FTX--A Classic American Scam, By J.L. Reiter
According to the “nation’s report card,” only 15% of 8th graders are proficient in American history. That makes it ever more likely that, in the epigram of philosopher George Santayana, they will be “condemned to repeat” the past, and keep falling for money scams. As we watch the meltdown of FTX, the latest speculative Icarus to fall from the sky, here’s a little historical context and warning from a former 8th grade history teacher.
In the Roaring 1920s, Charles Ponzi promised investors high profits based on his investment brilliance, but all he ever produced was his next investor’s money. Ponzi schemes work until enough people ask for their money back at once, the fraudster can’t pay them, and the scam collapses. Crypto currency goes one better: you exchange government-backed money for a bunch of numbers, the value of which is determined only by someone else’s willingness to buy it. It’s as safe as a bored ape.
Here are some warning signs of shaky ventures.
First, beware anyone who wants to “make a difference.” Elizabeth Holmes told Forbes back in 2015 that she created her miraculous new lab tests “because we’re trying to make a difference.” She created Theranos and raked in a billion dollars from investors like Larry Ellison, Rupert Murdoch, and the Walmart heirs. The actual ‘difference’ with her lab tests was that they didn’t work. At her sentencing this week, Holmes is looking at a 15-year prison stretch and coughing up $800 million.
With his bird’s-nest hairstyle, sloth-induced man-boobs, teenage gamer wardrobe, and Andy Kaufman voice, FTX founder Sam Bankman-Fried is classic Gen Z. Like Holmes in her heyday, he’s barely 30, has been hailed as a genius by elites, and was all over the business magazines and smart-people seminars. Sam also wanted to make a difference, and boy did he like to talk about it - just watch this cringe-inducing YouTube hagiography. He spouted woke nonsense while paying employees with his own made-up currency, FTT, and apparently using his exchange, FTX, to bankroll his hedge fund, Alameda Research, which was run by his 28-year-old girlfriend. One recipient of his money, a Stanford University official, called Sam “passionate about using his money to make a difference.” The next time someone says this, be careful to guard your wallet.
Second, remember the mafia rule: don’t shit where you eat. Any financial institution that attracts preponderate investment from a restricted population should raise suspicion. Bernie Madoff cultivated a reputation as a private financial guru with secret methods of making money. Incredibly, many of his clients were banks and foundations, who failed to ask where the consistently high returns were coming from. But most of Madoff’s individual marks were Jewish, like him. He didn’t advertise, but prospective clients heard about his magic through the grapevine and came to him. Madoff’s exclusivity and was the draw, and he milked it via his ethnic network.
The Bank of Credit and Commerce International (BCCI), founded by a Pakistani and based in Luxembourg, also played on cultural ties to defraud various creditors and over a million mostly developing world depositors. Thousands of British residents of South Asian origin were attracted by BCCI’s interest rate on deposits, which was above what competitors like Barclays and Lloyds could offer. (Note to anyone under 30: in the past, banks actually paid depositors interest to hold their money). How did BCCI manage this extra vigorish on deposits? Easy – they didn’t. BCCI “made phony loans, concealed deposits, hid huge losses, and was the bank for a host of shady customers ranging from terrorists and spies to drug runners and dictators” according to the Washington Post. As they were not regulated and insured to protect depositors like regular British-based banks, thousands of investors lost their money.
Third, if it’s too good to be true, it’s probably bullshit-based. Madoff and BCCI paid out higher and more consistent returns than their competitors. Holmes lived a life of implausible luxury. FTX spewed cash like there was no tomorrow, paying $135 million for naming rights to a Miami arena, renting out apartments and cars for staff in the Bahamas, and blowing $100,000 a week on catering. In the mid-terms, Sam was the second-biggest campaign donor behind only George Soros, contributing $28 million to Democrats. Sam’s philanthropic cash fountain, including $70 million for pandemic prevention and other “effective altruism,” created a fog of charitable good will that no one was motivated to look behind.
In the musical Guys and Dolls, Sky Masterson recalls his dad telling him this:
“One of these days in your travels, a guy is going to show you a brand-new deck of cards on which the seal is not yet broken. Then this guy is going to offer to bet you that he can make the jack of spades jump out of this brand-new deck of cards and squirt cider in your ear. But, son, do not accept this bet, because as sure as you stand there, you're going to wind up with an ear full of cider.”
I can’t put it any better than that. Caveat emptor – buyer beware, as the Romans said more than two thousand years ago.