In reality, FTX would never have grown to the size it did without the active support of the financial industry and the “grow at all costs” and “break things fast” culture that it fosters. The 30-year-old shaggy-haired man with his chaotic manner suddenly found himself in a position where billions of dollars were thrown at him. His investors included big names like Softbank and Sequoia while he worked with some of the world’s largest banks, accountants and law firms. People like Bill Clinton and Sir Tony Blair were happy to speak at his conferences, giving some seriousness to a company that had come out of nowhere.
There were red flags all over FTX that any proper investment professional should have spotted. There were few checks or controls. Clearly, there was a massive conflict of interest between the crypto hedge fund that was run alongside the exchange. Investors who asked perfectly normal questions about what was going on internally were told to jump.
As far as anyone can tell, there were no audits, much less in the basic accounting way. “Never in my career have I seen such a complete breakdown of corporate controls and such a complete absence of reliable financial information as happened here,” John J. Ray, the insolvency specialist and also the man who settled Enron, said in para trying to fix the mess the company was left in. It is a damning verdict.
And yet all of that was ignored because Bankman-Fried fit the image of the disruptive genius that the venture capital industry has come to believe in. He was absurdly young and a mess, usually attending meetings in shorts and a T-shirt. He championed social activism, donating large sums of money to left-liberal political causes and candidates, though he gleefully admitted that most of it was just a way to make the business look good. He surrounded the firm with high-profile celebrities like sports star Tom Brady and model Gisele Bundchen (although Taylor Swift, to her credit, declined the chance to get involved).
Perhaps most of all, it disguised what was basically a pretty old and boring idea: FTX was just a commodity exchange, trading cryptocurrencies instead of metals, oil or, now that I think about it, scrap metal, with a lot of visionaries. jargon about how he was creating something no one had ever seen before. He fit all the business clichés of the past two decades, and the financial industry loved him for it.
We have already seen this, of course. WeWork was over the top, so it turned out to be a pretty boring office management company that claimed to have reinvented the world. Klarna, the buy-now-pay-later startup, has seen its valuation collapse as people realize that lending money to people who don’t have much has always been a difficult way to make a living.
FTX is without a doubt the most spectacular crash yet. But there are many more very flimsy companies out there, and there will be many more write-downs in the next year. In reality, it is the venture capital industry, and the bankers and fund managers who support it, who should be on trial, not just like Sam Bankman-Fried. They are just as guilty, if not more so.