FTX Bites the Dust
Photograph: https://rogerlowenstein.com/when-genius-failed
Or the sand if you are hiding out in the Bahamas.
FTX Trading, LLC filed for bankruptcy on November 17th. FTX was one of the largest crypto trading platforms. The founder of FTX is Sam Bankman-Fried, a self-proclaimed “eccentric genius”.
The swift collapse of FTX was stunning. It seemed that overnight one of the “stars” of the crypto universe crash landed. Sam Bankman-Fried resigned. A new CEO took control of FTX.
The story of FTX is not about crypto. Although no charges have been filed, when the smoke clears we will see fraud, accounting malfeasance and possibly insider trading.
How do I know? Because this has all happened before. The story of FTX is the story of Enron.
The new CEO for FTX, John J. Ray III has been the Chief Restructuring Officer or Chief Executive Officer on several of the largest corporate failures in history. One of his most well-known bankruptcy clients was Enron.
Enron!!
When I read that Mr. Ray was now CEO, I knew the collapse of FTX was not simply a case of a cryptocurrency exchange failing.
Mr. Ray accepted the position of CEO for the Debtors (FTX Trading LTD, et al ) on November 11th.
On November 17th he submitted the Chapter 11 petitions and First-Day Pleadings in bankruptcy court for the District of Delaware.
I read the filing. I read it again. This is what he said:
“Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here. From compromised systems integrity and faulty regulatory oversight abroad, to the concentration of control in the hands of a very small group of inexperienced, unsophisticated, and potentially compromised individuals, this situation is unprecedented” [1]
What I believe he is saying, is that the collapse of FTX is WORSE than Enron.
Let me jog your memory.
Enron was an energy, commodity and services company based in Houston, Texas.
Enron was one of the “Best Companies to Work for in America” and was named “Americas Most Innovative Company” by Fortune for 6 years in a row.
In 2001 a whistleblower revealed that Enron had systematically engaged in accounting fraud. Enron became the poster child for corporate fraud and corruption. Arthur Anderson was the accounting firm for Enron. Once the accounting fraud was public Arthur Anderson was dissolved.
A federal jury found Jeffrey Skilling, the CEO, guilty of conspiracy, securities fraud, insider trading and making false statements to auditors. He was sentenced to 24 years in prison.
Ken Lay, the founder was also found guilty but passed away before sentencing
So if FTX is worse than Enron, things are not looking too good for Sam Bankman-Fried (also known as SBF).
Sam and his colleagues are now under investigation by the Department of Justice, the Securities and Exchange commission, the Commodity and Futures Trading Commission the US Attorney’s Office for the Southern District of New York and from what I’ve read a new bi-partisan House Committee. To name a few.
There is a second interesting link to the past in connection to FTX.
This link starts with a young, inexperienced bond salesman at Solomon brothers in the 1980’s. His name is Michael Lewis, and his first book “Liars Poker” is the definitive account into the culture and environment of bond trading.
John Meriwether was head of fixed income arbitrage at Solomon and rose to the position of vice chairman of the company.
It was John Meriwether who introduced the game called “Liars Poker”.
Playing Liars Poker became an obsession among the traders and John Meriwether excelled at the game.
In 1991 one of his bond traders, Paul Mozer confessed that he had submitted false bids to the US. Treasury in bond auctions. The confession caused a scandal that cost Meriwether his job.
What John Meriwether is best known for is not what happened at Solomon; it is what happened after he was forced to resign.
He started a hedge fund called Long Term Capital Management or LTCM.
His “niche” or his “edge” was to hire the best and the brightest in quantitative finance and economics. He wanted the cool intellectuals, not the hot headed “instinctive” gut players who dominated the trading floors.
The best and the brightest at LTCM included 7 Ph.D.’s from MIT and 2 Nobel Prize winners. All of them “genius’s”. And most of them in their 20’s and 30’s.
Regardless, within the space of 4 years all the PhD’s and 2 Nobel Prize winners managed to lose control of the hedge fund. It was not a secret that LTCM used leverage to help produce outsized gains for investors. But when losses started piling up the losses were outsized as well.
When FTX failed I was reminded of the book: “When Genius Failed. The Rise and Fall of Long-Term Capital Management” by Roger Lowenstein.
One of the similarities between LTCM and FTX is the use of leverage through derivatives.
FTX created crypto based options, futures and swaps that allowed investors to EASILY leverage their crypto holdings.
Leverage in financial jargon means borrowing money. FTX was lending money to investors who wanted to use either Bitcoin or Ethereum as collateral to borrow money .
The borrowed money was then reinvested in crypto, magnifying the risk to the borrower.
It didn’t end well for LTCM, and it didn’t end well for FTX.
And now the story comes full circle to Michael Lewis.
“Lewis, according to a letter from Creative Artists Agency circulating in Hollywood, has just spent the past six months or so “traveling with and interviewing Sam Bankman-Fried,” the former billionaire whose cryptocurrency empire dramatically blew up this month after a CoinDesk scoop spurred fear that his business was built on a house of cards.”
I wonder if Michael Lewis had any inkling that FTX would fail so spectacularly?
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