Apologies from tech chief executive officers are in vogue, as years of easy money and pandemic profits come to an end. “I got this wrong,” Mark Zuckerberg said after the Facebook billionaire’s pivot to a more Meta world decimated its stock price and led to 11,000 layoffs. Charismatic leaders are learning humility.
But in the league of weak-sauce apologies, the one from cryptocurrency exchange boss Sam Bankman-Fried stands head and shoulders above the rest. After his digital-asset empire FTX filed for bankruptcy on Friday, the onetime billionaire — who’s now lost it all — tweeted that he was “really sorry,” “shocked” at how things unraveled and “hopeful” that some kind of recovery was possible.
Let’s start with the hope. Judging by the scale and complexity of this bankruptcy — more than 130 entities with assets and liabilities in the tens of billions of dollars — customers have little reason to be hopeful. It will take time and money to sift through claims, with customers at the back of the line if the recent bankruptcy of Celsius is any guide. Martin Finnegan, a partner at Punter Southall, is skeptical of chances of recovery given legal fees and a likely lengthy process.
Then there’s the shock. To use that word is to pay homage to Captain Renault in Casablanca, who was “shocked, shocked” to uncover a gambling den — before being handed his winnings. Even if FTX’s collapse was precipitated by market pressure by rival Binance on its proprietary FTT coin, this only brought to light deeper issues at the exchange — such as lending more than half its customer funds to support risky bets by supposedly separate trading firm Alameda, according to the Wall Street Journal. The shock has spread to FTX’s former head of sales, who reportedly said he and his colleagues had been left “in the dark” about insolvency issues until it was too late.
And then, finally, the apology itself. It deserves as much value as the FTT token that once propped up Bankman-Fried’s empire. Is this an apology for stoking speculative excitement with unsustainable leverage during the good times, such as when Bankman-Fried eagerly explained his lucrative yield-farming business in terms that my Bloomberg Opinion colleague Matt Levine compared to Ponzi schemes? Or his handling of the bad times, when, as FTX was teetering on the brink, Bankman-Fried tweeted customer assets were safe? It’s unclear, though the latter tweet has disappeared.
The ex-billionaire’s confessional tweets sound so empty because the downfall of FTX isn’t just about a frothy market coming undone, similar to the way inflation has battered big technology 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 at its heart.
Bankman-Fried, after all, knew how to ride the crypto craze: He reveled in his image of the quant-trading wunderkind, who supposedly got his start spotting inefficiencies in Bitcoin trading across different exchanges. His charisma became adept at separating sophisticated investors, not just retail ones, from their money, attracting even pension funds to a platform that seemed to encourage dialogue with regulators and institutions. With one hand FTX took money offshore through leveraged bets and operating its own token and with the other donated to politicians and offered regulations to make the sector healthier.
While financial history should have inspired caution — and I noted on several occasions the risks that investors were ignoring when posting funds to FTX and other exchanges — it instead inspired greed and trust. William Quinn, co-author of a history of financial bubbles, compares the FTT token promoted by FTX to an artificial increase of purchasing power that fueled the market bubble. Using that token as collateral expanded Bankman-Fried’s wealth and that of his customers but also rapidly increased the complexity and risk of his empire. The result was an unsustainable house of cards.
FTX was not the first crypto exchange to fall over. And it likely won’t be the last. There will be talk of better regulation, though enforcing existing laws and protecting consumers would be a better start. But in this case, one thing is for sure: Sorry isn’t good enough.
(This story originally ran on Nov. 12, 2022. Sam Bankman-Fried was arrested in Bahamas on Dec. 12 and is in custody pending possible extradition to the US.)
© 2022 Bloomberg LP
