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ftx-exchange-sam bankman-fried

FTX Crypto Exchange Debacle Simply Explained

Sam Bankman-Fried (aka “SBF”) Fries Clients and Customers

FTX Crypto Exchange Bankruptcy Explained; Investors Loss Estimated at $2bil; Exchange Customers Loss Estimated at $4bil-$5bil (so far..)

Comparisons Made to Lehman Brothers Scandal; Sam Bankman-Fried Scheme More Similar to Jon Corzine Shenanigans when he ran MF Global into the ground.

FTX & Alameda Research Found Sam Bankman-Fried with Carlyle Group Co-Founder and Billionaire David Rubenstein

By now, the travails and debacle of FTX Cryptocurrency Exchange, established by MIT wunderkind and former Jane Street Capital trader Sam Bankman-Fried aka “SBF”, has sucked up more oxygen in the media landscape than 1000x the electricity needed to mine $5trillion worth of crypto / craptocurrency*.  

(* Editors note: MarketsMuse hereby petitions the financial industry, the media, and all others to now refer to “Crypto Industry” as “Crapto Industry”; and we have secured trademarks for the new phrase, as well as the trademark for “CraptoCoins”).

As of this writing, Google has counted more than 120 million search inquiries for the search term Sam Bankman-Fried and 6,500,000 search inquiries for “FTX”; the former far eclipsing the 30 million searches for “FM Global Crisis” and the 11 million queries for “Lehman Crisis”, the story that profiled Lehman Brothers collapse, the poster-child for the 2007-2008 global financial crisis. At this pace, “FTX” queries will dwarf the 220 million searches on Google re: “Global Financial Crisis 2008”.


But, as pictured below, this ain’t the first and it won’t be the last financial scandal. Not by a long shot. When considering this generation’s more recent protagonists, why would anyone be shocked??

According to the assortment of news reports, a cohort of 80+ institutional investors who manage respective pension fund and HNW client assets, along with a handful of individual celebrity investors (e.g. Meta’s Mark Zuckerberg, Millenium Management’s billionaire founder and chairman, Israel Englander, hedge fund legend Paul Tudor Jones, Shark Tank star, Kevin “Mr. Wonderful” O’Reilly, and football legend/investor Tom Brady), had deployed more than $2bil to either FTX entities, and/or SBF’s proprietary trading firm, Alameda Research, both enterprises entirely controlled by SBF.

Former Jane Street trader and FTX Founder Sam Bankman-Fried aka “SBF”

“FTX is the high-quality, global crypto exchange the world needs, and it has the potential to become the leading financial exchange for all types of assets. Sam is the perfect founder to build this business, and the team’s execution is extraordinary. We are honored to be their partners.” — Alfred Lin, partner at Sequoia Capital

So, MarketsMuse editors have attempted to consolidate the coverage and unpack the events that inspired the venture capital’s ‘smartest investors’ (including Altimeter Capital to BlackRock, Greylock, Insight Partners, Lightspeed Ventures, Ontario Teachers Pension Plan, Pantera Capital, Sequoia Capital, Softbank, Temasek Holdings, Dan Loeb’s Third Point Ventures, and Thoma Bravo to disregard any standard or semblance of due diligence before they parted with their client’s money.

“We have watched with excitement as Sam and the FTX team have successfully built the most cutting-edge, sophisticated cryptocurrency exchange in the world. While this has been an incredible accomplishment in itself, their commitment to making a positive impact on the world through their business is what sets the company apart. We are thrilled to partner with FTX on their next phase of growth as they create a new ecosystem for crypto.” — Orlando Bravo, founder and managing partner at Thoma Bravo

In the simplest terms, all of these investors deployed their clients’ money because they all determined (or were told) that SBF was a genius trader who earned $100mil for himself while working for HFT firm Jane Street, and then left to set up his own firm, where he made himself into a billionaire by buying and selling crapto currencies. Believing he could build a better mousetrap for people to trade crapto, he took some of his profits to build a “world-class crapto currency exchange.” That exchange, FTX, quickly attracted as many as one million retail customers, all of whom were convinced they could make fortunes via “yield farming” (a bizarre means by which investors attempt to earn Madoff-level interest on their money via purchasing and then lending out ‘coins’ to others), or buying and selling a broad assortment of ‘currencies’ that dominate the Crapto Industry. 

Keep in mind, that the many “industry experts”, outspoken advocates, and the several dozens of ‘asset managers’ overseeing billions of dollars of investors’ money, who “specialize in digital assets”, all these people buy and sell what most industry insiders acknowledge to be nothing more than air bubbles.

A Leading Crypto Trader

According to one such insider (who has held corporate communications roles for several firms in the crapto industry, and who asked to remain nameless, for obvious reasons), “80% of the firms in this business laugh behind the backs of their investors every day; they are getting outsized compensation to simply speculate in tens of dozens of different valueless ‘tokens’ that they [the asset managers] know to be no more akin to being currencies than farts are.”

Added the insider, “just like traditional hedge funds, they get paid hefty management fees, and a fat percentage of the ‘profits’, but unlike traditional hedge funds that invest across a spectrum of legitimate assets and legitimate, industry-regulated derivatives, they are buying and selling the farts in a completely unregulated environment, and when they lose, its no skin off their back. In the interim, they promote themselves (using their clients’ money) at lavish industry conferences and boondoggles, they host six-figure corporate offsites, they sponsor sports teams, all to the expense of investors who are told they can beat the returns of the best legitimate hedge funds in the world.”

Sam Bankman-Fried, aka “SBF”

What happened at FTX? It is pretty simple to understand for those who understand the regulated market structure.

The best analogy is that of commodity trading advisor MF Global, which was torched in 2011 by its CEO and former Goldman Sachs CEO Jon Corzine. The one-time US Senator and one-time New Jersey Governor stepped in to run one of the commodity trading industry’s oldest and largest brokerage firms (previously known as Man Financial), and soon thereafter, he was accused of using customers’ money to backstop highly-leveraged proprietary trades the firm made in emerging market debt and exotic fixed income products. When the leveraged trades went sour, the firm dipped into customer account balances (to the tune of $1bil) to meet margin calls from an assortment of counter-parties, and when rumors heightened as to the precarious nature of the firm’s proprietary trading activities, customers flocked en masse to get their funds out of the firm. But the funds were not in their accounts, as they had been pledged as collateral by the financial alchemists at MF Global.

Jon Corzine, MF Global Alchemist

To a great extent, the same thing happened to FTX and SBF. His proprietary trading firm, Alameda Research, was making outsized bets in crapto currencies, including buying his own firm’s private label crapto, “FTT”, which he used as ‘currency’ to purchase control of an assortment of competing firms, including a list of failing firms in the industry that went belly-up in the midst of this year’s ‘crypto winter’.

The best part? NO internal risk management, no internal compliance, no industry regulators to wander in and interrogate any risk management systems, no adults in the room, and no industry clearing organizations that have any rules or procedures to govern the extent of leverage trading firms can use.

This is exactly what the industry, including the biggest player and notorious money-laundering platform Binance has been working towards since Day `1. “We don’t believe in following the regulations of other people, we are independent, we know better!”

Worth mentioning, despite MF Global operating in a completely regulated industry (regulated by CFTC), Corzine, started as a bond trader before becoming CEO at Goldman Sachs. Per above, before MF Global, he was Governor of New Jersey and also U.S. Senator for New Jersey; despite the shenanigans that took place at MF Global, he was never criminally prosecuted. He did pay a $5mil fine and was banned from serving in a leadership role for any CFTC-regulated firm.

One interesting factoid, current SEC Commissioner Gary Gensler was the CFTC Commissioner who approved the final outcome for Corzine.

ftx-exchange-sam bankman-fried

So, what are the key takeaways?

  • A bunch of smart-ass institutional managers who were so enamored with the media reports about wunderkind day trader and trading exchange innovator, SBF, failed in just about every way to perform their fiduciary duties of the FTX exchange, or to question what the relationship was between FTX and SBF’s proprietary trading firm, Alameda Research. Thanks to this gross oversight, these genius investors managed to collectively lose $2bil of their investors’ money. Again, it’s not coming out of those managers’ personal pockets, as they continue to earn 2% fees for ‘managing’ their client’s assets. As a representative for Sequoia stated this past week when informing that firm’s investors they would be writing down $214mil, “We are in the business of taking risk; some investments will surprise to the upside, and some will surprise to the downside.”   Mea Culpa?
  • The Crapto Industry is as completely unregulated as it is completely ‘decentralized’. There is no regulation, and few in the industry want there to be any regulatory oversight, other than perhaps US-domiciled Coinbase and US-domiciled Kraken, another exchange operator.

Case in point, Binance, the world’s largest ‘crypto exchange’ which is operated by freshly-minted billionaire Changpeng Zhao, (another guy who likes to be called by his acronym,“CZ”…What is with these guys? They all emulate Saudi Princes?!) has no credible corporate domicile unless you want to believe that companies registered in the Cayman Islands offer safeguards for investors. The only place on the planet where it is registered with a regulatory agency is France. That’s right, there is no regulatory agency anywhere other than in France that can credibly pursue Binance in the event they are subjected to accusations of bad behavior. Beaucoup de chance!

  • Crapto Currencies are just like farts. The only intrinsic ‘value’ is the hope that some idiot will pay more than you just did. That’s only presuming that someone else likes the smell of your fart and would like to buy it from you and bottle it for safekeeping. Your digital wallets might as well be in the Metaverse, and we know how that’s working out for Zuck.   
  • JP Morgan CEO Jamie Dimon has been right all along about the nefarious nature of crypto and bitcoin. Yes, he has since allowed JP Morgan to let customers buy and sell this stuff despite his trepidations. He simply gave in to the underlings who said “the customer is always right and if they want a financial product, it’s our obligation to offer it to them!” Fidelity did the same, they opened the gates to their brokerage firm customers to trade crypto this year.
Has Jamie Hit the Bullseye?
  • Mike Novogratz, another Goldman Sachs aka Squid University alumni, and also a former bond trader, almost blew up Fortress Investment Group all by himself, yet the firm was sold and he turned a $10mil payout into becoming a crapto pioneer and he accumulated a nearly $2b nest egg (down from $8.5b) inside of four years. That aside, most within the industry view him as a renegade, if not a complete knucklehead. His financial services firm, Galaxy Digital, is publicly traded on the Toronto Stock Exchange (GLXY.CN) and “Novo” is a poster boy for the bitcoin and crapto currency industry. He also managed to get clipped for $80mil in the FTX meltdown. According to those who know him well, he is said to be “certifiable”.
Mike Novogratz, Genius
The Mooch, “I guess I was duped..”
  • Anthony Scaramucci, another graduate of Squid University, and a former Trump Whitehouse spokesperson (for all of 9 days), is yet another celebrity poster child for the crapto industry. He runs a “fund of funds” called “Skybridge”, which is dedicated to taking investor money and buying crapto currrency. During the 2022 crapto meltdown, he managed to squander away hundreds of millions of dollars given to him by investors. Our favorite quote from him (so far) is, “In the future, DOGE may become a competitive store of value. If Bitcoin is digital gold, then DOGE has a chance to become digital silver,” 

When acknowledging that his investment fund, Skybridge, was one of the many who invested in FTX, he said, “Gee, I guess I was duped.” Mea Culpa?

  • Instead of “Crypto Industry”, the active phrase is now Crapto Industry, until such time as investors demand regulations that match those inherent to the US financial market system. We admit that will be a stretch; too many legislators are influenced by big-buck lobbyists who will always be able to buy votes on behalf of their billionaire constituents and industry trade groups that make big bucks at the expense of unwitting, uninformed, or ‘easily-duped’ investors of all shapes and sizes.

Frmr CFTC & Current SEC CommishGary Gensler
  • Gary Gensler is so far over his skis when it comes to advancing important and timely initiatives that will protect investors, its almost indescribable. Let’s not forget that Gensler was the CFTC Commissioner who oversaw the MF Global investigation and the final outcome was a get-out-of-jail-free card for Jon Corzine.
  • Aside from the simple fact that it will take a squadron of lawyers to figure out whether or not the SEC even has jurisdiction over the FTX scandal and SBF, the SEC has long proven itself to be toothless, without qualified resources, and overwhelmed by a tsunami of issues, crimes, and broken policies. Fraudsters and bad actors have little to fear from the SEC, if only because when they do assert laws have been broken, they are obliged to turn over their conclusions to the U.S. Department of Justice, which is equally devoid of prosecutorial talent, and their prosecutors are notorious for limiting their pursuit of criminals to only the biggest headline-grabbing cases.

Case in Point:

seaquake.io crypto scam-andrew katz-matthew krueger-dylan-knight
Seaquake.io Scammers Andrew Katz (l), “CFO” Matthew Krueger (c) and CIO Dylan Knighthttps://www.marketsmuse.com/andrew-katz-seaquake-crypto-firm-still-scamming/

See Seaquake.io Scam website www.seaquake.io

When or if former Disney star Brock Pierce, yet another crapto currency billionaire, re-visits running for President, that’s when we all put our heads between our knees, grab our ankles, and contemplate moving to Kyiv.  

Finally, the explanation we offer regarding the FTX debacle is not intended to decry or debunk the blockchain industry, which is a completely different segment.

As best framed in a series of 2018 articles published at Prospectus.com, Its About Blockchain, blockheads, NOT Bitcoin” , blockchain and distributed ledger applications can offer meaningful utility to a range of enterprise solutions. The only ‘token’ component to these applications is the token (NOT COIN) is used to access applications. Those building enterprise applications rarely incorporate a component that places a value on the token, other than for its purpose of accessing software. Just like a subway token. That’s pretty simple.

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September Cycles & Stock Market Pundits

September (and October) are typically the most negative time periods for stock market investors, and to illustrate this seasonal pattern, this year is no different. And, stock market pundits are once again in the limelight.

First, if you are a CNBC enthusiast, stop reading here. Our MarketsMuse team has voted unanimously for you to cut the chord if your investment horizon is longer than 1-4 days. The stock market pundits on that program are, for the most part, day traders whose holding period on a particular trade is shorter than the days you would keep milk in your ice box.

(Editor Note: THEIR DEFINITION OF “INVESTMENT” IS BASED ON ANNUALIZED RETURNS; if they can make 1% -2% inside of two or three days, the odds are you won’t get the memo that they took their profits and ran! The odds are greater still that any of those folks who appear daily will admit that they took a loss two days after their ‘pick’ plummeted by more than 5%.)

Second, if you do follow financial news headlines, you might already appreciate that every major investment bank, whether it be JP Morgan, Goldman Sachs, Morgan Stanley or Bank of America, has its own pundits whose internal views are diametrically opposed to each other. Why would you be a “High Networth Client” of any of these firms, when they can’t even agree internally on how to advise you?! Good question.

In June of this year, and then again in July, JP Morgan’s 66- year old Chairman & CEO Jamie Dimon, who is no novice when it comes to financial market assessments, was vociferous in his view that equities markets were facing a pending hurricane. Yet the same day in June that Dimon became a front page ‘bomb thrower’, his very highly-paid Chief Market Strategist Marco Kolanovick advised JP Morgan clients to “buy the dip”, as the 46-year-old ‘genius’ predicted US stocks (as measured by S&P 500) “will likely rally and close the year unchanged”.

At Bank of America, Chairman and CEO Brian Moynihan (62 years old) has remained an ardent bull throughout the ups and bigger downs of 2022, while his Chief Market Strategist has been as grizzly as an angry bear since the beginning of the year. Goldman Sachs’s top guns have leaned toward the less-than-optimistic view for most of the year, following the lead of its Chairman David Solomon. Morgan Stanley CEO James Gorman has been been a bull for much of the year, and his Chief Market Strategist, Mike Wilson has been pounding the bear table, as he had been since early 2021.

All of this proves that broken clocks can be right at some point.

So, what is an investor (and or a CNBC ‘short-term trader’) to do, knowing that September-October time sell-offs are the best advertised “upcoming crisis events” since long before Millenials were even born?

MarketsMuse has been following an assortment of stock market pundits, ‘technicians’, and global macro experts for months. The stock market pundits have reliably proven to be wrong, simply because most of them are employed by asset managers and investment banks whose primary purpose of existence is to sell investment products to confused investors. The notion of advising clients to “stay in cash until there is more clarity” is the last thing they would advise, until after the stock market has rebounded 25% from its lowest point. And in bear markets, that is precisely the time to lighten up, not to enter.

The chartists have proven prescient (with bearish medium-to-long term views, and while various global macro gurus have been somewhat blind-sided thanks to “not anticipating extent of Russia-Ukraine fiasco to “discounting what the Fed meant and what they heard the Fed say”. The global macro pundits who take into technical analysis along with the assortment of pillars within the global macro playbook have, for the most part, been telling you to be wary of buying stocks since the Fed went into QT (Quantitative Tightening) mode.

Lesson to be learned: NEVER FIGHT THE FED; regardless of what Jim Cramer spews.

We can tell you that two of the more objective market experts that we’ve followed include Michael Kramer of Mott Capital and Neil Azous of Rareview Capital. Both of these 40-something students of financial markets have proven prescient throughout the year.

Kramer operates a relatively small hedge fund, yet is not beholden to bomb throwing and his humility factor is rare. While his equity-focused fund strategy is benchmarked to the S&P500 and that fund’s performance is still slightly negative on the year to date, his short-term trading calls have proven to be rock solid. Kramer is clearly a fan of all things technical, and his daily tweets and article posts on Seeking Alpha have made for great short and medium-term forecasts. Below are excerpts from charts that he has posted in recent weeks.

Rareview Capital’s Neil Azous layers his fundamental research (which incorporates rates, FX, energy, and geopolitical risk metrics) on top of technical charts. For example, in late April, after the S&P 500 had fallen from 4600 would to 4200, Azous sent a letter to a close-knit group of the world’s most sophisticated investors and warned of a fall down to 3600. Two weeks later, many (but not all) Wall Street analysts pivoted from bullish to bearish and bid on to Azous’s forecast. Azous then re-iterated his less than sanguine view in mid-May, suggesting S&P 500 (would likely go below 3400 before the worst was over).

Throughout the year, Bridgewater Capital’s Ray Dalio, viewed as one of a unique breed of global macro thought-leaders) has been an outspoken bear, even if it took him until recently to ballast his firm’s exposure to Chinese equities. While Wall Street stock market pundits have been pushing the buy the dip strategy, Dalio’s Bridgewater has reported 30% gains on investments. He’s still a bear; Dalio suspects the next 10 years will fall into the category of “another lost decade”.

From a historical perspective (yes, Matilda, history does it repeat itself!), and taking into account 2022 stock investors have suffered their worst start to a year since 1970, consider the following factoids that we sourced from across the ethernet:

  • According to APNews, bear markets since World War II have taken an average of 13 months to go from peak to trough, whereas the average time for the stock market to recover stands at 27 month
  • Forbes 08-24-22*  “In fact, the average length of a bear market for the S&P 500 is just 289 days. That’s not a typo. Just over 9 months and the average bear market is done. Finished. Not only that, but once the market turns around, the average bull market runs for 991 days or 2.7 years. Not a bad deal for investors. The bear market in the S&P 500 was confirmed on June 13th, 2022, but the market began its slide on January 3rd 2022. With this date as the start of the current official bear market, the average bear market of 289 days means that it would finish on the 19th of October 2022.
  • So there you go, the bear market will end, based on the historical average, in the Fall and the good times will be back by Christmas. * https://www.forbes.com/sites/qai/2022/08/24/the-average-bear-market-lasts-289-days-how-long-do-we-have-left/?sh=66f6e5245d5d
  • Raymond James’ historical performance of the S&P 500 Index throughout from `1926 through March 2017. The average Bear Market period lasted 1.4 years with an average cumulative loss of -41%.
  • Felix Richter / Statista.com June 2022  https://www.statista.com/chart/27616/length-and-depth-of-the-latest-s-p-500-bear-markets/bear Bear markets are not an everyday occurrence, thankfully, with the latest one being just the fourth in the 21st century. Looking at past bear markets all the way back to the 1970s indicates that things could very well get worse before they get better. In the previous seven bear markets, the S&P 500 dropped by an average of 38 percent before turning around and it often took years before the index had recovered all of its losses and returned to its previous peak.
  • Across the 10 bear markets since 1950, the longest was 929 days and the shortest was 33 days. Since 2000, there have been only three bear markets not including this one. One of those was history’s shortest; Bear markets, even the long ones, have always given way to bull markets
  • 1973-1974  48% decline, 69 months to break even..
  • 1980- 20 months; then 3 months to break even
  • 2008- 50% decline and two years to break even
  • S&P 500 bear markets since 1946 have taken an average of 389 calendar days to bottom, and then another two years to return to their prior high.
  • We are currently experiencing the 22nd bear market since 1929
  • The average loss of bear markets to reach the bottom before turning back up since 1929;  37%, Median 33.5%
  • The average length of a bear market is 344 days, median of 240 days (best case 2 years, outside 3 years)
  • 1990 bear market lasted 31 months
  • Nine of the 12 bear markets since 1948 have been accompanied by recessions, according to investment research firm CFRA
  • From peak Dec 1972, it took 8 years and 8 months  (to July 1980) for SP500 to achieve break even. Then it rallied 25% over the next 2 years, then fell 30% over the following two years into Aug 1983; not returning to a high point until January 1985
  • 2000-2007 was the lost decade.  Let’s not forget 2008-2013; prices peaked in late 2007, and did not achieve ‘break even’ until April 2013… Slightly higher (before adjusting for inflation) vs SP high of 2000.  So that’s actually a lost decade and ½.
  • According to investment analysis firm Seeking Alpha, the average duration of an S&P 500 bear market since the 1920s has been 289 days or about nine and half months. (The shortest, in March 2020, during the onset of the COVID-19 pandemic in the US, lasted just one month.) On average, the S&P 500 declined about 36% during those bear periods. 
  • But more recently, the 14 bear markets since World War II have averaged 359 days, or close to a year, according to Bespoke Investment Group.
  • Analyzing all the bear markets since World War II, Ben Carlson of Ritholtz Wealth Management found it took 12 months to go from “peak to trough,” or from the end of a period of growth to hitting rock bottom. That means the current bear market would bottom out at the beginning of 2023, a year after January’s peak.
  • Jan 2022, famed chartist Larry Williams predicted a series of declines and rallies, yet argued S&P500 would close the year higher. Yikes.
  • One of the shortest bear markets: Feb 2020 to Aug 2020, it took only 9 months to break even (more precisely, the shortest bear market in recent history Jan 2020 to Oct 2020 (pandemic era, the QE era with near-zero interest rates)
  • 2016 A recent study from Oxford University found that “returns on stocks with the most optimistic analyst long-term earnings growth forecasts are substantially lower than those for stocks with the most pessimistic forecasts.” In other words, your investment portfolio would be better off if you did the exact opposite of what most Wall Street analysts advise.

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