A few months ago, news broke of an insider trading ring at Coinbase, one of the many crypto exchanges hoping to make the world of magical Internet money easy for normals. SEC and other authorities acted swiftly and nailed down the perpetrators; their ill-gotten gains were around million-and-a-half dollars. The accused awaits sentencing. The swift action, in that case, is in sharp contrast to the largest cryptocurrency failure at FTX.
The founder of the bankrupt exchange, and the man at the heart of this multi-billion dollar scandal, Sam Bankman-Fried, is instead invited to the U.S. Congress for “hearings.”
Instead of being behind bars in custody, SBF is giving interviews to publications like Vox and The New York Times. Both these articles are a disgrace because both publications failed to ask the only question that mattered. Instead, they allowed SBF to come up with justifications, reasons, and bullshit excuses. Others are giving legitimate coverage to the likes of FTX’s house shrink and letting him make outrageous statements such as that he doesn’t see SBF knowingly committing the crime. “I just can’t see him doing that, honestly,” Lerner is quoted. If I were a house shrink getting paid outrageous money, I wouldn’t see anything wrong with the man either.
Instead of waiting for the bankruptcy filings and being armed with more details, The New York Times interviewed SBF for a fluff piece. It only undermines my confidence in the Times’ coverage of this part of the finance sector.
These stories are part of a pattern and an example of the failure of the mainstream press to ask tough questions. I make this point in my latest piece for The Spectator, Meet Sam Bankman-Fried’s Crypto Enablers.
The press is as complicit in this elaborate scheme to rip the face off investors — many retail and less sophisticated. And they are not alone. An army of online influencers and sports celebrities who endorsed and popularized FTX are as much part of the con job as anyone else. They don’t get to say, “oops, my bad, sorry!”
It might not seem so obvious, but if you follow the breadcrumbs trail — I did — this is a classic Ponzi scheme, where instead of mailed letters of the yore and the tattle of taxi drivers, FTX found suckers at network scale using YouTubers and Tom Brady. The icing on the cake came from media outlets such as Forbes and Fortune, the latter calling Sam Bankman-Fried the next Warren Buffett. Simply put, FTX is a textbook case of a massively successful content-based marketing strategy in the age of social networks.
“In general, the press goes along with the crowd,” said Andrew Odlyzko, a University of Minnesota professor who has written extensively about manias and bubbles. “Part of it is that journalists are part of the crowd and get caught up in the mass delusion. And part of it is ‘willing suspension of disbelief’ that is accentuated by the need to attract readers, which forces folks to emphasize the spectacular.”
This morning’s bankruptcy filing is a blockbuster and a half, full of nuggets that point to a more significant problems and the fact that SBF has been lying about it all along. Here are some clips from the bankruptcy filing (link) to give a glimpse of the criminality at FTX and the source of it all, SBF. John Jay, the acting CEO, in his filing notes:
Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here. From compromised systems integrity and faulty regulatory oversight abroad, to the concentration of control in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals, this situation is unprecedented.
In other words, this is a situation worse than Enron, another company he had to deal with after it went bankrupt due to widespread fraud.
In one of the more notable footnotes about Alameda Research in the bankruptcy filing: they loaned $4.1 billion in total: $2.3 billion to Paper Bird Inc. (a Debtor), $1 billion to SBF, $543 million to cofounder Nishit Singh, and $55 million to Ryan Salame. The filing also points out that the accounting department was outsourced. How many people work or have worked for the company is unclear. And that SBF communicated using apps that had auto-delete functions. What about the fact that they used an auditing firm whose claim to fame was that it was the first firm to open an office in the metaverse? Or the ‘expenses’ were approved using emoji? Sadly, a bankruptcy filing is just the start.
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And this leads to my final point about the only relevant question, brought up by a blogger in an excellent retelling of the whole dirty saga:
FTX is missing about $8 billion dollars’ worth of users’ collateral. Even if you consider the sum total of venture investments made by FTX and Alameda together, as well as a marginal drop in collateral value as a result of an FTT price decline, it simply does not make sense for FTX to be $8b in debt. The losses would be significant, yes, but they alone do not constitute a sufficient explanation for FTX’s bankruptcy.
As is the case with all frauds, the best way to cover or write about it, is to follow the money. Money trail shows you that a crime was committed, and those responsible for it are punished, like those amateur idiots from Coinbase.
November 17, 2022. San Francisco.
ICYMI: Here is a link to my Spectator column on the uncanny similarities between Enron and FTX.