Epic Collapse: A Trader’s Take On FTX, Sam Bankman-Fried, And Wall Street Hubris

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

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