Sam Bankman Fried
Aweh dearly beloved fellow ruminants & groupies
162/319 days of load shedding in 2022
Are Fortune and Forbes respectable and reliable business magazines? Are they good judges of character and are they capable of determining what constitutes a good business leader? Not so much it appears. The defenestration of the crypto “genius” Sam Bankman Fried (SBF) has been swift and brutal. Is he the next Warren Buffet? How wrong can you be? He belongs in the same category as Berni Madoff, Markus Jooste, Jeff Skilling, and a long list of business criminals before him.
Was there unique genius and sophistication in what SBF did? Not at all. He started by rapidly making a multi-billion-dollar fortune with a company he started, Alamada Research, in the cryptocurrency bull market by devising arbitrage trading strategies. He got very rich very quickly and there is a significant sector of society and the business community that idolises that above all else. Here is someone who quickly created a multi-billion dollar fortune out of thin air by being “clever”. Then he told us all that he was doing all this based on effective altruism and that he wanted to have the largest possible positive impact on the world. It was not about the money but doing good. How about that?
He could do no wrong and he created FTX which is a cryptocurrency exchange where you could buy and sell cryptocurrencies soon, he had more than 1.2 million accounts. Then things in the cryptocurrency markets changed and the “clever” trading strategies weren’t working so well back at Alameda Research and big losses were being made. What to do what to do? Why not “borrow” money from FTX to plug the temporary hole at Alameda? Of course, the money at FTX doesn’t belong to FTX but to the account holders but that’s a detail. Borrowing people’s money without their permission? There is a term for that. Theft. But perhaps it was altruistic theft. Soon the very clever chaps at Alameda would create new billions out of thin air to pay back FTX and the focus on effective altruism and doing good could resume.
Unfortunately, it didn’t work out like that, and FTX’s liabilities exceeded its assets by $8 billion and when account holders started asking for their money they couldn’t pay, swift bankruptcy ensued. SBF, this super smart, super cool icon claimed in an interview he “forgot” that FTX had “loaned” Alameda $8 billion. Account holders will be lucky to see any of their money. The veteran insolvency professional John Ray III who is running the insolvency process and ran the Enron insolvency process had this to say about FTX, “Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy information as occurred here”. Will SBM go to jail? Perhaps but criminal trials are never certain.
What is the problem here? Is SBF the problem? No, he is a symptom of a more significant problem. There have been many like him before and there will be many more. Some people think that cryptocurrencies are the problem or that more regulation would have avoided this. That’s also not dealing with the real problem. It is not cryptocurrencies or lack of regulation that is the core problem here. The real problem is idolisation of charismatic business leaders, greed, and the innate human desire to make a fast buck by finding a business messiah who can lead you to riches. Ponzi schemes are the crudest manifestations of this and are illegal and are run by the least sophisticated form of con- artist.
To make it onto the cover of Fortune and be hailed as the next Warren Buffet takes more sophistication. Let’s now try to be a bit sympathetic to SBF. When you start a Ponzi scheme just like planning to rob a bank you know you are perpetrating a crime. When SBF began Alameda as a crypto hedge fund he was probably not planning to perpetrate a crime. He wanted to make money and he probably also wanted to do good. He was smart in a very narrow sense in creating profitable trading strategies in the cryptocurrency bull market. His incredible short-term success led to a deification process by the media and business community. He was a God who could do no wrong. This sowed the seeds for his demise.
With all the adulation he got swept up in the mania and the pressure to keep delivering spectacular returns. If he had not started “borrowing” clients’ money and realised the losses at that stage his halo as a financial genius would have slipped but he would have survived. But SBF liked the label of financial genius and believed he could do it again. Like many of us, he is just a very fallible human being.
He is not the first nor the last “financial genius” to devise a very profitable trading strategy to generate spectacular returns while it lasts. The leveraged hedge fund, Long Term Capital Management, generated spectacular returns until it didn’t, and it imploded in 1998 leaving investors high and dry. It was highly respected, and the board of directors included Nobel prize-winning economists. The much larger subprime crisis is another example of “clever” financial engineering creating money out of thin air until it imploded.
Will we learn from this latest scandal? I suspect not much. In the future, other “financial geniuses” will likely feature on the cover of Fortune or Forbes as the next Warren Buffet and investors will flock to invest before losing their money. There are too many of us who believe there is a genius out there who can help us make a fast buck. Fortune and Forbes want to satisfy our need to know who the next financial genius is. Perhaps next time it will be different and there is a real financial genius out there. We are the problem, and we are unlikely to change.
Thank you for all the ideas and comments. I really appreciate them and please keep them coming.
Regards
Bruce
Ruminant Pink Friday 