FTX crash bears eerie similarities to Bernie Madoff, ex-regulator Sheila Bair says

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CNN affairs

In the space of just three years, Sam Bankman-Fried built FTX into a massive crypto exchange backed by major investors and valued at $32 billion. It was only days before that all imploded into a sprawling 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 scheme mastermind Bernie Madoff.

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

“Charming regulators and investors can be distracting [them] of digging and seeing what’s really going on,” Bair, who served as president of the Federal Deposit Insurance Corp. from 2006 to 2011, said 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 huge 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, sat on advisory panels for the Securities and Exchange Commission, and managed money for the rich and famous.

Bankman-Fried, for his part, was one of the top Democrat campaigners in the 2022 election cycle. He hired multiple former U.S. supervisors to fill senior positions at FTX, and his parents are both professors at Stanford Law School. In fact, until the bankruptcy filing, FTX had a pending application with federal regulators to release derivatives, The Wall Street Journal reported.

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

“People feel cheated,” Brian Armstrong, the CEO of rival crypto exchange Coinbase, told CNN in a phone interview on Friday. “At first glance, FTX could attract a lot of attention. But when people looked at it, the foundations weren’t there.

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

“You get a herd mentality where if all your peers and big names invest in venture capital, you should too. And that adds credibility to policymakers in Washington. It all feeds on itself,” said Bair, who sits on the board of directors of Paxos, a blockchain infrastructure company (Bair said she was speaking for herself, not Paxos).

Now authorities in the Bahamas are investigating possible criminal misconduct surrounding the FTX explosion.

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

Madoff offered investors great returns that were remarkably consistent and an unlikely track record that was later revealed to be made possible by a comprehensive plan where existing clients were repaid with new client deposits.

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

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

Bankman-Fried denied to Reuters that he had secretly transferred money, instead blaming “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 is not worried about the FTX implosion threatening the entire financial system as Lehman Brothers did in 2008. Crypto is still a relatively small part of the wider economy and financial market.

“There’s no systemic impact on the real economy,” Bair said, adding that this is all just “funny 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 makes investors vulnerable if something breaks.

“It is time to agree on a regulatory regime for crypto and find out who is regulating what,” Bair said, “because people are getting hurt.”

— If you are an FTX customer and would like to discuss how the bankruptcy has affected you, please contact [email protected]

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