Sam Bankman-Fried’s power depended on belief

On Sept. 16, CNBC’s “Squawk Box” aired a segment about Sam Bankman-Fried — the then-CEO of cryptocurrency exchange FTX — and his recent string of acquisitions as a result of an industry downturn. “They call it the JP Morgan of crypto, don’t they?” the host asked, comparing Bankman-Fried to a financier with so much money that he backed a myriad of failing banks in order to stabilize the entire financial industry. “The White Knight of Crypto,” reads the text at the bottom of the screen.

In a photo of Bankman-Fried trotting through a parking lot in the Bahamas, a reporter repeated facts that I have come to regard as Sam Bankman-Fried’s pre-crash litany: He is a multi-billionaire at 30, he drives a Toyota Corolla, he lives in the Bahamas with nine roommates and a goldendoodle. He got richer, faster, than almost anyone in history, after launching his best-known company in 2019. In an interview, he perched on a stool and talked about the moves that drew Morgan’s comparison: the sacrificial investments his company made in the interests of saving, in his words, the larger ‘ecosystem’. cryptographic.

Two months later, the “White Knight” story was thrown into the office trash can and set on fire. Crypto publication CoinDesk had reported on documents that had shaken people’s faith in Bankman-Fried’s businesses, and soon almost everyone except the goldendoodle — investors, customers, employees — rushed to the doors. In the blink of an eye, Bankman-Fried was removed from his position as CEO and FTX filed for bankruptcy. the The November 11 edition of “Squawk Box” featured Anthony Scaramucci, of which SkyBridge Capital sold a 30% stake in its fund to Bankman-Fried around the time of these “White Knight” bailouts. “I don’t want to talk about fraud right now because it’s actually a legal term,” he said. But you sensed that he was very keen to call it fraud, the legal word.

The speed of this change, especially in the financial media, was enough to give a casual observer a boost. In 2021, Forbes featured Bankman-Fried on its cover for its list of America’s 400 Richest, with a dynamic inside profile focusing on the young billionaire’s promises to donate his growing wealth. Skip last fall and the magazine released a video called “‘Devil in Nerd’s Clothes’: How Sam Bankman-Fried Fooled Everyone.”

On YouTube, the main comments about Bankman-Fried’s coverage before the collapse now tend to be sarcastic allusions to the change. (“Congratulations CNBC for recognizing a solid businessman!”) On Twitter, angry FTX clients berated crypto journalists for their perceived failures. But the media were not the only ones to change content quickly; almost no one told a coherent story before and after the accident. Even among the most irate commentators, few had picked up on details like Bankman-Fried’s relative lack of philanthropy compared to all the stories about his big philanthropy schemes. Far from being isolated, credulity abounds.

All that opacity can cloud our ability to tell accurate stories, allowing only two speeds: full throttle and roadside car fire.

Bankman-Fried insisted on remaining the main character of this story long after lawyers advised against him, giving numerous official interviews and appearing at The Times’ DealBook Summit conference. The saga of its rise and fall grew bigger and bigger, in part because it told a tale of rare crypto: the readable kind for those uninterested in crypto. On the way up, he was a budding philanthropist. Going down, he was proof, for those who wanted it, that crypto businesses were nothing more than a shell game. In mid-December, he was arrested in the Bahamas and charged with a wide variety of frauds in the United States, and the hit financial thriller was about to become legal.

Theranos, WeWork, countless early dot-coms and pre-2008 financial instruments: almost all started as exciting business stories about people and companies that seemed ready to remake their industries in innovative ways and had the capital, growth or yields suggesting they might be onto something. These articles continued until the companies imploded amid revelations of fraud, incompetence or brazen recklessness. “Whoever the gods would destroy,” wrote Paul Krugman in a 2001 Times column about Enron, “they put the cover of Businessweek first.”

These sorts of alluring optimistic possibilities — promises like painless blood tests or community-building offices — naturally attract attention, but they’re also at the heart of deception and fraud. The worst narrative implosions may be less about the wrong individuals and more about how easily consequential information can be hidden that could help reveal the difference. Public companies based in the United States must regularly open their books to investors, but private companies have no such obligation – especially those based abroad, as FTX was. Private wealth has skyrocketed over the past 20 years, as has the number of private companies, leading an SEC official to warn recently that a rapidly growing part of the economy is “go dark”. This may allow dangerous negligence or fraud. John Jay Ray III, the man brought in to clean up after Bankman-Fried – the man tasked with the same job in the Enron bankruptcy – said he had never before seen “such a complete failure of corporate controls”. company and such a complete lack of reliable financial information. On the one hand, people outside the company may have failed to do their due diligence; on the other, it would have been impossible if they had tried.

All that opacity can cloud our ability to tell accurate stories, allowing only two speeds: full throttle and roadside car fire. What few people knew about FTX supported, in a very real way, the story the company was telling; people really did trust Bankman-Fried with billions, and it really gave him some worthwhile power and influence. It was when the public no longer bought this story that the money flowed in. Its power depended on belief, an all-or-nothing proposition that media coverage dimly reflected. It’s no surprise that Bankman-Fried says he opposed filing for bankruptcy, a process that reveals heaps of information in public documents; he believed, rightly, that if he could somehow win back people’s trust, everything could go on.

Bankman-Fried now looks less like the main character of his own story and more like an empty vessel into which people pour torrents of money, hoping to create the crypto dream world they desire. The problem we have to reckon with is that even if the story people were telling about him was inaccurate, there was definitely a story to be told – his success and influence were real enough to alter the world while it existed. . Yet hardly anyone had access to the information needed to make this story more accurate or reveal the basis of this success. So we had a glowing story followed by a platter full of schadenfreude. There’s always the next time, right?

Photo credit: Jeenah Moon/Bloomberg, via Getty Images; Alex Wong/Getty Images