The FTX Disaster is Deeper Than you Think

[Music] hi welcome to another episode of Cold Fusion what do you think is the probability of a multi-billionaire losing his entire fortune in a single weekend most people would likely say that it's close to Impossible and yet this is exactly what happened to 30 year old Sam bankman freed the CEO of FTX the second largest crypto Exchange in the world he was the Golden Boy on the cover of Fortune and Forbes Magazine he had a net worth of 26 billion dollars watched the Super Bowl with NBA star Steph Curry had dinner with SIA Jeff Bezos and Leonardo DiCaprio big names like BlackRock and SoftBank invested in his vision but behind the facade was something completely different Sam's Empire was actually a bunch of 10 romantically involved crypto kids running a shady operation out of the Bahamas the fall of FTX triggered the collapse of more than 100 Affiliated companies and wiped out countless savings this story has strange but very real tires to American politics the war in Ukraine and Enron it has the intensity of theranos but with a collapse as rapid as Lehman Brothers this is the wild story of the fall of FTX [Music] you were watching cold fusion TV Sam bankmanfried with his moppy hair and unsuspecting look is at the center of this story he was born in 1992 in California to an academic and politically connected family his mother Barbara is a lawyer and the co-founder of multiple Democratic fundraising organizations Sam's Father Joseph was a law professor and would later help his son raise funds for his company in 2014 Sam would graduate from MIT and would go on to work at the New York trading firm Jane Street Capital there he realized that he could make untold amounts of money Trading cryptocurrency he discovered a loophole where he could buy Bitcoin cheaper in America and sell it for a higher price in Japan sometimes he would shift up to 25 million a day in 2017 he would use the money from these trades to start his own company Alameda research Alameda research was made up mostly of Sam's MIT College friends and former work colleagues this firm would later be a key player in the collapse Sam supposedly believed in effective altruism which he described as quote trying to figure out what practical things you can do with your life to have as much positive impact as you can on the world he would make an impact on the world alright but it was by no means positive perhaps to appear more trustworthy as Sam became Rich he would promote himself as the resourceful billionaire choosing to drive an average Toyota instead of a typical Supercar but in reality he would own a 30 million mansion in the Bahamas regardless many social media influences would later buy into Sam's humble brand image and many promoted his companies okay the guy you see next to me is the most generous billionaire in the world and I found him hi my name is Sam while trading at Jane Street Sam would make a few friends one of these was Caroline Ellison she and Sam would begin dating back in 2017 Caroline wasn't really sure what to do for a career Sam suggested working at his new company Alameda research she didn't mean to get into trading but Caroline thought that she might as well give it a go and with that someone with little to no experience would quickly be on her way to becoming the CEO of what would become a multi-billion dollar operation [Music] according to Fortune Alameda research quote was run by a gang of kids in the Bahamas end quote many of the staff were Sam's ex-coworkers from the trading firm Jane Street and others were from MIT Sam had an inner circle of 10 people who were all housemates they partied together and had been involved in romantic relations with each other this group of course included the inexperienced CEO Caroline who would publicly praise amphetamine drugs on her Twitter on Her Tumblr Caroline would state that the only acceptable polyamorous relationship should be in the form of a hierarchy people should know where they fall within the ranking and there should be vicious power struggles between the higher ranks I have no comment despite issues behind the scenes in 2019 Sam would start his next major project FTX FTX was a cryptocurrency derivatives Exchange for those not familiar an exchange is basically a place to store and trade different cryptocurrencies and tokens for a fee of course the firm would also offer discounts to clients who stored their money in a token called ftt the ftt token was made by FTX and it was also the token that blew up this entire Mass but we'll get to that shortly the group of young Misfits kept high level management in the dark about what they were actually doing one former FTX employee told Forbes that the group was quote kind of a little click just a bunch of degenerate kids at the end of the day end quote so what did Alameda research do well essentially they were a crypto hedge fund of sorts They carried out trades matched buyers and sellers and would give investors a supposed return an alleged 2019 promotional document raises some eyebrows to get people in the door Alameda promised 15 annualized fixed rate returns with no downside if you watch my episode on Luna you would know that that's an impossibly good offer as later reported by The Wall Street Journal The Firm would use customer deposits as loans for trading Alameda research would later receive 10 billion dollars in FTX customer funds FTX of course was also owned by Sam gambling and investing with customer funds without their knowledge is a clear violation in traditional Finance like 10 billion dollars in customer funds were transferred to Alameda now both the Wall Street Journal and Reuters are reporting that billions of dollars was being used on Alameda so billions of dollars in FTX customer money yes is being traded on the Alameda uh like through their trading house and so that's especially concerning I mean you can't you can't take customer funds without the consent and especially what's especially bad about it Brian is that it's a clear violation of ftx's own uh guidelines FTX and the Almeda offices are located in the Bahamas just steps apart from each other in a co-working compound what do we know about the use of customer funds from here to over here because that is spectacularly illegal oh yeah that doesn't happen on Wall Street that is a clear violation oh we're not in Wall Street we're in the Bahamas we're in the Bahamas and to make things worse some of the things that Caroline said in interviews weren't too encouraging yeah absolutely could pull it off without my math degree I use very little math uh use a lot of like uh elementary school math tend not to have things like stop losses I think those aren't necessarily great risk management tool trying to think of a good example of a trade where I've lost a ton of money um well I don't know I probably don't want to go into specifics too much with that Sam stated that he started FTX because he saw that most other crypto platforms only managed to cater to inexperienced retail investors FTX on the other hand would offer more Advanced Financial products like features and options trading for crypto or tokenized stocks that track the value of real companies like Tesla people either really like the idea or really trusted Sam because he managed to raise two billion dollars from various hedge funds and investment Banks including BlackRock how he managed to pull this off I'm not entirely sure but supposedly smart people thought of him as a genius in fact according to a blog post from Venture Capital Giant Sequoia Capital Sam was playing the video game League of Legends while on a call to discuss a 210 million dollar investment upon seeing this someone from The Firm typed quote I love this founder in a chat box during the meeting after the call Sequoia gave Sam the 210 million dollars little did they know they would never see this money again according to coindesk current and former FTX and Alameda employees claim that the operations were full of conflicts of interest nepotism and a lack of oversight here's a quote Gary nashard and Sam control the code the exchange's matching engine and funds if they move them around or input their own numbers I'm not sure who would notice end quote nashard's girlfriend Claire who used to live with Sam was hired and immediately promoted to head of HR this meant that she could and often did fire anyone who didn't agree with Sam other employees claimed that Sam was the ringleader quote Sam wanted to take risky decisions than what others would take Sam ran everything we trusted him and believed him but regardless for now crypto was Rising like no tomorrow and business was going great for Sam so I'd encourage everybody to go out there and look at you know let's call it the top 30 or so cryptocurrencies by market cap what's up I'm getting into crypto with FTX you in in July 2021 it was reported that FTX was averaging 10 billion dollars a day in trading volume across its 1 million users by this stage FTX had a UC Berkeley Stadium named after them an advertising partnership with the Golden State Warriors and the Mercedes F1 team they even had an NBA stadium in Miami named after them FTX was involved in every corner of the crypto space as FTX grew it became a household name promotional material included stars like Tom Brady Stephen Curry Naomi Osaka and Larry David and according to NBC these Stars received equity in Sam's company in return in fact it's reported that Tom Brady put his 650 million dollar Fortune into FTX it's worth noting that this whole time FTX had no board of directors just Sam another employee and a lawyer FTX even became involved geopolitically being a partner of the world economic forum they also built the infrastructure to supply funds to Ukraine basically converting cryptocurrency donations into fiat currency for deposit at the National Bank of Ukraine at this stage Sam became knee-deep in politics soon he would be worth 26 billion dollars he donated five million dollars to Joe Biden in 2020 alone and 50 million dollars to politicians ahead of the 2022 midterm elections but there's a hidden detail to the story a lesser known player within FTX was Ryan salami he donated 23 million dollars to Republican politicians to also gain political leverage for FTX left or right isn't the point here the main issue is that this company was buying political influence and nobody was paying attention on the 16th of November 2022 the United States New York fed and 12 Banks including Citigroup and Wells Fargo announced that their testing digital US dollar crypto tokens so after years of chatter Central Bank digital currencies are looking to be a part of the next financial system for the United States and FTX wanted to be at the center of it as Sam's empire grew someone was watching closer than most his name was Chang Pang Zhao AKA CZ and he was the CEO of Binet ftx's biggest competitor a single tweet from this man would start a chain reaction that would collapse Sam's Empire but we'll get to that for Sam everything would start to change in the second half of 2022. as inflation was beginning to rise the U. S federal reserve lifted interest rates higher rates mean more expensive loans and a more cautious economy for this reason risk assets took a dive and the premier among them was cryptocurrencies as crypto firms began to blow up and go under Sam became the man to bail them out he could then buy the crypto of their books at record discounts and this wasn't risky because after all Alameda research had plenty of capital to spare also everyone thought behind the scenes Sam and his friends at Almeida were making huge losses from Bad trades and these bailouts meanwhile guys as crypto lenders continue to collapse along with prices one key figure we've talked about has emerged to help stabilize the ecosystem that is sambang been freed founder and CEO of crypto exchange FTX bankman Freed's company provided a loan made up of crypto and cash it was worth about 500 million dollars Voyager only Drw on about 75 million worth of that total legal analysts that were telling me it's unlikely Alameda will recoup that equity and credit line that money may be wiped out in voyagers restructuring seeking to prop up Alameda Sam secretly transferred at least four billion dollars worth of FTX consumer funds publicly he was stating that all of these funds were being moved around within the FTX company quote heads up rotating a few FTX wallets today mostly non-circulating we do this periodically might have a few more coming won't have any effect people tracking these wallets were suspicious and they had a right to be Sam was lying this trade wasn't routine it was the largest transfer of tokens on an exchange ever and the recipient wallet wasn't one with an FTX but another wallet that was at Alameda according to Reuters Sam did not tell other FTX Executives about the move to prop up Alameda he was afraid that it could leak meanwhile Caroline accidentally said on a call that FTX used customer money to help Alameda meet its liabilities the 27 year old CEO just admitted to potentially criminal activity and could now be up for a lengthy jail sentence so a key point to note is that these funds given to Alameda weren't in dollars but four billion dollars worth of ftx's own tokens ftt and herein lies one of the biggest issues with Sam's crypto Empire ftt was essentially a made-up token by Sam and his friends here's the problem say you had a great idea and were looking for an investment Sam could say here's five million dollars but it's not dollars it's an ftt frankly he was using money that didn't exist to buy things Corey clipston CEO of the investment platform Swan Bitcoin puts it quote it's fascinating to see that the majority of net equity in the Alameda business is actually ftx's own centrally controlled and printed out of thin air token on November 2nd Sam's worst fears are realized when behind the scenes information about Alameda finally leaked a report by the news Outlet coindesk detailed a very unhealthy balance sheet that allegedly showed that much of alameda's 14.

6 billion dollars in assets were held in ftt the coin made up by Sam and his friends in essence Sam created a coin artificially attributed Valley to it and then used it as collateral to finance his projects it was very very shady for Sam this was never a problem as long as the coin went up in value but things were different now the crypto Market was sliding and as this happened much of alameda's books became essentially illiquid questions about the real Financial stability of FTX began swirling it became the perfect opportunity for Sam's main rival CZ to step in [Music] salmon sees Ed's relationship started six months after the launch of FTX CZ bought 20 of the exchange for about 100 million Sam would later buy back the stock for two billion dollars this sum was paid to binance in part by ftx's own token ftt meanwhile CZ was bitter because behind closed doors Sam had been lobbing for the creation of a brokerage-like licensing system a decentralized finance and who would lose out the most from this Arrangement almost all other exchanges especially binance ftx's main rival and this is where things get a bit crazy because interestingly it's reported that the head of the SEC Gary Gensler and Caroline's dad Glenn Ellison both worked at MIT as professors at MIT Caroline's dad was the former boss of the head of the SEC an alleged leaked email shows that the SEC was going to give FTX quote no action relief basically this means we know that you're breaking the rules but we'll look the other way if these reports are true we could be looking at genuine corruption within the US government as FTX grew CZ viewed them as a genuine competitor he now had two billion dollars worth of ftt tokens if he wanted he could bring down the house of cards so he did and the leaked coindesk report was the perfect excuse to do that what sets in motion the disaster was a simple tweet it's November 6th and CZ comes out publicly stating that binance will dump the two billion worth of ftt that they got from that early FTX stake now ftt wasn't heavily traded so dumping all of this on the Open Market at the same time would have Mammoth consequences so FTX CEO Sam Bateman free took to Twitter this morning to clear something up he said that a competitor is trying to attack the company with rumors he then says in the same tweet ftx's fine assets are fine over the weekend speculation Rose about the solvency of FTX this came after a coindesk report revealed elevator research's balance sheet is full of ftx's native token ftt so binance CEO CZ got in on the actions he said that he would be liquidating the exchanges ftt tokens on its books and there was a little bit of back and forth with Alameda CEO Adam I'm going to kick this off to you first I was gone for a week and what a story to come back to maybe you can talk us through what is going on the Tweet shook the crypto world and money began bleeding out of FTX and fast inner correspondence with staff a presumably panicked Sam said that the firm saw a quote giant withdrawal search as many users rush to withdraw 6 billion in crypto tokens from FTX in just 72 hours Sam would remain confident stating quote we're chugging along obviously binance is trying to go after us so be it end quote the ftt tokens priest collapsed 80 percent over the next two days this resulted in ftx's reserves falling FTX didn't even have the funds to pay out all of these withdrawals they had nine billion dollars in liability and only 900 million in liquid assets that's only 10 covered to stop a further sell-off Caroline of Alameda offered binance a deal Alameda would purchase all the ftt that binance were dumping on the open market but CZ binance's CEO answered by stating that they quote won't support people who Lobby against other industry players behind their backs next more news would come out that would shock everybody again Sam called CZ begging for help an agreement was made for binance to buy FTX so to go from saying that assets are completely fine to a complete 180 and selling his company in a single day things needed to be very bleak while the deal was labeled as a strategic acquisition CZ went into PR mode stating that quote FTX was in trouble we bought them to save them he may have said that but he knew perfectly well that dumping all of this ftt would destroy Sam's Empire buying up all of his assets at a steep discount would be a great way to consolidate power but as a side binance were by no means clean themselves the U. S justice department is investigating Finance allegations include money laundering and criminal sanction violations reportedly binance had helped Iranian firms trade 8 billion since 2018 despite U. S sanctions for a while this looked like one of the most Cutthroat business moves in recent times binance was able to destroy and acquire its main competitor however only two days later binance made another announcement and this would rock the crypto World once again they were no longer pursuing the deal and they weren't going to help FTX so what was the reason for the major U-turn once binance investigated ftx's books they found a disaster the company had a far bigger gap between assets and liabilities than they expected reports suggest an 8 billion shortfall with this news even some employees at FTX were shocked Executives had been left in the dark about the true State of Affairs the kids in the Bahamas were playing with risk and they were losing big without telling anyone on top of this the U.

S justice department began to investigate this was over the 10 billion dollars of customer FTX funds that were given as loans to Alameda so with no liquidity and no plan B FTX stopped withdrawals Whispers of bankruptcy filled the digital spaces of Twitter on the 11th of November Sam resigns and tweets that FTX and Alameda are filing for bankruptcy this news sent crypto markets crashing no corner of the market was left unscathed over 150 billion dollars in three days that's how much the world's 15 largest cryptocurrencies lost in market value it's because of the crypto exchange platform FTX orderly is difficult when you have an entity that has 130 entities across the globe really looking to file for bankruptcy and receive whatever assets they can to make some investors partly whole again however the value of a lot of their Holdings obviously have fallen dramatically you have FTX trading the FTX U. S entity Alameda research which is Sam begman Freed's trading shop and again like I said the 130 additional companies he apologizes and took full responsibility but people were understandably still extremely angry and with that FTX which was once valued at 32 billion earlier this year with investors including SoftBank and BlackRock was no more another mystery soon came to light as it was discovered that one billion dollars worth of customers cryptocurrency had vanished from FTX Traders is also reporting that one to two billion dollars of that customer money that was transferred to that trading House Alameda is just missing they just don't know where it is so that's a huge concern and to make matters worse whatever money remained in the FTX account was hacked and stolen alarmed consumers began chattering on social media that cryptocurrency was disappearing from their accounts and their balance was now reading zero over half a billion dollars in cryptocurrency was siphoned online blockchain detectives are now watching closely so far the hacker has moved into ethereum making them one of the largest holders in the world countless companies are affected okoya Capital One of the biggest FTX backers announced that their stake was essentially worthless and wrote it off their books so I guess next time when they take an investment call with a guy playing League of Legends they may think twice Goliath's capital a hedge fund whose founder is credited with spotting the collapse of Luna still had quote half of our Capital stuck on FTX at the time of implosion blockfire had to stop withdrawals and are now filing for bankruptcy a teacher's pension fund in Canada invested almost 100 million dollars into FTX so now innocent people who had nothing to do with crypto could see a dent in their retirement FTX bankruptcy files show 134 affiliate companies across the world estimates say that liabilities could be up to 50 billion dollars for a sense of scale enron's liabilities were 23 billion fittingly ftx's new CEO is the former Enron bankruptcy lawyer the White House would comment on the situation calling for more regulation as for Sam according to reports he lost all of his wealth and has a negative net worth this is because he has more debt than equity in all of his companies and Investments adding the involvement of the Department of Justice in the case who knows how much the damages would be Sam is currently under police surveillance in the Bahamas on November 16th Sam tweeted that he was going to meet Regulators to try and repay customers comments under the Tweet could be summarized as basically what are you doing you should be in jail meanwhile Bloomberg reports that U. S and Bahamian authorities are in talks to bring Sam back to the US for questioning this will be a test of his political donation money for sure so naturally this unconfirmed rumors at this point I'm going to still mention them but take the following with a grain of salt the main theory is that the hack was an inside job funds were stolen through a secret back door that Sam could siphon without detection when Reuters asked about the missing funds Sam simply responded with three question marks as for crypto as a whole there's now a whole lot of risk and uncertainty it's going to take a while to see which companies were dangerously tied up with FTX a lot of firms seemed like they were tied up somehow with FTA right now we're just going to have to wait and see what happens with the market and what arrests are being made will there now be regulation what happened to the missing funds we just don't know at this point it's a wild story that's still unfolding FTX you know generated an ftt token blue you know if you trade your own token on your own exchange with wash trading with leverage you can park the price at any number you want so you want to make a billion dollars you Jack the price by three bucks by wash trading with yourself then you generate a billion dollars of collateral then you look for a bank that'll loan you money against the collateral of course nobody in their right mind should be loaning money against an air token that you manipulated yourself but of course Sam happened to be the CEO of a bank that made loans so he applied for a loan from his own bank and he granted it to himself and then he took real assets like Bitcoin from his honest customers and then he rehypothecated them traded them lost them and so this is just an egregious ethical lapse and it can't go on so what can we learn here well if you're an investor only put in what you're willing to lose this story also shows that in a bull market with cheap money anything goes even the smartest experts become drunk with the idea of making millions they're willing to throw hundreds of millions of dollars to a 30 year old and his polyamorous friends some of whom had next to no experience really with this whole thing it just seems like no one knows what they're doing although there might be a deeper aspect at play here in the depths of U.