Regulators warn U.S. banks on crypto risks including ‘fraud and scams’

Ether has hugely outperformed bitcoin since both cryptocurrencies formed a bottom in June 2022. Ether’s superior gains have come as investors anticipate a major upgrade to the ethereum blockchain called “the merge.”

Yuriko Nakao | Getty Images

U.S. banking regulators warned financial institutions on Tuesday that dealing with cryptocurrency exposes them to an array of risks, including scams and fraud.

“The events of the past year have been marked by significant volatility and the exposure of vulnerabilities in the crypto-asset sector,” the regulators said in a joint statement from the Federal Reserve, Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency. The comments come just weeks after the spectacular collapse of crypto exchange FTX.

The regulators said the risks include: “fraud and scams among crypto-asset sector participants” and “contagion risk within the crypto-asset sector resulting from interconnections among certain crypto-asset participants.”

During the crypto boom, when financial players seemed to announce a new crypto partnership on a weekly basis, bank executives said they needed further guidance from regulators before dealing more directly with bitcoin and other cryptocurrencies in retail and institutional trading businesses.

Now, about two months after the bankruptcy filing of FTX, the industry has been exposed as rife with poor risk management, interconnected risks and outright fraud.

While the statement indicated that regulators were still assessing how banks could adopt crypto while adhering to their various mandates for consumer protection and anti-money laundering, they seemed to give a clue as to which direction they were headed in.

“Based on the agencies’ current understanding and experience to date, the agencies believe that issuing or holding as principal crypto-assets that are issued, stored, or transferred on an open, public, and/or decentralized network, or similar system is highly likely to be inconsistent with safe and sound banking practices,” the regulators said.

They also said that they have “significant safety and soundness concerns” with banks that focus on crypto clients or that have “concentrated exposures” to the sector.

Traditional banks have largely sidestepped the crypto meltdown, unlike the 2008 financial crisis in which they played a central role. One exception has been Silvergate Capital, whose shares have been battered in the past year.

Wall Street expects robust gains for these 10 Club stocks in 2023

Packages move along a conveyor belt at an Amazon Fulfillment center on Cyber Monday in Robbinsville, New Jersey, on Monday, Nov. 28, 2022.

Stephanie Keith | Bloomberg | Getty Images

Good riddance, 2022.

Tuesday officially marked the start of a new year on Wall Street, and while there is no guarantee 2023 will be a great one for stocks, for now it’s nice to turn the page on the worst year since 2008.

FTX task force launched as Sam Bankman-Fried appears in court

Former FTX chief executive Sam Bankman-Fried (C) arrives to enter a plea before US District Judge Lewis Kaplan in the Manhattan federal court, New York, January 3, 2023. 

Ed Jones | AFP | Getty Images

The Manhattan U.S. Attorney’s Office said Tuesday it had created an FTX Task Force to trace and recover assets of victims of the cryptocurrency exchange firm’s collapse and to handle investigations and prosecutions related to the company and other entities.

The announcement came as FTX founder and former CEO Sam Bankman-Fried appeared in U.S. District Court in Manhattan to plead not guilty in his criminal case, where he is charged with multiple counts of financial fraud and campaign finance crimes.

“The Southern District of New York is working around the clock to respond to the implosion of FTX,” Manhattan U.S. Attorney Damian Williams said in a statement.

“It is an all-hands-on-deck moment,” Williams added.

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“We are launching the SDNY FTX Task Force to ensure that this urgent work continues, powered by all of SDNY’s resources and expertise, until justice is done,” he said.

Williams’ top deputy, Andrea Griswold, is leading the task force, which will draw prosecutors from the Securities and Commodities Fraud, Public Corruption, and Money Laundering and Transnational Criminal Enterprises units.

The Securities and Exchange Commission has estimated that customers lost more than $8 billion as a result of fraud at FTX and Bankman-Fried’s hedge fund, Alameda Research.

When FTX filed for Chapter 11 bankruptcy protection in November, it claimed to have more than 100,000 creditors, and liabilities of between $10 billion and $50 billion, compared with assets in an identical range.

The 30-year-old Bankman-Fried is free but under house arrest at his parents’ residence, on a $250 million personal recognizance bond, which was set after he was extradited from the Bahamas late last month.

Two of his lieutenants pleaded guilty in Manhattan federal court to multiple counts of fraud before he was extradited: Caroline Ellison, the 28-year-old former CEO of Alameda, and FTX co-founder Gary Wang, 29.

Both Ellison and Wang are cooperating in the investigation of Bankman-Fried and related FTX matters.

Mega Millions jackpot is $785 million. Here’s the tax bill

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Of course, the advertised amount is only what you’d get if you were to choose to take your winnings as an annuity spread over three decades. The lump-sum cash option — which most winners choose — for this jackpot is $403.8 million, as of midday Tuesday.

Regardless of how you’d decide to receive your windfall, taxes would take a bite out of it.

$96.9 million in taxes would be shaved off cash option

Assuming you’re like most winners and were to choose the cash option, a mandatory 24% federal tax withholding would reduce the $403.8 million by $96.9 million. That would cut your take to $306.9 million.

However, you could expect to owe more to the IRS at tax time. The top federal income tax rate is 37% and applies to income above $578,125 for individual tax filers and $693,750 for married couples who file a joint tax return.

What to do if you win the lottery

This means that unless you were able to reduce your taxable income by, say, making large tax-deductible charitable contributions, you would owe another 13% — or about $52.5 million — at tax time. That would bring your winnings down to $254.4 million. 

There also could be state or local taxes depending on where the ticket was purchased and where you live. Those levies range from zero to more than 10%.

Most Mega Millions players, though, won’t have to worry about paying millions of dollars to the IRS or state coffers: The odds of a single ticket matching all six numbers to land the jackpot is about 1 in 302.6 million.

Meanwhile, the Powerball jackpot is $291 million (with a cash option of $147.9 million) for Wednesday night’s drawing. The chance of hitting the motherlode in that game is slightly better: 1 in 292 million.

Southwest Airlines cancellations abate after holidays but costs pile up

Pristine Floyde searches for a friend’s suitcase in a baggage holding area for Southwest Airlines at Denver International Airport on December 28, 2022 in Denver, Colorado.

Michael Ciaglo | Getty Images

Southwest Airlines stabilized its schedule over the weekend after about 16,000 cancellations, but its systemwide holiday meltdown could cost it hundreds of millions of dollars.

Southwest had canceled 304 flights since Friday, 2% of its schedule, most of them on Monday when U.S. airlines faced bad weather and ground stops in Florida tied to a Federal Aviation Administration equipment outage. For comparison, from Dec. 21 through Dec. 29 Southwest had scrubbed about 45% of its operation, a far bigger share than other major airlines, according to FlightAware.

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Now come two more difficult tasks for Southwest: going through thousands of passenger reimbursement receipts and improving the internal technology that contributed to the meltdown.

“We have plans to invest in tools and technology and processes, but there will be immediate work to understand what lessons are learned here and how we keep this from ever happening again, because it cannot happen again,” Southwest CEO Bob Jordan, who took the helm in February, told staff Friday.

Jordan said employees from other departments have volunteered to help customers and process refunds.

Bad weather kicked off the issues, impacting flights throughout the U.S. But Southwest crews struggled to get reassigned automatically after all of the changes and were forced to wait on hold for hours with crew scheduling services. Hundreds of thousands of passengers were impacted, and Southwest is still working through a backlog of misplaced luggage.

The carrier had canceled about two-thirds of its flights for much of the last week in an attempt to get crews and planes where they needed to go, before operating close to normally on Friday.

The chaos could cost Southwest between $600 million and $700 million, according to estimates from Bank of America airline stock analyst Andrew Didora on Tuesday. That includes both lost revenue from refunds and the reimbursements to affected passengers, which could include expenses like hotels and rental cars.

Didora cut his fourth-quarter adjusted earnings forecast for Southwest to 37 cents a share from 85 cents.

A Southwest executive last week said the cancellations will “certainly” hit its fourth-quarter results but that it will take weeks to work through customers’ reimbursement requests.

Transportation Secretary Pete Buttigieg vowed to hold Southwest accountable if it didn’t provide customers with refunds and reimbursements, though such fines associated with a failure to pay back customers can take months if not years.

Southwest shares were down more than 3% on Tuesday, more than rivals. The Dallas-based airline is scheduled to report results on Jan. 26 but is likely to preview the meltdown’s costs before then.

Ford F-Series 2022 sales show pickup continued decades-long dominance

2023 Ford F-150 Raptor R

Ford

DETROIT – The Ford F-Series continued its decades-long U.S. sales dominance in 2022 despite ongoing parts and supply chain problems, the company said Tuesday.

Ford Motor reported sales of its F-Series, which includes the F-150 pickup and its larger siblings, surpassed 640,000 trucks last year – making it America’s best-selling truck for 46 consecutive years and best-selling vehicle for 41 years.

The 2022 sales make for an average of at least one F-Series Truck sold every 49 seconds last year.

Despite topping the sales charts, F-Series sales are expected to come in lower than in recent years. Sales of the truck were off nearly 13% through November compared to a year earlier, however Ford said last month’s sales are anticipated to be the best of 2022 for F-Series.

Ford sold 726,004 F-Series trucks in 2021, which was a 7.8% decline from more than 787,400 vehicles in 2020. Prior to the coronavirus pandemic, Ford had been selling about 900,000 of the trucks annually.

Ford has attempted to prioritize production of the F-Series, including its new electric F-150 Lightning, throughout rolling shutdowns of plants due to the parts shortage in recent years. The company has even been partially building vehicles to complete them at a later date to keep production going.

Ford is set to report its total year-end sales on Thursday, a day after other major automakers are expected to release results.

This story is developing. Please check back for updates.

Kevin McCarthy aims to win House speaker vote in new Congress

House Minority Leader Kevin McCarthy, R-Calif., listens as other members speak during his news conference on FY23 government funding on Wednesday, December 14, 2022.

Bill Clark | Cq-roll Call, Inc. | Getty Images

WASHINGTON — As the House prepares to usher in the 118th Congress and new Republican majority on Tuesday, GOP Leader Kevin McCarthy is struggling to secure enough support for his bid to be House speaker to avoid a protracted and historic fight on the House floor.

The California congressman has lobbied his fellow Republicans for months and made several concessions to a small but outspoken bloc of conservatives. But the efforts have not yet produced the breakthrough McCarthy needs to be elected House speaker in the first round of voice voting, which is expected to take place shortly after noon ET.

In order to be elected speaker, McCarthy needs support from a majority of the members who vote Tuesday, or 218 of the 434 House members expected to vote. But with only 222 Republicans total, and no Democrats expected to vote for him, McCarthy can afford to lose only four members of his caucus.

As of Tuesday morning, six current Republican members and three members-elect, all conservatives, still publicly opposed McCarthy. McCarthy also faced months of organized opposition from influential conservative outside groups, which have amplified his critics on social media.

McCarthy’s failure to win public support from his entire caucus has already cast a shadow over the new Republican majority, exposing divisions within the party that have existed for decades. The differences were deepened by former President Donald Trump, who emboldened a small band of ultra-conservatives.

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Trump eventually backed McCarthy’s bid for speaker, as did other influential conservatives such as Rep. Marjorie Taylor Greene, R-Ga.

House Republicans began Tuesday morning with a caucus meeting that was viewed as McCarthy’s final opportunity to make his pitch to members who might be on the fence.

Heading into the meeting, McCarthy struck a confident tone.

“We’re going to unite the team,” he told Punchbowl’s Jake Sherman.

Yet judging from early statements by key Republican holdouts, the conservatives had a long list of demands they believed McCarthy has failed to meet.

House Democrats, meanwhile, openly relished the internal chaos roiling the opposing party.

“We certainly are seeing chaos today in Congress, and this is an extension of the extremism that we have seen from the GOP,” incoming House Minority Whip Katherine Clark, D-Mass., said on MSNBC’s “Morning Joe.”

She accused McCarthy of having “thrown away his moral compass.”

This is a developing story, please check back for updates.

Gold surges to 6-month high, and analysts expect records in 2023

One kilo gold bars are pictured at the plant of gold and silver refiner and bar manufacturer Argor-Heraeus in Mendrisio, Switzerland, July 13, 2022.

Denis Balibouse | Reuters

LONDON — The price of gold notched a six-month high early Tuesday, and analysts believe the rally has further to go in 2023.

Spot gold peaked just below $1,850 per troy ounce in the early hours, before easing off to trade around $1,838.60 per ounce. U.S. gold futures were up 1% at $1,845.10.

Gold prices have been on a general incline since the beginning of November as market turbulence, rising recession expectations and more gold purchases from central banks underpinned demand.

“In general, we are looking for a price friendly 2023 supported by recession and stock market valuation risks — an eventual peak in central bank rates combined with the prospect of a weaker dollar and inflation not returning to the expected sub-3% level by year-end — all adding support,” said Ole Hansen, head of commodity strategy at Saxo Bank.

“In addition, the de-dollarization seen by several central banks last year when a record amount of gold was bought look set to continue, thereby providing a soft floor under the market.”

Looking ahead, Hansen suggested the key events for gold prices would be Wednesday’s minutes from the latest U.S. Federal Reserve meeting and Friday’s U.S. jobs report.

“Above $1842, the 50% [mark] of the 2022 correction, gold will be looking for resistance at $1850 and $1878 next,” Hansen added.

New all-time high in 2023?

Much of the 2023 outlook for global markets hinges on the trajectory of monetary policy as central banks ease off the aggressive interest rate hikes of the past year amid slowing economic growth and possible recessions.

Economists are divided as to whether this will culminate in rate cuts by the end of the year, however, as inflation is expected to remain well above the target range in most major economies.

A full dovish pivot by central banks this year would likely have major implications for gold prices, according to strategists.

Gold could see 'Goldilocks conditions' in 2023, strategist says

Eric Strand, manager of the AuAg ESG Gold Mining ETF, said last month that 2023 would yield a new all-time high for gold and the start of a “new secular bull market,” with the price exceeding $2,100 per ounce.

“Central banks as a group have continued, since the great financial crisis, to add more and more gold to their reserves, with a new record set for [the third quarter of] 2022,” Strand said.

“It is our opinion that central banks will pivot on their rate hikes and become dovish during 2023, which will ignite an explosive move for gold for years to come. We therefore believe gold will end 2023 at least 20% higher, and we also see miners outperforming gold with a factor of two.”

There's been a rebound in demand for gold from India and China, says Standard Chartered

The bullion bullishness was echoed toward the end of last year by Juerg Kiener, managing director and chief investment officer at Swiss Asia Capital, who told CNBC last month that the current market conditions mirror those of 2001 and 2008.

“In 2001, the market didn’t just move 20 or 30%, it moved a lot, the same in 2008 when we had actually a smaller sell-off in the market and the stimulus coming back in, and gold went from $600 to $1,800 in no time, so I think we have a very good chance that we see a major move,” Kiener told CNBC’s “Street Signs Asia” in late December.

“It is not going to be just 10 or 20%, I think I’m looking at a move which will really make new highs.”

Tesla, Coty, PayPal and more

A Tesla vehicle is displayed in a Manhattan dealership on January 30, 2020 in New York City.

Spencer Platt | Getty Images

Check out the companies making the biggest moves in the premarket:

Tesla — Shares fell 5% after reporting a record 40% growth in deliveries. However, the numbers missed analyst expectations. JPMorgan analyst Ryan Brinkman cut his price target on the stock Tuesday, saying he sees more downside ahead.

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Coty — The stock rose 2.7% after being upgraded by Piper Sandler to overweight from neutral. Coty is increasing exposure to China and travel retail, which should allow for recovery tailwinds, analyst Korinne Wolfmeyer said.

PayPal — Shares gained nearly 3% premarket following an upgrade to a buy from a hold rating by Truist. The bank lifted its price target on the digital payments stock, saying that estimates now look reasonable.

Wynn Resorts, Las Vegas Sands — Shares of Wynn Resorts jumped 3% in premarket trading after Wells Fargo upgraded the casino stock to overweight from equal weight on Macau reopening optimism. Other Macau-exposed casinos rose in tandem, with Las Vegas Sands up 2% and MGM Resorts up over 1%.

Molson Coors Beverage — Molson Coors Beverage dipped 1% after being downgraded to underweight from equal weight by Wells Fargo, which said it sees significant downside to street estimates in 2023.

Linde — The stock dropped nearly 3% after Reuters reported that Russia froze almost $500 million of assets of the German industrial gas company. Linde had a contract with Russian companies for a new gas complex but notified its partners it had suspended its work due to European Union sanctions imposed after Russia invaded Ukraine.

— CNBC’s Yun Li and Samantha Subin contributed reporting

Two of San Francisco’s biggest issues: office vacancies and housing

San Francisco is facing its highest office vacancy rate since 1993. Commercial real estate firm CBRE said in a recent report that 27.1 million square feet of a total of 90 million square feet is currently vacant.

“The issue started with the pandemic,” said Colin Yasukochi, CBRE’s executive director at its Tech Insights Center. “Prior to the pandemic, in the city of San Francisco, our office vacancy rate was about 4%. Which meant that 4% of all the space, the millions and millions of square feet of space that we had in the city, were vacant. Today, that number is more like 26%.”

With remote work gaining popularity, the problem is only expected to worsen. San Francisco has been referred to as the work-from-home capital of the United States, with the American Community Survey finding that 46% of employees in San Francisco worked from home in 2021, up from 7% in 2019. 

To combat the rising number of office vacancies, one local legislator is pushing to convert empty office buildings into residential buildings. Matt Haney, a Democratic state Assembly member, says tackling the empty office problem could help the city take the much-needed steps it needs to address the housing crisis. 

“What we can’t do is just leave these buildings empty. That would be bad for our city’s downtown. It would be a total waste,” Haney said. “There are some obvious things that we can look at, where we can meet some of the other needs that we have and actually solve another problem that we have, and that’s our housing crisis.” 

Under the Housing Element, the state of California is mandating that San Francisco build 82,000 new units of housing, including affordable units meant for low-income residents, by 2031. In order to meet that goal, the city needs to build 10,000 units of housing per year starting next year. However, San Francisco Mayor London Breed believes that task is easier said than done due to the lack of support from local legislators. 

“It’s going to require that we make some major changes that I know our legislative body is not going to be open to,” Breed said. “But if they don’t, what’s going to happen? State support for affordable housing is going to be taken away. Tax credits and all the things that we enjoy to support the ability for us to build housing in the first place in San Francisco is going to be taken away.”

The latest CBRE report published in early December said that office vacancies reached a nearly 30-year high in the third quarter with a vacancy rate of 25.5%. And those rising vacancy rates are having a major impact on the city’s economy.

“We are facing an over $700 million budget deficit, mostly as a result to the challenges around our empty office spaces, as well as we’re seeing businesses closed in the financial district,” Breed said. 

CBRE data revealed that so far in 2022 there have been 42 office conversion completions in the U.S., but only 17% of those have been into multifamily homes, while 46% has been office-to-lab conversions. 

“The rents that you can get for a life sciences lab space are much higher than office space. So it makes that conversion financially viable,” said Yasukochi. “We have high demand for residential still, but not at the price that would be required for a developer to be able to do that from a financial perspective.” 

Under current market conditions, many developers lack incentives to build housing, and strict housing policies often mean developers go through lengthy processes that can turn a profitable project into one that loses money and time. 

However, in many cases developers are already at a point where they are investing in costly upgrades. Office conversion typically takes place in older, Class C buildings in need of major repair and remodeling and often in unfavorable locations. While an office-to-residential conversion may require the stripping of a building, in most cases it’s still much cheaper than building from the ground up.

“The most important thing from a developer standpoint is what makes the most financial sense,” said Marc Babsin, president of Emerald Fund, a real estate development company that completed one of the largest office-to-residential conversions in the city at 100 Van Ness Ave. 

“There’s a lot of things that are standing in the way of converting office to residential. The biggest one being that the numbers aren’t working today because construction costs are so high. There are things that the government could do to make it easier,” Babsin said. 

The San Francisco mayor said the problem is that it takes a long time to build housing, especially given all the requirements.

“We have so many laws on the books already in terms of height limitations, in terms of open space, in terms of number of units, in terms of everything that you have to do to build,” Breed said. “And then on top of that, we make people go through an insane process which takes an extremely long time.”

While office-to-residential conversion is seen as a step in the right direction to address San Francisco’s housing crisis, it is years away from being a solution. Breed says the city needs to build more housing in any manner. 

“We just need all housing,” she said. “You know affordable housing sounds good, but when you go through the process to try and get access to affordable housing in this city, it is hard and it is really, really challenging. And the system that we have tried to repair under state and federal law has been very, very difficult to work under. And so as far as I’m concerned, we need to be as aggressive as we can to get more housing built.”

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