Did FTX Fail Because of Regulators or Investors?

What to make of FTX and SBF?

Andrew here. Over dinners and text messages this weekend, financiers on Wall Street and Silicon Valley, and policymakers in Washington, debated whether the multibillion-dollar collapse of FTX, the crypto exchange founded by the wunderkind Sam Bankman-Fried, should be compared to the fall of Enron, Lehman Brothers, Bernie Madoff or MF Global.

It will take several more weeks to understand which comparison is most apt, and just how systemic the collapse is. It is too soon to know whether FTX’s downfall will deliver a fatal blow to crypto — or will simply make a good movie. (The business writer Michael Lewis, who has been embedded with Bankman-Fried for the past six months, is trying to sell the rights to one.)

The more immediate and practical question is how such a mess could have been avoided, and what lessons there are for the deal makers who turbocharged Bankman-Fried’s rise.

Was it a lack of U.S. regulation? Sort of, but not really: FTX was based in the Bahamas. Should the U.S. have moved faster to create an attractive regulatory environment so companies like FTX would have moved here and had to abide by Washington’s rules? Maybe. But if the FTX case turns out to be fraud, regulation unto itself may not have been enough to stop it. Madoff didn’t live on an island beyond U.S. jurisdiction — he was based on Lexington Avenue.

If we ultimately learn that FTX’s undoing is the first of many in an industry that has been built on a pile of offshore fairy-dust leverage, the regulatory lesson will actually be the opposite: The S.E.C., C.F.T.C. and Treasury will have proved prescient for all their warnings to the public that crypto was too risky. Privately, the crypto skeptics in Washington’s regulatory complex are already pointing to FTX’s collapse more as a badge of honor than an example of a failure to stop it.

Which brings us to the investment community, a group that has long argued that the free market is the best form of regulation and venerated the charismatic founder — remember Elizabeth Holmes? — above all else. FTX proves just how high a cost that strategy may exact. The venture capitalists behind FTX failed, and the libertarian views of Silicon Valley it was based upon might need to re-evaluated. It is hard enough in this environment to raise new funds; it is likely to only become harder for crypto-focused V.C.s, several executives told me.

Very few investors are publicly introspective about their misses. Sequoia Capital, the storied Silicon Valley V.C. firm that had to write down its $120 million investment in FTX to zero, defended its due diligence — even after it deleted a hagiographic letter about Bankman-Fried’s “awesome” intellect when his company imploded.

So give some credit to Marcelo Claure, the former SoftBank executive who helped lead the Japanese tech conglomerate’s investment in FTX. “I have been reflecting personally on the whole FTX fiasco and it taught me one more time that we should NEVER invest because of FOMO and we should always 100% understand what we are investing in. I totally failed here on both,” he tweeted on the weekend.

Any time there is a boom cycle like this, otherwise smart investors do dumb things because they see their pals and peers piling in and worry they will be left out. Envy is a pernicious quality — and one that is all too human.

HERE’S WHAT’S HAPPENING

President Biden and President Xi Jinping of China meet in person. Their first face-to-face meeting since Biden’s election, ahead of this week’s Group of 20 conference, takes place as tensions rise over issues like Taiwan and Washington’s restrictions on tech exports to China. American officials sought to play down any rifts — but also the chance of any breakthroughs.

Chinese stocks jump on new government measures. Beijing announced more financial support for debt-ridden property developers, pushing shares in the real estate sector — one of China’s biggest — up sharply on Monday. That followed a rise in the Hong Kong and mainland China markets after an easing of zero-Covid restrictions.

Democrats move to raise the debt ceiling soon. Speaker Nancy Pelosi suggested she would take action to push back a fight over government spending until after the 2024 election, as Republicans still appear poised to win control of the House. Separately, Democrats have maintained control of the Senate, after defending seats in Arizona and Nevada.

Jeff Bezos commits to giving away most of his billions. The Amazon founder told CNN that he would donate the majority of his $124 billion fortune during his lifetime, including to groups focused on climate change. Earlier, Bezos announced a $100 million grant to the singer Dolly Parton to donate to charities of her choice.

Disney will pause hiring and cut some jobs. The entertainment giant’s C.E.O., Bob Chapek, told executives that the company was looking to cut costs. Chapek’s announcement came after Disney announced a surge in losses at Disney+.

CZ wants to be a white knight, this time

As the crypto world reels from the collapse of FTX — and investors fear for other companies that might in turn implode — Changpeng Zhao, the founder of the giant exchange Binance, said he wants to essentially become the industry’s lender of last resort. (That comes after he agreed to, and then walked away from, a rescue of FTX last week.)

Zhao proposed “an industry recovery fund,” to help support otherwise strong companies facing runs on their assets, “to reduce further cascading negative effects of FTX.” And at the B20 business conference in Bali, Zhao — widely known in crypto circles as CZ — called for clearer and more sophisticated regulations.

But CZ also took a veiled shot at the FTX founder Sam Bankman-Fried, warning that the law is no help to investors “if a guy is very good at lying” and at “just pretending to be what he’s not.”

CZ’s comments come as the fallout from FTX grows. Speculation arose this weekend that Crypto.com, which is best known for running Super Bowl commercials starring Matt Damon, had lost millions in FTX. Kris Marszalek, Crypto.com’s C.E.O., tweeted that customer funds are safe, but not before the firm saw a brief spike in withdrawals. And Crypto.com’s native token, Cronos, lost nearly a quarter of its value on Sunday. Elsewhere, Pantera Capital and Galois became the latest hedge funds to announce losses tied to FTX, $130 million and $40 million, respectively.

Meanwhile, FTX’s bankruptcy is chaotic. Police in the Bahamas questioned Bankman-Fried over the firm’s collapse, amid a criminal investigation. And a mysterious potential hack siphoned $515 million from FTX and risked triggering widespread data leak.

FTX’s Chapter 11 filing, which said the firm had up to $50 billion in liabilities, lists 134 entities from across the globe, from an Australian metals mining company to the Gibraltar-based crypto exchange Zubr. But there are no answers yet for how Bankman-Fried lost so much — or how FTX could have hugely overinflated values for its crypto assets.

Elon Musk has another busy weekend

“I have too much work on my plate, that’s for sure,” Elon Musk told a business conference on the sidelines of the G20 summit in Indonesia, asserting that he’s working “the absolute most that I can work — morning to night, seven days a week.” The Tesla-Twitter-SpaceX boss certainly kept busy over the weekend, including reportedly laying off nearly all of the social media company’s contract employees.

And yet the billionaire also found time for a bit of trolling, taking aim at the failed crypto entrepreneur Sam Bankman-Fried, Twitter’s free staff lunches, and a powerful Democrat who chairs the Senate subcommittee on consumer protection, product safety, and data security — matters that touch on Twitter and Tesla.

That senator would be Ed Markey of Massachusetts, who questioned Musk after last week’s rash of impersonator Twitter accounts, including a Washington Post reporter who was able to impersonate Markey. Musk said it could be because Markey’s actual account sounded like a “parody” — to which the senator shot back that Twitter is subject to an F.T.C. consent decree and that auto safety regulators are examining Tesla over fatal incidents. “Fix your companies,” Markey tweeted, “or Congress will.”

(It’s worth noting that Twitter brought back gray “official” badges for prominent accounts, after pausing the Twitter Blue subscription service that spurred the widespread creation of impostor verified accounts.)

What’s Musk’s game plan? It’s one thing to troll a former C.E.O., and another to repeatedly antagonize a senator who can investigate one’s companies, including a business that is a big government contractor. Maybe Musk has some grand plan — get pushed out of Twitter and become a conservative political martyr, or perhaps some complex debt play — or he may just be shooting from the hip.

More Musk news:

The week ahead

The COP27 climate conference wraps up this week, and the G20 summit gets underway in Bali. Investors, meanwhile, will be following the quarterly results of big retailers for signs of the health of the American consumer.

Tuesday: Walmart and Home Depot kick off a week of retail earnings. Also: Krispy Kreme.

Wednesday: The Commerce Department reports U.S. retail sales for October. Earnings: Target, Lowe’s and Nvidia.

Thursday: Jeremy Hunt, the British finance minister, is expected to outline Britain’s new budget, which may involve a plan to raise taxes. Earnings: Alibaba, Macy’s and Gap.

Friday: Elizabeth Holmes, the founder of Theranos, is scheduled to be sentenced after being convicted in January of defrauding investors.