Sam Bankman-Fried succeeded in seducing a lot of the crypto world. Now comes the morning after.
As the autopsy of Sam Bankman-Fried’s crypto empire begins, it’s worth saying that there were red flags all over the place. We missed them.
It was a success story almost too good to resist. In just over three years, FTX would go from nothing to a $32 billion company. Now it’s back to nothing.
Along the way, investors, politicians, regulators and yes, journalists, dropped the ball. In Bankman-Fried, with his chirpy energy, bottomless optimism and texts-me-back-on-deadline openness, we found a conduit to the crazy world of cryptocurrency that could help make sense of it all.
To accept the image, however, was to suspend disbelief.
The clues were there, often coming straight from SBF himself. Talking to David Rubenstein, one of the founders of the Carlyle Group and a Bloomberg TV host, Bankman-Fried explained why he created FTX. It would foreshadow the exchange’s demise.
FTX, according to the man himself, was born out of the frustrations he was experiencing at Alameda Research, his crypto-focused proprietary trading firm.
Alameda was making lots of money, but it could have been making more. Venture capital wasn’t lining up to fork over cash to 20-something traders regardless of their purported 100% annualized returns. So instead, Alameda relied on “cobbling together lines of credit” to build its capital base, Bankman-Fried said.
In a stroke of what seemed at the time to be brilliance, FTX was able to solve its problems in a simple, elegant way. By building his own exchange, Bankman-Fried could create a platform tailored to Alameda’s trading needs and tick all the boxes for attracting venture capital money. FTX would adopt the tagline — “built by traders, for traders” — that was a subtle spin on the one Enron once used for its trading platform.
VCs were smitten with the young genius now that he had an exchange.
For evidence, look to 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 a hagiography, the firm published a magazine-style piece 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.”
“Embarrassingly, we had never tried to reach out to Sam, because we figured he didn’t need us,” Michelle Bailhe, a Sequoia partner, 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 found out later that Bankman-Fried was playing video games throughout the pitch meeting. Apparently, that wasn’t the only time he multi-tasked while others were focused on what he was saying. A Bloomberg story on Bankman-Fried claimed he played League of Legends as he addressed 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 companies.
The most troubling aspect of this would be the most obvious.
Alameda, a proprietary trading firm, would now be under the same leadership as an exchange open to the public. Whether it was planned from the start or just a last-ditch effort to save the trading firm years later, FTX would be used as a cash cow to keep Alameda afloat.
In an April 2022 appearance on Bloomberg’s Odd Lots podcast, Bankman-Fried explained how value could be created from nothing using tokens. Although his explanation left the hosts “stunned” — their word — what he described was a process eerily similar to what we now suspect FTX and Alameda were engaged in. FTX’s token price was said to be being propped up by Alameda, and Alameda was allegedly 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 amplify gains, it can also lead to devastating losses.
Yet Bankman-Fried was a proponent of such trading. 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. “One could believe that, but I don’t believe that.”
While all the details have yet to emerge, it appears so far that Alameda’s use of leverage contributed to its demise.
The investors who handed over hundreds of millions to FTX might have been mesmerized by visions of SBF as the world’s first trillionaire, but their enthusiasm wasn’t kept in check by the media or regulators.
Bankman-Fried was a mainstay on the podcast and conference circuits. He was a fixture on magazine covers (including Forbes) and made himself available to journalists on deadlines.
As FTX grew in prominence, few questions were raised about how it grew so big so fast. But Bankman-Fried was doing more than shaping his image with the media. He was joining it. In June, the New York Times reported that he was backing Semafor, a media startup founded by alums from the Times and Bloomberg.
He also opened up his life to the biggest name in financial journalism. Michael Lewis, the author of “The Big Short,” was reportedly following SBF around for his latest book.
The cozy relationship Bankman-Fried and FTX cultivated with journalists may have headed off closer scrutiny.
Brett Harrison, the president of FTX’s U.S. crypto exchange, left the company in late September without providing a reason. The move raised eyebrows, yet journalists viewed his reluctance to speak as motivation to shoot an impromptu dance video with him rather than an impetus to dig deeper into what spurred him to go. At least one reporter (at another news organization) shot down the idea of delving deeper into FTX and Alameda because they had a friendly relationship with the founder.
Government officials were no less enthralled by the FTX wunderkinds.
Whether it was because of his largesse — Bankman-Fried donated nearly $40 million to candidates during the latest midterm election cycle — or because FTX had a revolving door for regulators looking to move into industry, the crypto baron had Washington’s ear.
He testified multiple times to Congress over the past year on subjects such as regulating crypto markets, and records show he personally met with SEC Chairman Gary Gensler.
During one of his appearances on Capitol Hill, Bankman-Fried touted the transparency afforded to regulators by exchanges like FTX. The comment stands in stark contrast to his tweets on Thursday in which he blamed the company’s problems on “poor internal labeling of bank-related accounts” that caused him to miscalculate how much leverage FTX users were employing.
However, not everyone bought FTX’s success story.
For months, Marc Cohodes, the perennial short-seller with a functioning bullshit detector, has been sounding the alarm.
“In my view, nothing ever added up,” Cohodes told Forbes. “I think SBF will make Bernie Madoff look like Jesus Christ.”
Then there’s Orthogonal Credit, formerly a lender to Alameda Research. On Thursday, Orthogonal tweeted that it severed its 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) less than robust operational and business practices; and d) an increasingly byzantine corporate structure,” the tweet read. “We considered these key weaknesses and made a commercial decision to sever our institutional lending relationship.”
Still, the power of wanting to believe proved strong. Bankman-Fried was the prodigy who, along with co-workers like Alameda CEO Caroline Ellison, worked all day and night to conquer a market that never sleeps.
The SBF myth, cultivated by SBF, was that he wasn’t in it for his own enrichment. He was a mercenary, and crypto was how he would amass a fortune he wanted to give away for the betterment of the world. Now there might not be much to give away.
The epitaph of a crypto king might be a Slack message Bankman-Fried reportedly sent this week to employees.
“For the next week, we will be conducting a raise,” the message said. “The goal of this raise will be first to do right by customers; second by current and possible new investors; third of all you guys. And in, and only in, a hypothetical world where everything turns out amazingly and everyone else is done right, maybe myself as an investor.”
MORE FROM FORBES
MORE FROM FORBESStripe, Deloitte, Sullivan & Cromwell Are Among 53 FTX Advisors, Vendors And Bankers Weathering Exchange’s CollapseBy Javier PazMORE FROM FORBESAndreessen Horowitz’s Crypto Lobbying Blitz Is Paying OffBy David JeansMORE FROM FORBESFire Sale! China’s “Warren Buffett” Races To Sell AssetsBy Yue WangMORE FROM FORBESThe Secretive World Of MEV, Where Bots Front-Run Crypto Investors For Big ProfitsBy Jeff Kauflin