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Sunday, March 26, 2023

Sam Bankman-Fried’s apology is as hollow as his empire

The FTX crash isn’t just about a frothy market coming undone. It’s more like a combination of a financial bubble and shady accounting with a dash of charisma.

Apologies from tech CEOs are all the rage as the years of easy money and pandemic profits come to an end. “I was wrong,” said Mark Zuckerberg after the Facebook billionaire’s pivot to a more Meta world decimated his share price and led to 11,000 layoffs. Charismatic leaders are learning humility.

But in the league of weak apologies, cryptocurrency exchange chief Sam Bankman-Fried stands head and shoulders above the rest. After his digital asset empire FTX filed for bankruptcy protection on Friday, the once-billionaire, who has now lost everything, tweeted that he was “really sorry”, “shocked” by how things turned out and “hopeful” that someday. kind of recovery was possible. .

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 hope. It will take time and money to sift through claims, with customers at the back of the queue if Celsius’s recent bankruptcy is any guide. Martin Finnegan, a partner at Punter Southall, is skeptical about the chances of recovery given legal fees and a likely lengthy process.

Then there is the shock. To use that word is to pay homage to Captain Renault in Casablanca, who was “shocked, shocked” to discover a gambling den, before the winnings from it were handed over to him. Even if FTX’s collapse was precipitated by market pressure from rival Binance on its proprietary FTT coin, this only brought to light deeper issues at the exchange, such as lending more than half of its clients’ funds. to back risky bets by the allegedly separate trading company Alameda, according to the Wall Street Journal. The shock has spread to FTX’s former head of sales, who allegedly said that he and his colleagues had been “in the dark” about the insolvency issues until it was too late.

And then, finally, the apology itself. It deserves as much value as the FTT token that once supported the Bankman-Fried empire. Is this an apology for stoking speculative enthusiasm with unsustainable leverage during good times, like when Bankman-Fried enthusiastically explained his lucrative yield farming business in terms my Bloomberg Opinion colleague Matt Levine likened to Ponzi schemes? ? Or his handling of the bad times, when, while FTX was teetering on the brink, Bankman-Fried tweeted that client assets were safe? It is not clear, although the last tweet has disappeared.

The former billionaire’s confessional tweets sound so hollow because the FTX crash isn’t just about a frothy market falling apart, similar to the way inflation has hit big tech companies. It looks more like the combination of a good old-fashioned financial bubble and, as Larry Summers points out, the murky accounting complexity of Enron, whose executives were once dubbed the “smartest guys in the room,” with Bankman-Fried in your heart. .

Bankman-Fried, after all, knew how to ride the cryptocurrency craze: he reveled in his image as the quant trading wunderkind, who allegedly started spotting inefficiencies in Bitcoin trading on different exchanges. His charisma made him adept at separating sophisticated investors, not just retail ones, from his money, drawing even pension funds onto a platform that seemed to encourage dialogue with regulators and institutions. On the one hand, FTX raised money from abroad through leveraged betting and operating its own token, and on the other, it donated to politicians and offered regulations to make the sector healthier.

While the financial story should have inspired caution, and I repeatedly noted the risks investors were ignoring by posting funds on FTX and other exchanges, it instead inspired greed and confidence. William Quinn, co-author of a history of financial bubbles, likens the FTX-promoted FTT token to an artificial increase in purchasing power that fueled the market bubble. Using that token as collateral expanded 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 was not the first crypto exchange to go down. 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 enough.

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