I’ve been in the trading business for over three decades. In that time I’ve seen so many boom/bust scenarios they no longer excite me. And not just with markets, but with individuals and their firms within the markets as well.
They seem to fall into different categories of collapse.
Some go down in flames as a result of hubris. The $7 billion obliteration of Amaranth Advisors hedge fund due to the massive position-taking of one energy trader is a good example. The classic “I am bigger than the market” delusion.
Long Term Capital Management went belly-up largely because of a stubborn belief that their models were infallible because they were smarter than everyone else — a finance dream team.
Then there are those who lose everything because the bets they place are just disastrously wrong. Morgan Stanley’s $9 billion pummeling in the mortgage-backed securities market at the hands of Howie Hubler comes to mind. As does the sudden immolation of the absurdly-named OptionsSellers.com — although anyone who knows options saw that one coming far down the road; we like to say that selling options with its limited reward and unlimited risk is like picking up pennies in front of a steamroller.
These events stemmed from a violation of the classic rule of trading: respect risk.
But dwelling in the lower circles of high finance hell we find the fraudsters.
Bernie Madoff is an obvious example. Yet even he was not pure evil. From what I know of his story, his started off as a legitimate business, only to morph somewhere along the way into the Ponzi scheme it became. Barings Bank rogue trader Nick Leeson also fits this mold. He kept doubling up, losing bets to even up before he resorted to hiding his mounting losses in a panic.
Still, who could be farther down the pit than the criminal Madoff? Enter Sam Bankman-Fried.
Knowing the history of boom/busts going all the way back to the Dutch tulip mania of 1636-37, never have I seen such blatant misconduct. “SBF” as he was once so fondly called by politicians, mostly Democrats, who gleefully took his $40 million in donations, and activists and journalists who were all too giddy about his “effective altruism” schtick, may go down in history as the king criminal of finance.
The more we learn of his shenanigans, the more we see that from the very beginning, his was an enterprise based on deception and greed and fueled by a bizarre childishness that has no place in business.
The model was simple enough. Convince politically like-minded investors to invest billions to fund his FTX crypto exchange, then take that money and hand it over to Alameda Capital, a crypto trading firm run by his ‘friend with benefits,’ in which he owned a 90% stake.
In the meantime, siphon off a few of those billions to fuel a hedonistic lifestyle that would have made Larry Flynt blush. At the same time donate tens of millions to key politicians, while embarking on a public relations campaign designed to present him as Gandhi with cash to shield himself from scrutiny. I’m sure it was fun while it lasted.
The problem with Fried’s alleged fraudulent model was that it was built upon a sandcastle that is the crypto market. Much of this market is based upon the greater fool theory. To wit: Coin X has no intrinsic value, unlike a bale of wheat, barrel of crude oil, or share of a company with bona fide earnings. Thus, its worth is solely a function of what the next guy down the line is willing to pay for it. Like a financial game of hot potato.
When confidence in its perceived value evaporates, as we saw in FTT, the digital coin issued by FTX and bought up by Alameda to support its “value” and then offered as collateral to prop up the FTX mirage, a run on the exchange that is so invested in FTT ensues. SBF suddenly found himself facing his George Bailey moment. All of his customers were at the counter demanding access to their crypto wallets at once. Only for SBF, there was no Mary Bailey holding up a fan of honeymoon money to make the depositors whole. And unlike the Baileys, SBF and his merry men and women had spent all the panicked depositors’ cash.
He may feign ignorance, or that he just “f***ed up.” Whoops. But FTX’s interim CEO, John Ray — the man who was brought in after the Enron debacle and so knows of what he speaks — while testifying before Congress, got it right: “This is just plain old embezzlement.”
It takes a certain breed of sociopath to concoct such a scheme. Someone who has zero empathy, no remorse, and can lie with such skill that one wonders if they even fool themselves. Anyone watching Elizabeth Holmes’ filmed deposition is hard-pressed to spot even a hint of shame or guilt. As if she has no idea, or at least no concern for the damage she left in the wake of her Theranos fraud.
SBF was supposedly scouring for investors to launch yet another business even as a federal case was being built against him.
In the Netflix documentary “Fyre,” one can see up close this breed of sociopath in action. Billy McFarland lies and deceives his way throughout the film while planning a party for the ages he knows is never going to happen, and, in fact, becomes a nightmare. And yet, as the event planning collapses around him he rides jet skis as if he hasn’t a care in the world. Even as he faces prison, we see him on the phone scamming all over again, and smiling as he does so. Such people are broken. (I’ll leave it to the Jordan Petersons of the world to do a deep dive as to why. I’m sure it would be fascinating).
We see in nefarious characters who occupy this circle certain common threads. Most notably, Madoff aside, they tend to be young. And although such a lack of life experience might give an astute investor pause, there are others who are conversely drawn to the wunderkind fairy tale.
Elizabeth Holmes, Stanford drop-out, in black turtleneck ala Steve Jobs, becomes the world’s youngest self-made female billionaire. What a story!
SBF, boy genius who eschews the accoutrement of the pin-striped Gordon Gekko Wall Street tycoon with a devil-may-care uniform of shorts, t-shirt, and sandals, and who plays video games while pitching investors to feed his criminal enterprise. Where do I sign up?
More often than not, experience matters. How many young traders have I seen go down in flames while ignoring the counsel of the seasoned old salts of the markets who’ve seen what they have not, and know it can happen again?
Many of these fractured creatures are unique products of the tech age which enables their psychopathy. Never have we seen so much wealth accumulated by so young a cadre in so short a timespan. It didn’t used to be this way. The great wealth barons of old — Carnegie, Vanderbilt, Rockefeller, Ford — spent decades, sometimes generations, building their fortunes.
Unlike such captains of industry, the new wave of hoody-sporting business titans goes from having little to being mega-rich in an astonishingly short period. Good on them, I say. But I sense that something has been lost in the process. Technology has pushed both access to, and velocity of, capital into hyper-speed. But, if I may channel my inner Ian Malcolm here, somewhere in this new age of instant uber-riches, the discipline required to build these fortunes has been lost.
The late media mogul Sumner Redstone once offered he’d learned more from his failures than successes. Indeed, that rings true in my own experiences as well. Business-building, and the personal fortunes that go with them, once required decades of dedication, long work hours, and trial and error to arrive at a successful, and sustainable, model. One wonders what an R.J. Reynolds or George Eastman would think of the disheveled, goofy, video-game-playing boy billionaire who, it turns out, was anything but.
So many questions arise from FTX’s epic collapse. How can something be worth $30 billion in the morning and zero by sundown? This is prima facie evidence of a fatally flawed regulatory environment. Indeed, where were the regulators? And, of course, will the politicians who, in effect, took stolen money give it back?
How could anyone be fooled by this man-child, who, undoubtedly bright as he is, lacked the maturity and seriousness necessary to run a business? Think about it: They ran what was once the second-largest crypto exchange — the digital version of the NY Stock Exchange — on QuickBooks!
One gets the feeling that, given the amount of money SBF donated to an already corrupt political system, many on Capitol Hill are hardly incentivized to get to the bottom of all this. But we must get to the bottom of it. Otherwise, it will just keep happening. Unlike a hedge fund, wherein losses primarily affect accredited investors who supposedly have both the sophistication to know the risks, and the bank accounts to absorb them, FTX’s collapse hits over 100,000 far-from-wealthy creditors who believed that the exchange was simply a repository for their crypto wallets, nothing more.
But SBF in his pathological pursuit of lifestyle and status, and no doubt thinking he was the smartest man in the room, took their money without their knowledge and without permission traded and either lost or spent it as if it was his personal ATM. And why not? He was woke, after all, and he was a player in DC.
If he’d learned one lesson watching the unchecked criminality running rampant in the Emerald City, from perjuring intelligence officials to sleazy influence peddling by the President’s son, it was that crime does indeed pay.
Brad Schaeffer is a commodities trader, columnist, and author of the best-selling novel “The Extraordinary,” which deals with autism and PTSD and the critically acclaimed World War II novel, “Of Another Time And Place.”
The views expressed in this piece are those of the author and do not necessarily represent those of The Daily Wire.