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A Crypto Catastrophe: The Stunning Fall of FTX—and What Comes Next

William D. Cohan joins to discuss finance frauds and his new book ‘Power Failure’

Key Speakers At Bitcoin 2021 Event Getty Images

Derek shares his thoughts on the meltdown of crypto exchange FTX and the disgrace of its founder, Sam Bankman-Fried, before welcoming veteran finance journalist William D. Cohan to discuss the history of finance frauds, what comes next for FTX, the media’s relationship to CEO royalty, and his new book, Power Failure, on the rise and fall of GE.

Host: Derek Thompson
Guest: William D. Cohan
Producer: Devon Manze

Subscribe: Spotify

To open today’s show, Derek discusses his initial admiration of Sam Bankman-Fried—and bemoans the possibility that a lot of people put misplaced trust in SBF.

Derek Thompson: Today’s episode is about a crypto implosion that stunned the world, or at the very least, stunned me. As listeners of this podcast know, I am not exactly the world’s biggest crypto booster. I consider myself a skeptic who tries not to write off technologies that I don’t fully understand. But of all the characters in the crypto landscape, the one I was perhaps most interested in, even in a way the most impressed by, was Sam Bankman-Fried. He went by SBF. SBF is the founder of a crypto exchange, FTX, and a hedge fund, Alameda Research. Sam was a quirky nerd with wild hair who dressed in cargo shorts and T-shirts for conferences, and he was a fixture of media events. He appeared on the cover of magazines like Fortune and Forbes. He donated to Democratic candidates. He subscribed to a philosophy known as effective altruism, which is a kind of utilitarian movement that seeks to do the most good for the most people now and in the future.

And he has expressed an interest in giving away all of his money to an array of charities, from malaria prevention to artificial intelligence safety. Some magazines had called him the next Warren Buffett. Others went even further. As cryptocurrencies fell in value over the last year, SBF bailed out several projects, which struck some as a kind of echo of Gilded Age robber barons stepping in to prop up the financial industry during the crises of the late 1800s. People called him the J.P. Morgan of crypto, or the JPEG Morgan. And his company was a fixture in sports, too. FTX spent $135 million on the naming rights for FTX Arena, where the Miami Heat play. They paid millions of dollars for a Super Bowl ad with Larry David. They attracted investment from not only blue chip venture capital firms like Sequoia, but also Tom Brady, Gisele [Bündchen], Steph Curry—and then it all fell apart.

One month ago, FTX and SBF were the darlings of crypto, and now it’s a total cluster shit. After a report circulated a couple weeks ago that this exchange’s balance sheets were heavily composed of tokens that were essentially invented cryptocurrencies or mathematically sophisticated IOUs, there was a run on the bank that left FTX down several billion dollars. A rival exchange called Binance initially offered to buy them but later pulled out, and the company has declared bankruptcy. SBF’s $16 billion wealth was wiped out in a matter of days. We don’t yet know the full shape of the failure here, but it looks a lot like fraud, and this is the part where I have to make a confession, or a few confessions.

I have met and interviewed Sam. I liked him. I thought he was charming, and weird, and smart, and playfully intelligent, game to answer questions about the intersection of crypto, the greater good, the nature of capitalism. I liked that he talked about crypto not like a true believer, but rather like a guy who stuck a drill in the ground, found $1 billion in oil, and decided he didn’t really care that much about oil but he’d like to soak it up and give it away to better causes. That was a really interesting perspective from the richest 29-year-old in the world. Another confession: The movement that SBF subscribed to, effective altruism, is a movement that I have respected for a long time. In fact, when I lived in New York City for several years, one of my subletter roommates was a philosopher named Will MacAskill, who is now a leader of that movement, effective altruism, and was until recently sort of a moral consigliere for Bankman-Fried.

I knew Will. I knew that Will trusted SBF. And so, while I never wrote or podcasted or had any money or any financial relationship with FTX, I sort of admired Sam’s strangeness from afar. I admired the causes that he gave to, including and especially pandemic preparedness. And now, like a lot of people, I think he may have been a fraud. I want to stress that we don’t yet know exactly what happened, but at least one plausible scenario is that SBF was in charge of both a trading platform, FTX, and a hedge fund. That meant he had access to customer funds that he could bet with. And when the hedge fund made a series of bad investments, he may have transferred customer funds to fill that hole. That is incredibly bad. It might meet the legal definition of outright fraud, and it makes me feel like this guy that I kind of admired from afar might have been less of a J.P. Morgan and more like a bizarro Elizabeth Holmes, the former CEO of Theranos.

If you recall, Holmes had a costume, the black turtleneck, the red lipstick. SBF had a costume too. The frizzy hair, the disheveled clothes. Holmes hid her fraud with bluster and confidence. SBF hid behind this illusion that he was in on the joke, that he partially understood that some crypto valuations relied on a kind of infinite Ponzi scheme. Where Holmes seduced with impressiveness, SBF may have seduced by being disarming. I don’t know, maybe there’s a ton we still don’t know about this. Maybe there’s a more innocent explanation, but right now I don’t think there is. I think people got played. Now, there are so many lessons we can draw from an implosion like this, an Icarus story like this. I think one of the lessons is the dangerous power of stories.

When SBF was raising money from Sequoia, which is one of the most famous and successful venture capital firms on the planet, he reportedly wowed the entire VC movement, the entire VC team, while playing a video game on a separate screen. So, at the same time, the fact that he could secure millions in funding from discerning investors while playing a video game—that was seen as a sign of incredible genius, right? His ability to do nine things at once, which is an important trait for a founder. But now in retrospect, it looks like Sequoia gave their money to a kid who was either in way over his head or, worse, was so unmoved by the immorality of his entire enterprise that he couldn’t be bothered to give investors his full attention. Another lesson is that we the media kind of suck at allocating our trust.

We idolize wealth. We idolize people who braid mainstream success and radical personality quirks. We Hollywoodize complicated characters and fail to ask the hard questions, questions like, “Hey, Sam, you run a trading exchange that has an obscure and complex relationship with a hedge fund. Are we sure that’s above board, or is this arrangement an obvious invitation for duplicity and fraud?”