Apologies from tech bosses are in vogue as years of easy money and pandemic profits come to an end. “I got that wrong,” Mark Zuckerberg said after the Facebook billionaire’s move to a meta-world decimated its stock price and led to 11,000 layoffs. Charismatic leaders learn humility.
But in the league of flimsy excuses made by the head of the cryptocurrency exchange Sam Bankman Fried stands head and shoulders above the rest. After his digital asset empire FTX After filing for bankruptcy on Friday, the former billionaire – who has now lost everything – tweeted that he was “really sorry”, “shocked” at how things turned out and “hopeful” that some sort of recovery was possible .
Let’s start with hope. Given the scale and complexity of this bankruptcy — more than 130 companies with tens of billions of dollars in assets and liabilities — customers have little reason for hope. It will take time and money to sift through claims, with customers at the back of the line if Celsius’ recent bankruptcy is any clue. Martin Finnegan, a partner at Punter Southall, is skeptical about the chances of recovery given the legal fees and what is likely to be a lengthy process.
Then the shock. Using this word means paying homage to Captain Renault in Casablanca, who was “shocked, shocked” when he discovered a gambling den – before his winnings were handed to him. Even if FTX’s collapse was triggered by market pressure from the competitor binance On its proprietary FTT coin, that only brought to light deeper issues in the exchange — like allegedly separate trading firm Alameda lending more than half of its client funds to support risky bets, according to The Wall Street Journal. The shock has extended to FTX’s former head of sales, who reportedly said he and his colleagues were “kept in the dark” on bankruptcy issues until it was too late.
And then, finally, the apology itself. It deserves as much value as the FTT token that once backed Bankman-Fried’s empire. Is this an excuse to stoke speculative excitement with unsustainable leverage in good times, such as when Bankman-Fried explained his lucrative yield farming business in such a way that my Bloomberg Opinion colleague Matt Levine compared Ponzi schemes? Or his handling of the bad times when Bankman-Fried tweeted client assets were safe when FTX was on the brink? It’s unclear, although the latter tweet has disappeared.
The ex-billionaire’s self-confessed tweets sound so empty because FTX’s demise isn’t just about a seething market, much like 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 taking center stage.
After all, Bankman-Fried knew how to ride the crypto craze: he reveled in his image of the quant trading prodigy who supposedly started to spot inefficiencies Bitcoin Trade across different exchanges. His charisma became adept at segregating sophisticated investors, not just retail investors, from their money, even luring pension funds onto a platform that appeared to encourage dialogue with regulators and institutions. With one hand, FTX took money abroad through leveraged bets and operating its own token, and with the other, it donated to politicians and offered regulations to make the sector healthier.
While financial history should have encouraged caution – and I’ve pointed out on several occasions the risks that investors ignored when sending funds to FTX and other exchanges – it has instead instilled greed and confidence. William Quinn, co-author of a history of financial bubbles, likens the FTX-backed FTT token to an artificial boost in purchasing power that fueled the market bubble. Using this token as collateral increased Bankman-Fried’s fortunes and those of his clients, but also quickly increased the complexity and risk of his empire. The result was an untenable house of cards.
FTX wasn’t the first crypto exchange to fall. And it probably won’t be the last. There will be talk of better regulation, but enforcing existing laws and protecting consumers would be a better place to start. But in this case, one thing is for sure: sorry isn’t good enough.
(This story originally ran on November 12, 2022. Sam Bankman-Fried was arrested in the Bahamas on December 12 and is being held in custody pending extradition to the United States.)
© 2022 Bloomberg LP
