Sam Bankman-Fried
The failure of Sam Bankman-Fried's company FTX has far reaching implications. Even though it operated in the Bahamas, many investors, including the state pension fund of Kansas, are from the United States.
FTX, an international cryptocurrency exchange, and its subsidiaries filed for bankruptcy on November 11. The company at one time was valued at $32 billion, but now more than a million customers fear their assets are gone.
Bankman-Fried told the New York Times Deal Book conference in Manhattan that the failure of his company was due to huge management failures, and sloppy accounting. But others like CoinDesk say the failure was due to the company using customer funds for the hedge fund Alemeda Research, losing much of the money on bad trades with too much leverage.
The Missouri public pension fund invested $1 million into FTX via Blockrock, a money manager. The Kansas pension fund KPERs invested $187,400 into FTX.
Sam Bankman-Fried had specifically promised customers it would never lend out or otherwise use the crypto they entrusted to the exchange.
Another red flag with FTX is the lack of a Board of Directors. Operating in the Bahamas, it appears there was little oversight. A board of directors can provide accountability and oversight while conducting annual audits to make sure the books are clean.
How Sequoia Capital, a reputable investment firm, gave $213 million to FTX as an investment is beyond me. Promoters billed Sam Bankman-Fried as a wonder kid who grew up with highly educated parents in Silicon Valley. He believes in effective altruism; earning as much as possible so you can donate it to charity. But the reality is Sam Bankman-Fried is a con man. He was holding up a house of cards with his mouth.
David Morris at crypto website, CoinDesk, says many news outlets have perniciously described what happened to FTX as a bank run or a run on deposits. But the exchange was not a bank. The big problem is that FTX assets were intimately linked to the trading firm Alameda Research where it seems they were simply gambled away, Morris wrote.
FTX was using leverage to make trades. Leverage can be very dangerous. Extreme levels of leverage brought down some of the biggest financial houses in history, including Lehman Brothers and Bear Stearns.
The FTX failure should be a wakeup call to Congress, which has failed to come up with a formal crypto regulatory policy, even though Bitcoin has been around since 2009.
When public pension funds in Kansas and Missouri put money into crypto companies like FTX without any real scrutiny, the public is likely to get burned. I know I could have managed that money much better than Sam Bankman-Fried. I got into crypto in 2017 and sold out in 2018 and moved the proceeds into my vacation fund. I also invested some of the proceeds into gold and Berkshire Hathaway. Both choices turned out well. I still own a little crypto but never saw the crypto market as stable enough for large amounts of assets.
I wouldn't recommend betting your retirement on crypto assets. It's better to have your wealth diversified across stocks, bonds and real estate.
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