FTX crash looks suspiciously like Bernie Madoff scandal, says ex-regulator Sheila Bair |  CNN Business

FTX crash looks suspiciously like Bernie Madoff scandal, says ex-regulator Sheila Bair | CNN Business

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CNN Business

In just three years, Sam Bankman-Fried has transformed FTX into a massive crypto exchange backed by big-name investors and valued at $32 billion. It only took a few days for it all to implode into a sprawling bankruptcy filing.

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

Bair notes that Bankman-Fried, 30, like Madoff, has proven adept at using his pedigree and connections to woo sophisticated investors and regulators into missing “red flags” hidden in plain sight.

“Charming regulators and investors can distract [them] to dig in and see what’s really going on,” said Bair, who chaired the Federal Deposit Insurance Corp. from 2006 to 2011, during a telephone interview on Monday. “It looked a lot like Bernie Madoff 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 fell apart, Madoff was known as a wizard on Wall Street. He was the former chairman of the Nasdaq Stock Market, served on advisory boards for the Securities and Exchange Commission, and managed the money of the rich and famous.

For his part, Bankman-Fried was one of the Democrats’ top campaign contributors in the 2022 election cycle. Stanford Law School. Until the bankruptcy filing, FTX even had a pending application with federal regulators to clear derivatives, The Wall Street Journal reported.

Better Markets CEO Dennis Kelleher said in a statement Monday that FTX has a strategy of “revolving door recruitment” from the Commodities Futures Trading Commission (CFTC) and elsewhere “to use their knowledge, influence and access to agency and Washington to move 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 as people got interested in 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 big names in venture capital are investing, you have to be too. And it adds credibility to policy makers in Washington. Everything feeds off of itself,” said Bair, who sits on the board of Paxos, a blockchain infrastructure company (Bair said she was speaking for herself, not Paxos).

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

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

Madoff offered investors wonderful, remarkably consistent returns and an improbable track record that later proved to be made possible by an elaborate system 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 strength of FTX’s track record. FTX’s bankruptcy filing says 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 and used a “backdoor” to avoid triggering accounting red flags, sources told Reuters.

Bankman-Fried denied to Reuters the secret transfer of funds, blaming instead “confused 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 FTX implosing threatening the entire financial system like Lehman Brothers did in 2008. Crypto is still a relatively small part of the world. economy and financial market at large.

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

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

“These crypto-asset risks are very real,” Acting FDIC Chairman Martin Gruenberg said in prepared remarks to deliver at a hearing on Tuesday. “After the crypto-asset platform bankruptcies that have occurred this year, there have been many news reports of consumers not being able to access their funds or savings.”

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

“Crypto-assets bring with them new and complex risks that, like the risks associated with innovative products in the early 2000s, are difficult to fully assess, especially with the market’s eagerness to move quickly to these products,” Gruenberg said in testimony for 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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