Former regulator Sheila Bair says the FTX crash shares eerie similarities with Bernie Madoff



New York
CNN Business

In just three years, Sam Bankman-Fried has built FTX into a massive $32 billion cryptocurrency exchange backed by marquee investors. It only took days for all of this to explode in a widely publicized bankruptcy filing.

Sheila Bair, one of the top regulators during the 2008 financial crisis, told CNN that there are eerie similarities between the dramatic rise and fall of Bankman-Fried and FTX and infamous Ponzi scheme boss Bernie Madoff.

Bankman-Fried, 30, like Madoff, proved adept at using his pedigree and connections to lure sophisticated investors and regulators to missing “red flags” hiding in plain sight, Bair notes.

“Attractive regulators and investors can be distracting [them] Bair, who led the Federal Deposit Insurance Corporation from 2006 to 2011, said in a phone interview Monday. “It felt very Bernie Madoff-like in that way.”

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

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

For her part, Bankman-Fried was a top campaigner for Democrats in the 2022 election cycle. He has recruited many former US regulators to serve in senior roles at the FTX, and both of his parents are professors at Stanford Law School. Prior to the bankruptcy filing, FTX had filed with federal regulators to clear the derivatives, The Wall Street Journal reported.

Better Markets CEO Dennis Kelleher said in a statement on Monday that the FTX has a “revolving door lease” strategy from the Commodity Futures Trading Commission (CFTC) and elsewhere, “a move to leverage their knowledge, influence and access at the agency and in Washington.” to do. The agenda of the FTX.”

“People feel cheated,” Brian Armstrong, CEO of rival cryptocurrency exchange Coinbase, told CNN in a phone interview on Friday. “On the surface, FTX managed to attract a lot of attention. But as people looked at it, the fundamentals weren’t there.”

FTX was valued at $32 billion thanks to investments from BlackRock, SoftBank, Sequoia and other top investors.

“You get this herd mentality that if all your peers and marquee names in venture capital are investing, so should you. And that boosts credibility among Washington politicians. Everything feeds on itself,” said Bair, who sits on the board of Paxos, a blockchain infrastructure company (Bair said he was speaking for himself, not Paxos).

Now, authorities in the Bahamas are investigating potential criminal activity in connection with the FTX explosion.

Neither FTX nor an attorney representing Bankman-Fried responded to requests for comment.

Madoff offered investors fantastic returns that were incredibly consistent and later proved to be possible thanks to a sophisticated scheme that involved paying existing customers with new customer deposits.

Considering the speed of its demise and media coverage, serious questions have been raised about the accuracy and strength of the FTC’s balance sheet. FTX’s bankruptcy filing shows that it had between $10 billion and $50 billion in liabilities at the time of the filing.

Bankman-Fried secretly moved about $10 billion in client funds from FTX to trading firm Alameda Research and used a “backdoor” to avoid raising red flags in its accounting, sources told Reuters.

Bankman-Fried denied to Reuters that she secretly transferred the money, instead blaming it on “confusing internal labeling.”

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

The good news is that the former FDIC chairman isn’t worried about the FTX implosion that threatened the entire financial system like Lehman Brothers in 2008. Crypto is still a relatively small part of the broader economy and financial market.

“There’s no systemic impact on the real economy,” Bair said, adding that it’s all “funny money on the air.”

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

“These risks of crypto-assets are very real,” FDIC Acting Chairman Martin Gruenberg said in prepared remarks for Tuesday’s hearing. “Following the collapse of crypto-asset platforms this year, there have been numerous reports of consumers unable to access their funds or savings.”

Gruenberg, who was nominated by President Joe Biden on Monday to be the full-time head of the FDIC, drew parallels between cryptocurrencies and exotic financial instruments that played a central role in the 2008 financial crisis.

“Crypto assets bring with them new and complex risks that are difficult to fully assess, much like the risks associated with innovative products in the early 2000s, especially with the market’s willingness to move quickly to these products,” Gruenberg said in a statement. Senate Banking Committee hearing.

— If you are an FTX customer and would like to discuss how the bankruptcy affects you, please contact Matt.Egan@CNN.com.



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