Mr. Freed's protestations, his strategy was doomed for failure from the start.

And Michael, before we let you go, From your expert standpoint, having been a federal prosecutor at one point, if you look at this case as it's developing, we don't know the full details yet, as it's developing, and you put it face to face with, say, Bernie Madoff, or you put it next to Enron and some other high-profile prod cases. How big is this? How does it rate compared to some of the other big frauds in U.S. history? Well, it certainly rates amongst those cases in terms of the amount of loss that we're dealing with. And I think the important message is, as has been said, this is a fraud case. It's not really about the crypto per se. It's an old story that's been written before. This is about lies, deceit, and political influence.

All right. Thank you very much to Michael's Wybeck. Also, Kate Rooney as well for her reporting. We appreciate it. Ahead on power launch inflation finally cooling off, perhaps. Ray Tykes could be slowing down, maybe. Both benefits, housing, and home builders. But which of the United States?

these names is the best bet for investors. We'll take a look at some of the big ones coming up next and we'll debate it. Keep it right here. Welcome back to Power Lunch. Let's get a check on the markets right now as we are seeing some big swings today. The Dow was up more than 700 points at the highs of the day, but then as you can see briefly dip negative down about 114 points at its lows. Now a diverse group leading to the NASDAQ 100, Moderna is soaring on clinical trial results for a cancer vaccine tied to skin cancer. DocuSign gaining again today up 40% in about a week or so. Match and meta platforms also with nice gains as you can see so far today. Checking on the bond market, yields moving opposite of stocks falling sharply after the CPI report and rebounding throughout the course of the session.

The 10-year yield now sits at just around 3.5% or so right there, but again, climbing steadily through the course of the session. And the price of oil up about 3% today, the dollar falling on signs inflation is possibly slowing down. A weaker dollar makes oil. cheaper for other currency and international buyers, which could possibly, Kelly, boost demand. All right, Don, thank you very much. Time now for our home builder, bullfight. The sector has been rallying amid a pullback and interest rates. Both Lanar and Maritage homes are up more than 20% in the past three months.

Lanar is set to report quarterly results tomorrow. So which of these two homebuilders will bring you a bigger profit? Here with the Bull case for Lenar is Kenneth Zener, equity research analyst with Key Bank Capital Markets. Joining us with the Bull case for Meritich Holmes and Stephen Kim, Home Builder sector analysts with Evercore ISI. Gentlemen, it's great to have you. And Ken, why don't you kick things off here? Thank you for having us.

Just to set it up, in contrast to our prior bare thesis, we think the stocks in general have largely de-risk versus the market for now. And that's consistent with our RIP framework, which uses data since 1962. And the key point here in a highly correlated group and how we avoid being impermable, we use a quantitative of framework avoiding adjectives and longer-term factors like demographic supply that really missed a lot of the stock catalyst. So the book value is de-risk versus the market, pressure on earnings and the multiple.

We like Lenar for three reasons within our framework. It has a high trailing return on inventory. has a low net leverage versus peers. And it's that simple that it's a relative call. It's been working. But we do think, as today highlights in the market, there's a lot of sensitivity around rate forecasts. No, I would never think of you as a permable, Ken,

because the last couple times we spoke in prior months, you were much more bearish. And if I recall, you always said, don't buy the builders until the Fed tightening cycle stops. So is that implicit in your call here and in your bullishness that you think we're basically at the end of that cycle? Good memory. We have changed the nuance of the call as many of our investors, PMs, really try to outperform the S&P. Our analysis back to 1962 looked when the group's risk versus the market largely abated versus the overall cyclical returns. So the timing of the market, in terms of the absolute stocks, avoided. by reflecting the investment process of our clients.

Okay. So again, to be clear, you are a bull on Lenar. And Stephen, you are more focused on Meritage. Do you also like Linar or do you think that Meritage is much more attractive here and why? I sure do. I sure like Linar as well. In fact, I think Ken's going to look real smart here in about, you know, three, six and even 12 months out if he keeps his call.

We actually have probably a higher target price than Ken does actually on Linar. So I absolutely agree with what he's saying on Lanar and the group in general. I will say, though, that when a group like a home, like when a group like the home builders comes into favor, a lot of times it's some of the smaller cat names that get maybe a little overlooked, and they can actually have bigger moves. And so Meritage is one that I do think has a lot of virtuous qualities. A lot of the things actually that we like about Lenar, for instance, very low leverage, high profitability, a business model that goes for affordability and does spec building of the focus on efficiencies.

These are all things that these two companies share. What's different, though, is their valuations. Meritage trades at a significantly lower valuation. It trades below its book value. And as a result of that, when this group, we think, comes into its own in 2023, we think that Meriters will probably have a bigger move. So I have an over 50% return. over the next 12 months that I'm projecting for Meritage. Stephen, it's Dom here. I wonder if you could tell us, I mean, Lenore Meritage aside or maybe included, we know that home builders, by their very business, are geared and more levered towards

the interest rate market, right? But I wonder if you could tell us and our viewers which home builders in your coverage universe are more sensitive to interest rates than others on a relative basis? I don't actually believe that there is a significant difference for most of the builders. I would say perhaps Toll Brothers might stand out as one that is less sensitive to interest rates just by virtue of their luxury buyer. That being said, I think that what the problem is that has been sort of keeping the valuations on the builders depressed is this general overarching concern that home prices across the country are going to go down something on the order of 20. or more percent. That is something which is, in our view, not going to happen. I've been pretty clear that I think that is not in the cards. And that's been an area of disagreement, we believe, for the group.

So as 2023 comes into view and we think that it becomes clear that you're not going to see that, we think this whole group will benefit. And a key part of that, of course, is going to be mortgage rates. I would point out, Dom, that the spread of the 30-year mortgage rate over the 10-year yield is incredibly wide and could easily contract 50 to 100 basis points and still be above normal. That would bring your mortgage rate into a five-handle territory. And I think housing demand would really rebound well in the spring if that were to happen. That's exactly what Diana and I were talking about last hour, although I don't know if QT interferes with those prospects. But before we go, just to keep it focused on the stock picks, Ken, are there any names in your coverage universe that you wouldn't be as positive on here?

And if so, why? Well, we have a framework for the home builders called KISS. We do try to keep it simple. And we simply rank the top five highest return on inventory builders, of which Meritage is one in the smaller cap space. I think if you look at the low return builders, KB, Toll, Taylor Morrison's more an aggregation of its prior M&A history. So operationally, while the smaller cap, our charge.

trading at a discount. Historically, that's tied to less clean operations, which the best way to look at it is in terms of leverage. And Meritage does stand apart from its, you know, three billion market cap peers in that regard. But we think investors buy stocks relative to the S&P. We think the builders are set to outperform on a relative basis and then into the eventual cyclical bottom of the group, timing unknown. All right, gentlemen, a bull fight. And I was kind of dressed for it. The humane variety, by the way.

Yeah, humane variety. No one's getting stabbed at the end. Ken Zener, we hope. And Stephen Kim, thank you both very much for your time today. All right, coming up next on the show, pouring some out for sinking valuations. We're breaking out a special edition of the three stock launch, trading three names that have seen their valuations absolutely slacks. this year, those trades coming up after the break.

Welcome back to Power Lunch. Time now for today's three-stock lunch, forward PE edition. We're trading three names that have seen their evaluations slash this year. Tesla's forward price to earnings ratio sitting here 30 after beginning the year at more than a hundred times next year's expected earnings. That's less, by the way, than Chipotle, which trades at 37 times forward earnings. I know, right? It's crazy. Well, listen to this one. Meta. is down to 17 times forward earnings. Wow.

Now cheaper than McDonald's, which trades at 27 times forward earnings. And then J.P. Morgan also historically cheap, at least from that perspective, as the financials can't catch a real tailwind here, trading it at 10 times forward earnings. But it does trade, again, at a premium on a forward or a book value basis. So, you know, kind of depends on which way you look at it. Let's now bring in Delano Soporu, who's at New Street Advisors. He's also the founder and CEO there, also a CNBC contributor. Delano, thank you very much.

Let's start it up with Tesla. I mean, this is pretty big. This is not a call on whether it's a buy or a sell from my standpoint, but it catches someone's eye when you say it was 100 times forward earnings and now it's 31 times. What does that say for you or are you a buyer or a seller? Hey, Dom. That is attractive and it does catch someone's eye.

And it actually caught my eye at the beginning of the year when I was trading a lot less attractively. And now, if you look at that trade not been working so far, I think a part of that's the macro environment, part of that's reports of production cuts over in Shanghai. And so I think, you know, when I looked at it now, there's an opportunity when, you know, the valuation's gotten a lot better. If you look at actually the industry, we know that, you know, there's a push towards electric vehicles. We know that Tesla is the biggest brand name and the biggest market share in the U.S. in that area. And so, you know, even if that competition tends to pick up, I do think they'll bode well. I think expansion and production in Europe is getting better.

So I like it here, and I liked it earlier. So I definitely like it here. And I think if you're holding, you can hold. And if there's opportunities in the next couple of months, there might be to actually buy here as well. I just keep looking at that 29.8 forward P. I used to be over 100. It's just remarkable. All right, Dilan, what about meta, which has long been kind of a value stock, if you want to call it that?

But it's pretty much near its cheapest level ever now, 17 times forward earnings estimates. Yes, definitely around its cheapest level. Seven times four earnings. It hasn't done well year to date. And the last month or two, it's bounced a little bit. And you saw that because of a lot of the restructuring that's been happening at meta and investors did like that. I think, you know, they still have headwinds when it comes to competition and addressing, you know, the privacy changes and seeing if commercial ad spend will come back on the e-commerce side. But, you know, overall, this is a hold for me.

I think if you look at it just from, you know, the top down, you just have an area where they have the biggest, you know, of apps at over 4 billion users. They're still on the platform. So I think ad spend comes back in the late half of 2023. And we see a company that has been spitting out profits rather well for, you know, a decade. And so I think that continues. But there's some headwinds that they'll have to get through first. All right.

So that's the call on meta. I also want to take the final name here. It's J.P. Morgan Chase Delano, now trading at a forward price to earnings ratio of 10 as the financial sector continues to suffer this year. Now, I will point out that. at a discount valuation from an earnings basis, many traders and investors look towards book value. This still does trade at a premium to book more so than others. It trades at about 1.4 times book for comparison Bank of America trades right at book value. So is J.P. Morgan of value at this level?

I think, you know, looking at the price section, you know, relative obviously, the tech names we mentioned, it's held up a little bit better. I think, you know, one of the areas that I like is the consumer banking side. When you're talking about obviously the interest rate environment we're in right now, a lot of it could be a benefit for their banks on the consumer banking side if they have obviously higher loans that they're getting higher interest on. And also, if you look at the lending and the asset, the deposits increase on the side for JPM, that's the things that I like. I know that the capital markets has dried up and M&A has kind of dried up. But the banks, if you look at JPM and Bank of America, they've done well on the consumer banking side. And that's the thing

that's attractive here, whether it's a better valuation, maybe not as crazy as the other, the better, more attractive as the other valuations, but I still think it's one that you could potentially buy if you're looking to hold on something that could potentially have a tailwind going into 2023 based on the interest rates that we're at right now. A lot of traders out there point, Kelly, towards the outperformance in JP Morgan, over other big money center type banks. All right, Delano Siporu, thank you very much for the three-stock lunch on Tesla, META, and JPMorgan.

We'll see you next time around. All right, coming up next on the show, Kelly. No, please. No, I'd love you to do it. WeWorking to survive. The company's once robust cash reserves are dwindling. If WeWork doesn't turn a profit, it could face bankruptcy. You'll want to hear this.

Welcome back to Power Lunch, everybody. Let's check out shares of WeWork. They're flat. They're down 50% in the past three months, and it's currently just under a $2 stock. Now, the Wall Street Journal is reporting the company's cash reserves have dwindled, leading, in fact, to the possibility on Dvourke. of default on some of the debt. Their losses were backed by SoftBank,

which the journal has said has put $10 billion in to back those losses. But WeWorks Market Cap right now, Dom, just under $1.5 billion. It's amazing. Some of these high flyers at one point, private markets or otherwise. I mean, I think of Carvana right now,

which has also been smoked, taking a beating there as well. Now, before we go, let's take a look at the yield curve. We've got to talk rates, right? First of all, let's show you what's happening right now with the two-year, 10-year spread, often looked at as one of those kind of barometer or benchmark gauges for the health of the economy.

Remember, Kelly, at one point, it was a minus 80 basis point handle. That was the lowest since, or most inverted since 1981. We know what happened recession-wise in like the early 1980s. The second is a three-month tenure, which a lot of other traders say is a better indication. Yeah, I like it. But we just want to show it to you because it is a Fed meeting day tomorrow, and all these rates will be hugely in focus. And what do they have to cut by about that much? They want to unavert the curve at this point? I'm just looking at the two-year and the three-month. A lot of people just parking money there right now.

Rest up, everybody. It's going to be another busy one. Dom thanks. Thanks for watching Power Lines.