the money game

Sam Bankman-Fried Created a Crash for the Ages

Photo: Jeenah Moon/Bloomberg via Getty Images

Sam Bankman-Fried was always a mishmash, a billionaire Everyboy with messy hair and a negative style and ten roommates in the Bahamas — a math genius who also happened to be bankrolling political campaigns and plausibly thinking about buying Goldman Sachs with a bunch of crypto money that didn’t even exist before his 17th birthday. (He’s now 30.)

But this week, Bankman-Fried was found out to be less than the sum of all these disparate parts. His fortune is largely gone: Bloomberg estimates he has lost about 95 percent of it in the past few days. The two companies responsible for most of his formerly $15 billion net worth were his crypto exchange, FTX, and his hedge fund, Alameda Research. Now both appear to be headed toward bankruptcy, and the contagion is likely to spread throughout the crypto industry — and perhaps into the traditional financial world. Here’s what we know.

The Deal to Save FTX Is Dead

On Tuesday, FTX collapsed into a pit of insolvency, with only Changpeng Zhao, the CEO of the bigger crypto exchange Binance, able to save it. Zhao, known as CZ, had extended a nonbinding offer to buy the company, pending a look at its books.

Well, Binance had a look and — it said absolutely not. “In the beginning, our hope was to be able to support FTX’s customers to provide liquidity, but the issues are beyond our control or ability to help,” the company said ominously on Twitter.

This had been expected since the morning, when reports first came out that FTX had a $8 billion hole in its balance sheet. And CZ himself took what was an apparent shot at the business, saying that Binance had never taken on debt and never used its own cryptocurrency as collateral — two things that Bankman-Fried’s exchange did. So why would he start now?

The Markets Have Sold Off 

If you’ve had any interest in crypto at all this year, you’ve probably heard the cliché “crypto winter.” It’s a convenient shorthand that for the fall in prices and the spread of collapsing companies, yet embedded in the term is a sense of optimism, an implication that spring is around the corner. Now, that spring has been tabled even further.

Bitcoin, the biggest and most entrenched cryptocurrency, is down to its lowest point in two years — and falling. The whole crypto universe is down to about $840 billion or so as of Wednesday afternoon. This is a pattern that would be familiar to anyone who followed the end of the Terra cryptocurrency: As people try to figure out how bad things are, they sell whatever else they have either because they’re forced to or out of fear. Right now, there’s a lot of fear.

A Lot Of People Will Lose a Lot of Money — Including Tom Brady and Gisele

If there’s no one around to buy FTX, that means that a whole lot of people are going to lose money. If the firm goes into bankruptcy, people who bought stakes in the company will probably be wiped out. This means that not only faceless venture capital firms like Sequoia and SoftBank are likely to lose the entirety of their investments, but also Tom Brady and Gisele Bündchen, who sank an undisclosed amount of money into the company and, in exchange, received fake-sounding jobs (“brand ambassador” and “environmental & social initiatives adviser”) and fake money (very probably FTT tokens, the cryptocurrency issued by Bankman-Fried’s exchange that has since plummeted in value).

But it’s not just VCs and other supervillains who are out of luck. Among the investors that are down is Canada’s third-largest pension fund. And those who have accounts may have to wait years to get their money back — and who knows how much liquidators will be able to recover. Then there are about $8 billion in loans outstanding, according to the initial report on Alameda’s balance sheet. A few companies have tweeted out that they’re exposed to the firm, but the repercussions of those connections are still to be determined.

FTX Is Under Investigation

It was inevitable that this would happen: Federal investigators at the Securities and Exchange Commission, as well as the Commodity Futures Trading Commission, are investigating the relationship between Bankman-Fried’s exchange and his hedge fund. The investigators are also looking into how FTX handled clients’ funds, according to Reuters. Alameda, the hedge fund, had been holding $5 billion worth of FTT tokens — a position that appears to have been propping up the exchange. The investigation has been in the works for a few months already, and given what’s come to light so far, investigators are going to have a field day.

Bankman-Fried Has Gone From Superstar to Pariah

This year, Bankman-Fried pledged to spend $1 billion on political donations. He ended up spending something closer to $40 million before pulling back, but the ambition alone made him a force in politics. Had things kept on going the way they were, Bankman-Fried could have been the face of softer regulation and the force that would keep a handful of crypto-friendly Democrats from regulating it like the rest of the financial industry. Now, with his firms under investigation and too many questions about where his money came from and what he did with it, it’s unlikely he’ll have many people returning his phone calls; losing billions of dollars of other people’s money tends to make one very unpopular. “Sam had become a leading voice and someone who was seen as a bridge builder in D.C.,” said Matt Homer, a former crypto regulator at the New York Department of Financial Services. “In retrospect, the industry probably developed an overreliance on him.”

Sam Bankman-Fried Created a Crash for the Ages