The downfall of FTX isn’t just about a frothy market that’s going down. It feels like a mixture of a financial bubble and opaque accounting with a dash of charisma.
Apologies from tech executives are in vogue, as years of easy money and pandemic profits wind up. “You got this wrong,” Mark Zuckerberg said after the billionaire Facebook’s transformation into a dead scientist even more wrecked his stock price and led to the layoffs of 11,000 employees. Charismatic leaders learn humility.
But in the league of weak apologies, it is the apologies from crypto exchange chief Sam Bankman-Fried that stand head and shoulders above the rest. After declaring his digital asset empire FTX bankrupt on Friday, the former billionaire – who has now lost everything – tweeted that he was “really sorry” and “shocked” at how things had unraveled and “hoped” that some kind of recovery could happen.
Let’s start with hope. Judging by the scale and complexity of this bankruptcy – more than 130 entities with assets and liabilities in the tens of billions of dollars – clients have little reason to be hopeful. It will take time and money to examine claims, with clients at the back of the line if Celsius’ recent bankruptcy is any evidence. Martin Finnegan, partner at Punter Southall, is skeptical about recovery prospects given legal fees and a potentially lengthy process.
Then there is the shock. The use of the word is a tribute to Captain Renault of Casablanca, who was “shocked and shocked” to uncover a gambling den – before handing over his winnings. Even if the collapse of FTX precipitated market pressure from its FTT-owned rival Binance, it only highlights deeper issues with the exchange — such as the lending of more than half of its clients’ funds to support risky bets by a supposedly separate trading company. Alameda, accordingly. To The Wall Street Journal. Shock extended to FTX’s former head of sales, who said he and his colleagues were left “in the dark” on insolvency issues until it was too late.
And then, finally, the apology itself. It’s worth the same value as the FTT token that once backed the Bankman-Fried empire. Is this an apology for stirring up speculative excitement with unsustainable leverage during the good times, as when Bankman-Fried eagerly explained his lucrative crop farming business in terms of fellow Bloomberg opinion matt Levine compared to Ponzi schemes? Or his handling of bad times, when FTX was teetering on the edge, when Bankman-Fried tweeted, clients’ assets were safe? It’s unclear, though the last tweet has disappeared.
The tweets of the former billionaire’s confessions seem pretty empty because FTX’s downfall isn’t just about a frothy market in decline, similar to the way inflation has hit big tech companies. It sounds like an amalgamation of an old-fashioned financial bubble, and, as Larry Summers points out, the murky accounting complexity of Enron—whose CEOs were once called “the smartest men in the room”—with Bankman-Fried at its core.
Bankman-Fried, after all, knew how to ride the crypto-craze: I enjoyed his portrayal of the wondrous world of quantitative trading, who supposedly began to discover the inadequacies of Bitcoin trading across various exchanges. His allure became adept at separating seasoned investors, not just individual investors, from their money, drawing even pension funds into a platform that seemed to encourage dialogue with regulators and institutions. On the one hand, FTX took money from abroad through leveraged betting and running its own token, and on the other hand it was donated to politicians and introduced regulations to make the sector healthier.
While the financial history should have inspired caution – and I have noticed on several occasions the risks investors ignore when sending money to the FTX and other exchanges – it has instead inspired greed and confidence. William Quinn, co-author of The History of Financial Bubbles, compares the FTT token promoted by FTX to the artificial increase in purchasing power that fueled the market bubble. Using this token as collateral increased Bankman-Fried’s wealth and that of his clients, but it also rapidly increased the complexity and risk of his empire. The result was an unsustainable house of cards.
FTX wasn’t the first crypto exchange to drop. And it probably won’t be the last. There will be talk of better regulation, although enforcing existing laws and protecting consumers would be a better start. But in this case, one thing is for sure: Sorry is not good enough.
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