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FTX crash shares eerie similarities with Bernie Madoff, former regulator Sheila Bair says





New York
CNN Business

In just three years, Sam Bankman-Fried built FTX into a massive crypto exchange backed by marquee investors and valued at $32 billion. It only took days for all of this to implode in a comprehensive bankruptcy filing.

Sheila Bair, a top regulator during the 2008 financial crisis, told CNN that there are eerie similarities between the dramatic rise and fall of Bankman-Fried and FTX and that of notorious Ponzi mastermind Bernie Madoff.

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

“Charming regulators and investors can be distracting [them] from digging in and seeing what’s really going on,” said Bair, who led the Federal Deposit Insurance Corp. from 2006 to 2011, in a phone interview Monday. “It felt very Bernie Madoff-esque in that way.”

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

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

Bankman-Fried, in turn, was a top Democratic campaign contributor in the 2022 election cycle. He hired several former U.S. regulators to serve in senior positions at FTX, and his parents are both professors at Stanford Law School. Until the bankruptcy filing, FTX even had an application pending with federal regulators to clear derivatives, The Wall Street Journal reported.

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

“People feel cheated,” Brian Armstrong, CEO of rival crypto exchange Coinbase, told CNN in a phone interview Friday. “On the surface, FTX was able to get a lot of attention. But when people looked at it, the fundamentals weren’t there.”

FTX achieved its $32 billion valuation with the blessing of investments from BlackRock, SoftBank, Sequoia and other top investors.

“You get this herd mentality where if all your peers and marquee names in venture capital are investing, so must you. And that gives credibility with politicians in Washington. It all feeds on itself,” said Bair, who sits on the board of Paxos, a blockchain infrastructure company (Bair said she was speaking for herself, not Paxos).

Now the authorities in the Bahamas are investigating potential criminal circumstances surrounding the FTX explosion.

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

Madoff offered investors stunning returns that were remarkably consistent and an improbable track record that later turned out to be made possible by an elaborate scheme that involved repaying existing customers with new customer deposits.

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

Bankman-Fried secretly transferred about $10 billion in client funds from FTX to his trading firm Alameda Research, using a “backdoor” to avoid triggering accounting red flags, sources told Reuters.

Bankman-Fried denied to Reuters that he had secretly transferred funds, blaming instead “confusing internal labeling.”

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

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

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

But the bad news is that the crypto market remains largely unregulated, making it the wild wild west of the financial world. And that leaves investors vulnerable when something breaks.

“These risks of cryptoassets are very real,” FDIC Acting Chairman Martin Gruenberg said in prepared remarks to be delivered at a hearing Tuesday. “Following the bankruptcies of crypto-asset platforms that have occurred this year, there have been many news stories about consumers who have not had access to 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 crypto and the exotic financial instruments that ended up playing a central role in the 2008 financial crisis.

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

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



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