Last week, chair Sherrod Brown (D-Ohio) and ranking member Pat Toomey (R-Penn.) invited Bankman-Fried to testify under threat of subpoena. After he declined, Brown and Toomey issued a statement that the disgraced crypto founders lawyers were unwilling to accept service of a subpoena with their client still in the Bahamas. Following his arrest on Monday, the drama lost its relevance.

Instead, the Senate Banking Committee invited four witnesses, an odd pairing of two academics and two TV stars, O.C. veteran Ben McKenzie and Shark Tank host Kevin OLeary.

Unlike Tuesdays hearing in front of the House Financial Services Committee, where FTXs caretaker CEO, John Ray III, testified, the Senate Banking Committee was less interested in diagnosing the collapse of the exchange and more focused on the crypto ecosystem going forward.  

As Brown said during his opening remarks, the hearing was bigger than one person or one firm, and thats the point.

TV stars and policy wonks 

The Banking Committee was split on potential threats posed by crypto and what lawmakers should do about it, which was reflected in the witness list.

McKenzie has branched out from his Hollywood resume to become one of the most prominent crypto critics, initially criticizing fellow celebrities for shilling shitcoins and since delving into the weeds of the ecosystem, including traveling to El Salvador to detail its failures in adopting Bitcoin as legal tender.  

His counterpart, Hilary J. Allen, is a law professor at American University and another vocal critic, and she urged lawmakers in her opening remarks to ensure that any cryptocurrency regulation does not make it too big to fail. 

On the other side was Kevin OLeary, the celebrity investor and crypto booster. As OLeary detailed in his testimony, he had a close relationship with FTX, receiving $15 million to serve as a spokesperson and investing $1 million of his own money into the exchange, which he has now marked down to zero.  

In a moment that raised eyebrows, he said that he spoke with Bankman-Fried after the collapse, with Bankman-Fried convincing him that the failure of FTX came at the hands of its rival, Binance. Bankman-Fried spent as much as $3 billion buying back FTX equity owned by Binance, which OLeary said wiped out its balance sheet.

Despite seemingly putting the blame on Binance and not any fraud committed by FTX, OLeary did tell Fortune after the hearing that he expects more details to come out in the coming weeks about FTXs accounting failures.

OLeary was joined by Jennifer Schulp, director of financial regulation studies at the free-market-minded Cato Institute, who similarly touted cryptoand specifically DeFias a necessary innovation.

Risk is a natural component of markets, she said in her opening remarks. Failure is often necessary for development.

A committee divided

The 24-member committee used the witnesses as foils, asking questions to each that seemed to support their own views on cryptocurrency. The split began on the top, with Brown more of a skeptic and Toomey advocating for regulation to ensure that crypto can thrive on American soil.

Code committed no crime, Toomey said during his opening remarks. Short of enacting draconian, authoritarian policies, cryptocurrency cannot be stopped.

Brown and Toomey have called for different approaches to regulation, and Fortune caught up with each after the hearing. Toomey, who is retiring after this session, has called for several crypto provisions to be added to the omnibus spending bill. He told Fortune that the most ambitious one, a stablecoin bill with Sens. Kirsten Gillibrand (D-N.Y.) and Cynthia Lummis (R-Wyo.), was a long shot, but said that two othersa de minimis exception and a fix to the definition of brokerswere still possible.

While Brown has called for comprehensive regulationwhich he reiterated in a letter to Treasury Secretary Yellin following FTXs collapseits unclear what types of legislation he would support. 

Its going to be difficult to pass anything, he told Fortune after the hearing, adding that his priority was empowering the Securities and Exchange Commission to step up and do its job. Most crypto supporters are critical of the SEC, instead preferring legislation that expands the oversight and funding of the Commodity Futures Trading Commission to oversee the sector.

Sen. Elizabeth Warren (D-Mass.) was a late arrival to the hearing, using her time to ask questions about the risks of money laundering endemic to cryptothe subject of a bill that she also proposed on Wednesday.

Warren asked Allen, the law professor, about the ability to mask transactions using blockchain technology, which Allen agreed with, describing crypto as a privacy nightmare for everyday people and a boon for criminals.  

As we move into the next congressional session, every lawmaker seems in agreement about the need for regulationthe only question is what it might look like.

At the end of the hearing, Brown asked if crypto companies could comply with existing laws.  

Allen said that they couldnt, adding that this is why the industry is calling for bespoke regulations.

Good answer, Brown replied.

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Ive seen a number of economic cycles, pendulum swings, manias and panics, bubbles and crashes, but I remember only two real sea changes, Marks wrote in a memo published Tuesday. I think we may be in the midst of a third one today.

The first shift, in the 1970s, was the adoption of a new investor mentality, as he put it, to embrace risk. Marks said the shift led to new kinds of investments like distressed debt, mortgage backed securities, structured credit, and private lending. 

Marks recognized that sea change as it was happening, and he chose to invest in bonds of Americas riskiest companies, and made money steadily and safely.

Its no exaggeration to say todays investment world bears almost no resemblance to that of 50 years ago, Marks wrote. Young people joining the industry today would likely be shocked to learn that, back then, investors didnt think in risk/return terms. Now thats all we do. Ergo, a sea change.

The second transformation came in the 1980s. The Federal Reserve, led by Paul Volcker, raised the federal funds lending rate to 20% to lower inflation that had soared to 13.5% because of a spike in oil prices that pushed the cost of goods up and ignited rapid inflation, he said. Three years later inflation had dropped to 3.2%. With that success, the Fed gradually reduced the federal funds rateprompting a declining-interest-rate environment that prevailed for four decades. 

Investor success over the last 40 years is largely due to those low interest rates, Marks said, because they fueled an era of cheap and easy money. Bank of America described that environment as an aberration, rather than labeling it a new normal. 

The past two decades of 2% inflation, growth, and wages have ended with a reversion to the long-term historical mean, BofAs analysts previously wrote in a research note. 

Interest rates hit an all-time low in 2008 after the Fed cut the federal funds rate to zero in an attempt to rescue the economy from the Great Financial Crisis. From 2009 to 2020, when the pandemic began, the U.S. enjoyed its longest economic recovery in history, Marks said.

During the Great Financial Crisis, Oaktree raised billions of dollars in debt to purchase distressed assetsand his investors benefited from the firms recognizing the opportunity as debt boomed.

But that era ended this year, with high inflation and higher interest rates. Year-over-year U.S. inflation reached a four-decade high at 9.1% in June before slowing to 7.1% in November. It drove the Fed to hike interest rates seven times this year, pushing the federal funds rate to a range of 4.25% to 4.5%. 

Pessimism took over optimism, Marks said, and inflation and interest rates are highly likely to remain the dominant considerations influencing the investment environment for the next several years.

Weve gone from the low-return world of 2009-21 to a full-return world, and it may become more so in the near term, Marks wrote. 

And that means investors can get solid returns without having to rely so heavily on riskier investments, which in turn could mean better opportunities for lenders and bargain hunters. But investment strategies that worked best over the last 40 years might not perform well in the years to comethats the sea change Im talking about, Marks wrote. 

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The Federal Open Market Committee raised its benchmark rate by 50 basis points to a 4.25% to 4.5% target range. Policymakers projected rates would end next year at 5.1%, according to their median forecast, before being cut to 4.1% in 2024 a higher level than previously indicated.

The hawkish projections have the potential to jolt financial markets, where speculation that the Fed would soon pause its hikes has contributed to easier financial conditions. Stocks have risen, while mortgage rates and the dollar have fallen since Powell last month suggested a policy shift was coming.

Investors prior to the decision bet rates would reach about 4.8% in May, followed by cuts totaling 50 basis points in the second half of the year reflecting views that the Fed would be forced to shift in response to a weaker economy and falling inflation.

Instead, Fed officials stood firm on Wednesday.

The committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time, the FOMC said in its statement, repeating language it has used in previous communications. 

The vote was unanimous.

Treasury yields rose and the S&P 500 index gave up the days gains and the dollar index pared losses on the day.

Fed Chair Jerome Powell, who holds a press conference at 2:30 p.m. in Washington, had previously signaled plans to moderate hikes, while emphasizing that the pace of tightening is less significant than the peak and the duration of rates at a high level.  

The decision follows four consecutive 75 basis-point hikes that have boosted rates at the fastest pace since Paul Volcker led the central bank in the 1980s.

Consumer-price increases have begun a more pronounced slowdown from their 40-year high earlier this year. But a growing cadre of economists expect the Feds aggressive action to tip the US into recession next year.

Such concerns have drawn lawmaker criticism, with Democratic senators Elizabeth Warren, Bernie Sanders and Sheldon Whitehouse warning that rate hikes risk slowing the economy to a crawl.

Officials gave a clearer sign that they expect higher rates to impact the economy. They cut their 2023 growth forecasts, seeing expansion of 0.5%, according to median projections released Wednesday. They raised their estimate for 2022 GDP slightly to 0.5%. The central bankers increased their projection for the unemployment rate next year to 4.6% from its 3.7% level in November.

The distribution of rate forecasts also skewed higher, with seven of 19 officials seeing rates above 5.25% next year.

Fed officials raised their estimates for the main and core readings of their preferred inflation gauge, the index for personal consumption expenditures. They now see PCE at 3.1% in 2023 compared with a September estimate of 2.8%, while core which excludes food and energy may be 3.5% for next year.

Wednesdays move caps a challenging year for the US central bank which was initially slow to begin tightening policy in response to surging price pressures.

Since lifting rates from near zero in March, the Fed has moved aggressively to catch up, while preserving hope it can deliver a soft landing that avoids a dramatic surge in unemployment.

Officials are seeking to slow growth to below its long-term trend to cool the labor market with job openings still far above the number of unemployed Americans and reduce pressure on prices that are running well above their 2% target.

Officials got some good news Tuesday when government data showed consumer prices rose 7.1% in the year ending November, the lowest rate this year.

Even so, Powell has repeatedly said hes willing for the economy to suffer some pain to lower inflation and avoid the mistakes of the 1970s when the Fed prematurely loosened monetary policy. 

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