Expert says similar scheme used by hedge funds in 2008 market crash
Attorneys for fallen crypto exchange FTX argued at the firm’s bankruptcy hearing Tuesday that the company served as founder Sam Bankman-Fried’s personal “fiefdom,” reaching $40 billion in market cap as of January before crashing in recent weeks to its current valuation of around $422 million.
Those who have looked under the hood in the wake of the crash, including new FTX CEO John J. Ray III, have expressed dismay at the company’s lack of basic bookkeeping and compliance protocols, sparking questions over how Bankman-Fried was able to build such an enormous, unchecked operation that bought him incredible influence and political power.
Sam Bankman-Fried, founder and chief executive officer of FTX, speaks during an interview on “Bloomberg Wealth with David Rubenstein” in New York on Aug 17, 2022. (Jeenah Moon/Bloomberg via Getty Images / Getty Images)
So, how did Bankman-Fried do it? Ben McMillan, co-founder of IDX Digital Assets, spells it out with a simple analogy:
In a hypothetical scenario, imagine someone owns every house in a 100-home neighborhood and forces the sale of one home for $1 million, then uses that sale to show they have $100 million in “equity.” But then, the owner is forced to sell all the remaining 99 homes, and the houses only sell for $100,000 each – meaning $90 million of their so-called equity disappears.
But that equity never existed in the first place.
McMillan told FOX Business that is exactly what Bankman-Fried did with his FTT tokens, since he controlled the float.
The FTX logo is seen at the entrance of FTX Arena in Miami on Nov. 12, 2022. (Reuters/Marco Bello/File / Reuters Photos)
FTX, according to McMillan, would make sure and trade a small portion of FTT and other coins like Serum at a favorable-enough dollar price to create the “equity” reflected on the balance sheet. Then Bankman-Fried would borrow a lot of money against what was essentially a very large – and very fake – asset number.
That, in turn, allowed FTX and its hedge fund, Alameda Research, to artificially inflate assets.
“This isn’t new or unique to crypto, by the way,” McMillan explained. “It was done by more than a few hedge funds during the 2008 crash – especially in the distressed debt space.”
FTX and Alameda accelerated the scenario by using the inflated asset number to take out very real liabilities, according to McMillan. It also ap