FTX Incident Shares Disturbing Similarities With Bernie Madoff, Says Former Regulator Sheila Bair

New York
CNN business

In just three years, Sam Bankman-Fried transformed FTX into a huge cryptocurrency exchange backed by prestigious investors and worth $ 32 billion. It took a few days for all of this to implode in a sprawling bankruptcy filing.

Sheila Bair, a leading regulator during the 2008 financial crisis, told CNN that there are disturbing similarities between the dramatic rise and fall of Bankman-Fried and FTX and that of infamous Ponzi scheme creator Bernie Madoff.

Bair notes that 30-year-old Bankman-Fried, like Madoff, has proven adept at using his pedigree and connections to seduce sophisticated investors and regulators by making him miss the “red flags” hidden in plain sight.

“Charming regulators and investors can be distracting [them] from examining and seeing what’s really going on, “Bair, who chaired Federal Deposit Insurance Corp. from 2006 to 2011, said Monday in a telephone interview.” He looked a lot like Bernie Madoff in that way. ”

FTX filed for bankruptcy on Friday, throwing the cryptocurrency industry into chaos and raising the specter of huge losses for the cryptocurrency exchange’s clients.

Long before his Ponzi scheme failed, Madoff was known as a Wall Street wizard. He was the former president of the Nasdaq Stock Market, served on the advisory committees of the Securities and Exchange Commission, and managed money for the rich and famous.

For his part, Bankman-Fried was a major contributor to the Democratic campaign in the 2022 election cycle. He hired several former US regulators to fill senior positions at FTX and his parents are both professors at Stanford Law School. Until filing for bankruptcy, FTX even had a pending application with federal regulators to write off derivatives, the Wall Street Journal reported.

Better Markets CEO Dennis Kelleher said in a statement Monday that FTX had a “revolving door rental” strategy from the Commodities Futures Trading Commission (CFTC) and elsewhere “to use their knowledge, influence and access to the agency. and to Washington to relocate The FTX agenda.

“People feel deceived,” Brian Armstrong, CEO of rival cryptocurrency exchange Coinbase, told CNN in a phone interview Friday. “On the surface, FTX was able to attract a lot of attention. But when people looked into the matter, the fundamentals weren’t there. ”

FTX earned its $ 32 billion valuation with investment blessings from BlackRock, SoftBank, Sequoia and other major investors.

“You have this herd mentality that if all your peers and high-profile names in venture capital are investing, you must too. And that adds credibility to Washington’s politicians. Everything feeds on itself, “said Bair, who sits on the board of directors of Paxos, a blockchain infrastructure company (Bair said she was speaking to herself, not from Paxos).

Now, Bahamian authorities are investigating potential criminal misconduct surrounding the FTX explosion.

Neither FTX nor a lawyer representing Bankman-Fried responded to requests for comment.

Madoff offered investors wonderful returns that were remarkably consistent and an unlikely track record that later proved possible thanks to an elaborate scheme that involved repaying existing customers with new customer deposits.

Given the speed of his demise and media reports, serious questions have been raised about the accuracy and soundness of FTX’s balance sheet. FTX’s bankruptcy filing indicates that it had liabilities between $ 10 billion and $ 50 billion at the time of filing.

Bankman-Fried secretly transferred about $ 10 billion of client funds from FTX to its trading company Alameda Research and used a “backdoor” to avoid triggering accounting warning signs, they told Reuters.

Bankman-Fried denied Reuters secretly transferring funds, accusing instead of “confusing internal labeling”.

Bair urged investors to use caution and be skeptical. “If it sounds too good to be true, it probably is,” he said.

The good news is that the former FDIC chairman is not worried about the FTX implosion threatening the entire financial system like Lehman Brothers did in 2008. Cryptocurrencies are still a relatively small part of the economy and market. financial in general.

“There is no systemic impact on the real economy,” Bair said, adding that it’s just “fun money in the ether with speculation.”

But the bad news is that the cryptocurrency market remains largely unregulated, making it the Wild Wild West of the financial world. And that leaves investors vulnerable when something breaks down.

“It’s time to establish a regulatory regime for cryptocurrencies and resolve who is regulating what,” Bair said, “because people are getting hurt.”

– If you are an FTX client and want to discuss how you were affected by the failure, please contact Matt.Egan@CNN.com


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