The company’s financial woes, which was valued at $ 32 billion in February, surprised many, as the company and its CEO and founder Sam Bankman-Fried emerged as the saviors of many struggling crypto firms during the year. ‘summer.
They had bailed out major cryptocurrency lenders such as BlockFi, Voyager Digital, Celsius Network, and Robinhood (HOOD) – Get a free reportwhich had suffered a liquidity crisis due to the sharp collapse of its sister cryptocurrencies Luna and UST, or TerraUSD.
What no one seemed to know was that FTX’s practices and its balance sheet were not what Bankman-Fried and the company claimed to be.
As a cryptocurrency exchange, FTX has executed orders for its clients, withdrawing their cash and purchasing cryptocurrencies on their behalf. FTX acted as a custodian, holding the clients’ cryptocurrencies.
FTX then used its clients’ cryptocurrencies, through its affiliate’s Alameda Research trading arm, to generate money through loans or market making. The money borrowed from FTX was used to bail out other crypto institutions in the summer of 2022.
Cuban is angry
At the same time, FTX was using the cryptocurrency it was issuing, FTT, as collateral in its balance sheet. This represented significant exposure due to the concentration risk and volatility of FTT.
Once this exposure came to light, clients, fearing an FTX crash, rushed to liquidate their cryptocurrency positions and get their money back. Customers on November 6 withdrew a record $ 5 billion. It was a rush to exchange. This led to FTX’s insolvency, as it did not have the cryptocurrencies, now on loan or sold, to honor its customers’ sell orders.
Panic has caused cryptocurrency prices to plummet. Shares of crypto companies like Coinbase (CURRENCY) – Get a free report and MicroStrategy (MSTR) – Get a free report they are sold by investors, who fear a contagion effect. The question now is which companies will be affected.
Many retail investors and institutional investors will never see their money again.
For Mark Cuban, the FTX case highlights the dysfunction of the US Securities and Exchange Commission (SEC), the main regulator of financial markets. Cuban believes the federal agency allows publicly traded companies to get away with deliberately manipulating investors.
The Dallas Mavericks NBA franchise owner has just vented his anger at what he calls a laissez-faire attitude, the victims of which are “charms” or investors who buy company shares on promises of executives who often tinge themselves with falsehood.
In essence, the billionaire attacks the system as a whole, even if he himself is part of the same system.
“The stock market is a platform where corporations pretend that their shares represent ownership in their enterprise. Using this claim, they actively market their shares to buyers, attempting to raise the price, often buying shares themselves, to make up for the lack of demand, ”Cuban criticized on November 12 on Twitter.
“No intrinsic value”
In essence, the billionaire, who has invested in hundreds of companies and created a dozen, denounces the phenomenon of share buybacks, which is an indirect way for companies to raise the price of their shares.
“By harnessing real or artificial demand, they issue shares to themselves to speed up their compensation, rarely doing the same for everyone except employees who are already highly paid,” the billionaire added to his criticisms of public companies.
He continued: “The myth of stock representing ownership falls apart when shareholders attempt to influence the firm’s operations through recommendations or active participation in shareholder meetings where these efforts are summarily dismissed as nuisances. How am I doing so far? “
For Cuban, these shares “have no intrinsic value”.
“Their only value comes from selling to someone who believes the stake will increase in value,” Cuban said. “To increase demand, the company will market its shares to funds and brokers in the hope that they will buy their shares and recommend them to their clients. One tool is quarterly earnings calls. Another is the creation of modified reporting structures. like EBITDA and other invented metrics. “
EBITDA refers to earnings before interest, taxes, depreciation and write-downs, which help investors assess a company’s financial health.
Basically, the information that companies often provide to investors is exaggerated at best and falsified at worst.
“Unfortunately for idiots, I mean investors, there are thousands of SEC-approved companies trading major exchanges for which there is little regulation, less information or liquidity, and where we often see BANKRUPT companies trading millions of shares,” he said. concluded Cuban.