Sam Bankman-Fried has managed to seduce much of the crypto world. Now comes the next morning.
As the autopsy from the start of Sam Bankman-Fried’s crypto empire, it’s worth saying that there were red flags everywhere. We missed them.
It was a success story almost too good to resist. In just over three years, FTX would grow from nothing to a $32 billion business. Now it’s gone for nothing.
Along the way, investors, politicians, regulators, and yes, journalists, have dropped the ball. In Bankman-Fried, with his twittering energy, bottomless optimism, and open-mindedness at the deadline, we found a conduit to the crazy world of cryptocurrency that might help make sense of it all.
To accept the image, however, was to suspend disbelief.
The clues were there, often coming directly from SBF itself. Speaking to David Rubenstein, one of the founders of The Carlyle Group and host of Bloomberg TV, Bankman-Fried explained why he started FTX. This would prefigure the disappearance of the exchange.
FTX, according to the man himself, was born out of the frustrations he experienced at Alameda Research, his proprietary crypto-focused trading company.
Alameda was making a lot of money, but she could have made more. Venture capital was not lining up to shell out money to traders in their twenties, regardless of their alleged 100% annualized returns. So instead, Alameda relied on “fitting lines of credit” to build its capital base, Bankman-Fried said.
In a move of what seemed at the time to be brilliant, FTX was able to solve its problems in a simple and elegant way. By building its own exchange, Bankman-Fried could create a platform tailored to Alameda’s trading needs and tick all the boxes to attract venture capital. FTX would adopt the slogan — “built by traders, for traders” – it was a subtle version of what Enron once used for its trading platform.
The VCs were smitten with the young genius now that he had a trade.
For proof, check out the website of Sequoia Capital, the venerable venture capital firm and one of Bankman-Fried’s biggest backers.
In what could be charitably described as hagiography, the company published a magazine-style article in September with quotes from partners describing what they saw in Bankman-Fried. It was titled “Sam Bankman-Fried has a savior complex – and maybe you should too”.
“Awkward, we never tried to reach out to Sam because we thought he didn’t need us,” Sequoia partner Michelle Bailhe said in the story. “I thought they were just minting money and had absolutely no need for investors.” Sequoia recently removed the article from its website.
Sequoia only later discovered that Bankman-Fried was playing video games throughout the pitch meeting. Apparently, that wasn’t the only time he was multitasking while others concentrated on what he was saying. A Bloomberg story about Bankman-Fried claimed he played League of Legends while addressing the Economic Club of New York.
What Sequoia and other investors might have seen, beyond Bankman-Fried’s vision of an everything app where you could buy bananas or bitcoin, was a complex web of interconnected businesses.
The most troubling aspect would be the most obvious.
Alameda, a proprietary trading company, would now be under the same management as a public exchange. Whether planned from the start or just a last ditch effort to save the trading company years later, FTX would be used as a cash cow to keep Alameda afloat.
During an April 2022 appearance on Bloomberg’s odd lots podcast, Bankman-Fried explained how value could be created out of thin air using tokens. Although his explanation left the hosts “stunned” – their word – what he described was an eerily similar process to what we now suspect FTX and Alameda were engaged in. FTX’s token price would have been backed by Alameda, and Alameda would have been using the token as collateral to fund its own trading activities.
You don’t need an MBA to know that leverage — borrowing money to trade with — can be a killer. While it can magnify gains, it can also lead to devastating losses.
Yet Bankman-Fried was a proponent of this trade. At the Bitcoin 2021 conference, he pushed back against warnings that the trading strategy was inappropriate for cryptocurrencies.
“You can take the position that leverage is bad,” he said. said. “You might think so, but I don’t.”
While the full details have yet to emerge, it so far appears that Alameda’s use of leverage contributed to its demise.
Investors who have handed over hundreds of millions to FTX may have been mesmerized by visions of SBF as the world’s first billionaire, but their enthusiasm has not been checked by the media or regulators.
Bankman-Fried was a mainstay on the podcast and conference circuits. He was a staple on the covers of magazines (including Forbes) and made himself available to journalists on time.
As FTX grew in prominence, few questions were raised about how it grew so fast. But Bankman-Fried was doing more than shaping his image with the media. He joined her. In June, the New York Times reported that he was backing Semafor, a media startup founded by alumni of the Time and Bloomberg.
He also opened his life to the biggest name in financial journalism. Michael Lewis, the author of “The Big Short”, reportedly followed SBF for his latest book.
The warm relationship that Bankman-Fried and FTX have cultivated with reporters may have come under closer scrutiny.
Brett Harrison, the president of US crypto exchange FTX, left the company at the end of September without giving a reason. The move raised eyebrows, but reporters saw his reluctance to speak as motivation to shoot an impromptu dance video with him rather than an impetus to dig deeper into what made him go. At least one reporter (from another news organization) dismissed the idea of digging into FTX and Alameda because they had a friendly relationship with the founder.
Government officials were no less captivated by FTX’s prodigies.
Whether it was because of its largesse — Bankman-Fried donated nearly $40 million to candidates in the last midterm election cycle — or because FTX had a revolving door for regulators looking to get into industry, the crypto baron had Washington’s ear.
He has testified to Congress several times over the past year on topics including the regulation of crypto markets, and records show he personally met with SEC Chairman Gary Gensler.
During one of his Capitol Hill appearances, Bankman-Fried extolled the transparency offered to regulators by exchanges like FTX. The comment contrasts sharply with his tweets on Thursday in which he blame the firm’s issues with “internal mislabeling of bank accounts” that led it to miscalculate the leverage that FTX users were employing.
However, not everyone bought FTX’s success story.
For months, Marc Cohodes, the eternal short seller with a working bullshit detector, has been sounding the alarm.
“In my opinion, nothing ever added up,” Cohodes said. Forbes. “I think SBF will make Bernie Madoff look like Jesus Christ.”
Then there’s Orthogonal Credit, a former Alameda Research lender. Thursday, orthogonal tweeted that he severed his relationship with Alameda earlier this year.
“During our Alameda due diligence earlier this year, the team identified a number of key weaknesses: a) declining asset quality; b) unclear capital policy; (c) weak operational and business practices; and d) an increasingly byzantine corporate structure,” the tweet read. “We have considered these key weaknesses and have made the business decision to terminate our institutional lending relationship.”
Yet the power of wanting to believe proved strong. Bankman-Fried was the prodigy who, along with colleagues like the CEO of Alameda Caroline Ellisonworked day and night to conquer a market that never sleeps.
The SBF myth, cultivated by SBF, was that he was not there for his own enrichment. He was a mercenary, and crypto was how he would amass a fortune he wanted to give away for the good of the world. Now, there may not be much to give.
The epitaph of a crypto king could be a Slack message Bankman-Fried reportedly sent to employees this week.
“For next week, we will be doing an increase,” the message read. “The objective of this increase will first be to benefit the customers; second by current and potential new investors; third of you guys. And in, and only in, a hypothetical world where everything is going amazing and everyone is doing well, maybe myself as an investor.