Rise like lighting, crash like thunder
Abraham George Crypto Musings
By now most of us have come to some grips with the FTX scandal. Sam Bankman-Fried or SBF came to the world stage, a little over three years back like a tsunami and created this exchange called FTX. In this limited time, it became the second biggest crypto exchange in the world, SBF self-destructed, destroyed a lot of other firms, and retail investors probably committed even a lot of fraud and bowed out from the scene leaving a chain of problems that may take many years to be sorted out.
As the saying goes “if you rise like a lightning, you will crash like thunder”. In terms of dollar destruction and damage to an emerging asset class, this is bigger than Enron and Madoff. The only difference is those frauds took long years to surface and be revealed but this happened so fast. It is estimated the liabilities can run into anything between $10 bio to $50 bio. A few months back FTX was valued at $32 bio and SBF himself was worth $16 bio before the collapse. What a tragedy and disaster. The full story will take a longer time to unfold and there could be skeletons in all unexpected places.
Many other exchanges could be under pressure due to the contagion impact and some of the activities that I am hearing from Crypto.com doesn’t sound very comfortable. USD Tether (USDT) which comes under pressure whenever there is stress in the crypto market needs to be watched. So far they have never come out clean on what backs this coin. It is a 68 bio dollar market cap coin and if that has to fail it will be total pandemonium in the crypto markets.
All this points to the importance of moving your cryptos to a cold wallet. I cannot emphasize more on the importance of that and I had dedicated an entire article in my past writings.
Actually, we had enough warnings about FTX when the clown of financial reporting Jim Cramer likened FTX to a modern-day JP Morgan. Don’t think many people picked on that.
Of all the retail investors who lost money, the American footballer Tom Brady and his ex-wife Gisel Bundchen stand out. They have lost around USD 650 mio. Probably most of their net worth. What a way to start a divorce! In a divorce normally the man goes broke but here both of them are broke. Shows what games greed and lack of risk management can play on your life. But then you can forgive them for not being professional investors. But what about all the big whales in the industry who got caught up with this kid and his cronies? Now all of them have to write down their investments to zero.
The names include Sequoia Capital, SoftBank (never mind Masayoshi Son has a history of terrible investments), and Dan Loeb the brilliant founder of the hedge fund Third Point. I forgot to mention BlackRock and Tiger Global. The list also includes Zuckerberg and Jack Dorsey too. The list is even longer.
The best quote I read was from Kevin O’Leary of Shark Tank lovingly known in the industry as Mr. Wonderful. He said he never felt safer in his investment with FTX than any other as SBF’s both his parents are compliance law professors at Stanford. That really hurt. What sort of analysis is that?
Well, it is clear the parents didn’t impart any of their knowledge to SBF or he didn’t heed to any of their advice. The allegation is that SBF transferred $10 bio from customer accounts to his trading firm. I am no lawyer but common sense tells me that if true, it is a criminal offense and he needs to go to jail for that.
SBF no doubt had created a web of offshore companies to structure his empire. Heard that SBF’s father Joseph Bankman is an authority in creating offshore structures. Don’t think SBF would have the experience at such a young age to do that. John J. Ray the eminent Chicago-based lawyer who oversaw the liquidation of Enron is overseeing the bankruptcy proceedings of FTX.
Well, there is more to the story. SBF was one of the biggest contributions to the Democratic Party. That gave him easy access to most politicians in power. Gary Gensler, the SEC Chairman, and a Democratic Party political appointee met with SBF on March 22. What was that meeting about? Did Gensler ask SBF how leveraged he was or did he misuse customer money? If so, let Gensler come clean on this. Or was Gensler helping him to find regulatory loopholes to become a monopoly exchange house? That’s the allegation that is running in the markets.
Most donations that were going to the Ukraine war by Western donors were being paid in cryptocurrencies. It is estimated that this amounted to around USD 200 mio. All that was parked on FTX. Ukraine has used up only USD 22 mio. They have no trace of the balance of their cryptos.
The August issue of Fortune had a cover page of SBF and had the headline “The Next Warren Buffett”. That truly seems comical now. It was only some months back SBF was using its financial might to bail out firms such as BlockFi and Voyager Digital much like Buffet bailed out Goldman Sachs and General Electric during the 2008 crash. Now there are allegations that SBF was responsible for the Luna crash. Boy!! This will turn very ugly.
SBF was all about regulation and lobbying at Capitol Hill hard to get an edge over other exchanges. Gensler’s association with SBF has raised all sorts of red flags in the Congress and Senator Tom Emmers who has been an ardent critic of Gensler has publicly said that an investigation into the SEC Chairman’s activities is overdue. Forbes magazine which has been also very critical of Gensler has run an article titled “The FTX debacle makes SEC Chair Gensler look bad again”.
In the 1980s and 1990s, Jon Corzine was the MD of Goldman Sachs. Later he went on to become a US Senator and governor of New Jersey.
In 2010 he returned to finance to head MF Global, a firm with a lineage going back to 18th century England. Within 18 months, Corzine destroyed MF global.
He made a bad bet in the firm’s trading account on European government bonds. To meet the margin calls, he raided customer accounts to the tune of $1.6 bio. The feds never brought any criminal charges against Corzine but he settled a civil case with customers in 2016 for $132 mio. In 2019, the SEC approved Corzine’s application to manage money again. It all depends on who you know in key positions.
SBF’s connections with Gensler probably go back to his alma mater MIT. Gensler was a professor at MIT. Caroline Ellison, the 28-year-old CEO of SBF’s research firm is a giddied Harry Potter fan and she had a $10 bio at her disposal to play around with. The attached video explains everything.
https://www.linkedin.com/posts/oskargoyvaerts_the-ceo-of-ftxalameda-i-dont-think-ugcPost-6996894826239508480-Tcom
I cannot believe what the value investors were seeing in FTX. It was not that they had a super app or any proprietary software. As long as the human race exists, they will get fooled in various different ways but some of us can still learn from every failed story. There is no end to how naive and gullible we can become.
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Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and multi-billion dollar portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office, and a hedge fund.