Hiltzik: Sam Bankman-Fried falsification and crypto . fortunes

The Greek tragedy unfolding in the financial press over the past week is the story of Sam Bankman Fried, a would-be crypto tycoon and political kingmaker whose multi-billion dollar empire sank like the Titanic after his confrontation with the iceberg.

Bloomberg put it this way: “Bankman-Fried’s assets plummet from $16 billion to zero in days.”

The story under that title stated that the entirety of Bankman Fried’s fortune had been “wiped out” in “one of the greatest wealth destruction in history.”

In the end, I should have been on top of everything. Obviously, I failed at that. I am sorry.

– Sam Bankman Fried

However, something does not count here. It’s $16 billion in assets that simply couldn’t disappear in a matter of days – not if it was real in the first place.

Bankman-Fried either had $16 billion in assets at the start of last week and still owns a large share of it today, or it’s zero now and close to zero then. Both things cannot be true.

Based on reports that Bankman-Fried and his cryptocurrency exchange, FTX, are now under investigation by federal prosecutors and securities regulators, I vote that $16 billion was legendary and zero is the right number.

This is not the narrative being sold wholesale by the financial press and investment experts. Their story is that Bankman-Fried owned it all, and then lost it all. He played in this novel himself, via Tweet series Last week he apologized, among other things, for overestimating the amount he had available to pay clients who wanted to withdraw their funds from FTX.

He wrote on Twitter, “*I*, in the end, should have been on top of everything. I clearly failed at it. I’m sorry.”

In other words, things were going smoothly, until FTX hit the pit. Bankman-Fried says he’s as surprised as you.


What is known so far, according to the FTX balance sheet published by the Financial Times, is that the company recently had about $900 million in liquid assets against nearly $9 billion in liabilities. This means that FTX, the core of Bankman-Fried’s alleged fortune, was up to $8 billion in the hole.

Not all of these liquid assets are as valuable as the balance sheet states. He mentions about $472 million in the stock of the brokerage firm Robinhood. But Robinhood’s shares have fallen in price by about 20% in the past 11 days, so that number could be optimistic about $100 million.

When initial reports of FTX’s inverted capital structure leaked recently, clients began trading on the exchange, requesting to withdraw billions of dollars in deposits that FTX was unable to provide. FTX has now filed for bankruptcy, and Bankman-Fried has stepped down as CEO.

Reports also surfaced that FTX loaned client assets to its related trading arm, Alameda Research, which it used to fund risky investments of its own. If FTX is regulated by the same rules that traditional stock and bond brokerages must follow, then client assets must be kept separate from brokerage assets.

Among the assets that the balance sheet describes as “illiquid” or “less liquid” — that is, possibly unavailable to cover liabilities — are cryptocurrencies purportedly worth billions, including $554 million in FTT, a crypto token created by FTX itself.

Another cryptocurrency, Serum, was listed with a value of $2.2 billion as of last Thursday. Last week, the highly volatile cryptocurrency was worth $5.4 billion, according to the balance sheet. Serum, by the way, is another crypto token created by FTX, so even its $2.2 billion value on the balance sheet is until far away Doubtful.

Much of this was unknown to the financial community, because FTX did not make public disclosures. But what was known was that Bankman-Fried’s alleged fortune derives from cryptocurrencies, which are notorious for their price volatility. Why did he get a fortune estimated at billions of dollars?

One reason is the tendency of the financial press and other investment followers to accept their subjects’ wealth claims at face value. Forbes fell into the same trap as Bloomberg, ranking Bankman-Fried 41 in the 2022 list of the 400 richest Americans, with her estimated net worth of $17.2 billion as of September 27. Both estimates were based on a speculative valuation of FTX at the time of a $420 million investment round in January.

But this is a fine rod on which we can build estimates estimated at billions of dollars.

One would have hoped that the financial press had learned a lesson from its earlier adventure in hiring a new billionaire. This was the case of Elizabeth Holmes, the creator of the scam known as Theranos.

Holmes tricked a group of aging senior high-profile figures – among them George Shultz and Henry Kissinger – into the board of her company, which she claimed had devised a new method of blood drawing that would “disrupt” the old, porous healthcare business. In fact, Theranos had no successful technology, only a catchy story.

Among those hosted were staff members at Forbes, who ranked Holmes number one on its list of America’s richest self-made women in 2015, giving her a net worth of $4.5 billion. The following year, after the Theranos scam was exposed, Forbes reconsidered her fortune and put her fortune at $0.

It should be obvious that Holmes did not have $4.5 billion. The magazine’s estimate was based on its 50% ownership of Theranos, which raised $400 million from venture firms that acquired 4.4% of the company with this investment. But Theranos didn’t have $9 billion; I only invested 400 million dollars.

A small number becomes a big number through the magic of venture capital math: If a 4.4% stake in a company is worth $400 million, then 100% of it should be worth about $9 billion.

The flaw in this reasoning should be obvious: If the next round of investors asks 50% of the company for $400 million, the project will suddenly be worth just $800 million. And what if there are no new investors at all?

The main problem was that private capital valuations were inherently suspicious. Shares in private companies cannot be sold on the public market, which gives public investors an opportunity to acquire shares at an agreed price; Instead, private companies are only worth as much as their new investors think, and their opinion can change in the blink of an eye.

The same is true of the cryptocurrency space. Like private companies, the value of cryptocurrencies can be placed anywhere. They do not produce income like bonds, and their prices cannot be linked to liquid markets such as those in which public company securities are traded. No one has ever explained what useful cryptocurrencies are, other than paying fraudsters who hold databases or computer systems hostage in ransomware attacks.

As I mentioned recently, even Bankman-Fried admitted that claims about the utility of cryptocurrency involve “a lot of hand waving.”

At some point, Bankman-Fried must have had real money. He contributed nearly $40 million to Democratic campaigns in the current election cycle.

FTX paid $135 million for the naming rights to the NBA Miami Heat Arena (Miami local authorities say they returned the naming rights to the FTX Arena for bidding), and has spent huge sums to produce a television ad featuring Larry David and air it during this year’s Super Bowl.

Add up all known expenses, though, and you wouldn’t get close to $16 billion.

The rise and fall of Bankman Fried in public esteem is tied to our culture’s habit of compiling lists that rank anything and everything — the best electric toothbrushes, the highest-yielding savings accounts, the richest people.

The reasons for many of these ratings are always ambiguous or at least subjective, even when they seem to arise from solid numbers, as in Forbes and Bloomberg’s wealth lists — some of those numbers shrink, and they shrink.

It’s hard to fathom what turned Bankman-Fried into a darling of the gossip classes in finance, journalism and politics. For some, it may be his lineage – he is the son of two law professors and has a degree from the Massachusetts Institute of Technology.

For others, it may be his commitment to “effective altruism,” a vague philanthropic principle that seems to boil down to a justification for making as much money as possible in business and finance, because in the end you’ll give it all away.

Last May, while presenting a House Committee with a motion to relax tough regulations on the crypto industry, he claimed that he promised to donate 99% of his fortune to charity (an easy commitment, of course, when you don’t have one).

The most striking aspect of awarding Bankman-Fried as the richest and truest of the new billionaires is how little of it was based on solid information. Venture capital firm Sequoia Capital invested $150 million in FTX, and it followed up by publishing a slave-crazy article about Bankman-Fried on its website.

The article stated that the Sequoia partners decided to make their investments after a single Zoom call at the “last minute” with Bankman-Fried, known to movers and shakers as “SBF”. The article’s author, Adam Fisher, recounted that after his first interview with SBF “I was convinced: I was talking to a future trillionaire.”

Fisher, who claims to have decades of experience talking to budding entrepreneurs, added, “I don’t know how I know, I just know. SBF is the winner.”

Sequoia has removed the article from its website (retrieved from the Internet Archive). The company also assured its investors that its $150 million stake in FTX, which it has now reduced to zero, was Never a big deal Sequoia said it represented only about 3% of one of the funds that went into retirement, and 1% of another.

The company assured its supporters that its investment in FTX was the result of “extensive research” and “a rigorous diligence process.” (This should be some Zoom call!)

Someone’s snowing here. Perhaps Bankman Fried was snowing himself, or perhaps he knew he was living a lie. The truth will likely become clearer with time.

But all the talk about Bankman-Fried losing his entire fortune isn’t designed to explain to ordinary people what happened to FTX. He’s designed to hide the fact that his fans and investors made a huge mistake. They trusted someone who never earned their trust. This is not the first time, and the saddest part of this fiasco is that it will not be the last.

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