Sam Bankman-Fried’s apology is as hollow as his empire
Apologies from tech CEOs are all the rage as years of easy money and pandemic profits come to an end. “I was wrong,” said Mark Zuckerberg after billionaire Facebook’s pivot to a more meta world decimated its stock price and resulted in 11,000 layoffs. Charismatic leaders learn humility.
But in the league of weak-sauce apologies, this one from cryptocurrency exchange boss Sam Bankman-Fried stands out above the rest. After his FTX digital asset empire filed for bankruptcy on Friday, the former billionaire – who has now lost everything – tweeted that he was “really sorry”, “shocked” by how things turned out and “hoped” that some sort 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 running into tens of billions of dollars – clients have little reason to hope. It will take time and money to sift through the claims, with customers trailing the queue if Celsius’s recent bankruptcy is any guide. Martin Finnegan, a partner at Punter Southall, is skeptical of the chances of recovery given the legal costs and a likely lengthy process.
Then there’s the shock. To use this word is to pay tribute to Captain Renault in Casablanca, who was “shocked, shocked” to discover a gambling den – before being handed over his winnings. Even though FTX’s collapse was precipitated by market pressure from rival Binance on its proprietary FTT coin, it only brought to light deeper issues at the exchange – like the loan of more than half funds from its customers to support risky bets by the supposedly separate trading company Alameda, according to The Wall Street Journal. Shock spread to the former FTX sales chief, who reportedly said he and his colleagues were left “in the dark” about insolvency issues until it was too late.
And then, finally, the apologies themselves. It deserves as much value as the FTT token that once supported the Bankman-Fried empire. Is that an excuse for stoking speculative excitement with unsustainable leverage during good times, like when Bankman-Fried eagerly explained his lucrative yield farming business in terms that my colleague at Bloomberg Opinion, Matt Levine, compared to Ponzi schemes? Or his handling of bad times, when, as FTX was on the brink, Bankman-Fried tweeted that client assets were safe? It’s not clear, although that last tweet has disappeared.
The denominational tweets from the ex-billionaire ring so empty because FTX’s downfall isn’t just a frothy market unraveling, the way inflation has hit big tech companies. It’s more like a combination of a good old-fashioned financial bubble and, as Larry Summers points out, the arcane accounting complexity of Enron – whose executives were once dubbed the “smartest guys in the room” – with Bankman-Fried at its heart. .
Bankman-Fried, after all, knew how to ride the crypto craze: he reveled in his image of the quantitative trading prodigy, who reportedly began spotting inefficiencies in Bitcoin trading on various exchanges. His charisma became adept at separating sophisticated investors, not just individuals, from their money, even luring pension funds to a platform that seemed to encourage dialogue with regulators and institutions. On the one hand, FTX took money overseas through leveraged betting and mining its own token and, on the other hand, donated to politicians and proposed regulations to make the sector healthier.
While the financial story should have inspired caution – and I have repeatedly noted the risks that investors were ignoring when posting funds on FTX and other exchanges – it instead inspired greed and confidence. William Quinn, co-author of A History of Financial Bubbles, compares the FTT token promoted by FTX to an artificial increase in purchasing power that fueled the stock market bubble. Using this token as collateral expanded the wealth of Bankman-Fried and that of its clients, but also rapidly increased the complexity and risk of its empire. The result was an unsustainable house of cards.
FTX was not the first crypto exchange to fall. And it probably won’t be the last. There will be talk of better regulation, although enforcement of existing laws and consumer protection would be a better start. But in this case, one thing is certain: Sorry is not enough.
(This story was originally published Nov. 12, 2022. Sam Bankman-Fried was arrested in the Bahamas on Dec. 12 and is in custody pending possible extradition to the United States.)
© 2022 Bloomberg L.P.
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