The risky business of Sam Bankman-Fried
Summary
The FTX founder’s approach to risk fueled his rise to the top of the crypto world. Then came the catastrophic fall
Nobody as rich as Sam Bankman-Fried ever spent so much time speaking to podcasters and explaining how they got rich. Weeks before the crackup of his cryptocurrency exchange and spectacular collapse of his wealth, the chief executive of FTX gave an interview that began with an illuminating question: What was the first thing his company did better than any other?
“Manage risk," he said.
Those two words read very differently after last week’s swift unraveling of FTX, a crypto giant valued at $32 billion before it vaporized into bankruptcy.
There is much that remains unknown about the meltdown, and one big question for the investigators figuring out what happened is whether it was folly or fraud—a cautionary tale of excess risk or an empire built on a house of cards. After resigning and tweeting that he was sorry, Mr. Bankman-Fried has gone mostly silent.
But his own words, long before they were so closely scrutinized, help explain how Mr. Bankman-Fried’s approach to risk fueled success and triggered a catastrophic failure.
Sam Bankman-Fried was in the business of risk. His real-time, round-the-clock engine for monitoring risk powered his exchange. His personal appetite for risk drew him to the volatility of cryptocurrencies and then animated his trading firm, which took off when he spotted a glorious inefficiency in global bitcoin prices and exploited it for millions of dollars. And his perspective on existential risk is what he said inspired him to earn as much as he could for the express purpose of giving that money away.
The unkempt millennial in a T-shirt, shorts and ratty sneakers presented himself as a benevolent crypto agnostic so earnest that people actually believed Mr. Bankman-Fried when he said he was pursuing billions of dollars only because he was trying to save the world.
What they didn’t know was that his exchange was lending massive sums of customer money to fund aggressive bets by his trading firm, Alameda Research. The undisclosed loans propping up Alameda’s losses amounted to $10 billion, more than half of FTX’s assets, according to Wall Street Journal reporting. Mr. Bankman-Fried’s companies imploded together with disastrous consequences for everyone involved.
Mr. Bankman-Fried didn’t respond to a request for comment.
He grew up at a time when industries were being invaded by quants who knew that assessing value meant knowing how to calculate risk—even in sports. Instead of spending on a baseball player because of the way his swing looked, for example, teams crunched numbers to make probabilistic decisions based on data and win more games with less money. Mr. Bankman-Fried, 30 years old, once dreamed of working in baseball, but he was born too late for the statistical revolution in sports. That market had been corrected by the time he was out of school.
He would be precisely the right age to take advantage of another opportunity—and this one wouldn’t pay in baseball wins.
The uncertainty of crypto proved irresistible to young people early in their careers who were hungry for risk and realized Wall Street and Silicon Valley no longer offered the greatest rewards. After graduating from MIT and getting his education in quant trading at Jane Street, Mr. Bankman-Fried has said he weighed several career paths, including journalism and politics. But he felt a gravitational pull to the land of potentially mispriced assets. “The numbers just seemed really big," he said.
The gold rush was on, and his formative moment in crypto was arbitraging the difference in prices between the U.S. and Japan, which was free money for traders who could find ways to capitalize on the spread. Mr. Bankman-Fried says he made a fortune in a few weeks on a trade without much risk.
But he always insisted that was only a means to his end. In college, Mr. Bankman-Fried learned about the concept of “earning to give" from Will MacAskill, a philosopher and evangelist for the movement of effective altruism, or using analytical reasoning to maximize good. Mr. Bankman-Fried has said in previous interviews that he bought Mr. MacAskill’s pitch that he could do more good as a donor than, say, a doctor. So he says he set about making money to donate.
That decision coincided with one of the fastest creations of wealth in history. A decade later, Mr. MacAskill texted the richest guy he knew, and he told him about Mr. Bankman-Fried.
“Does he have huge amounts of money?" Elon Musk wrote back, according to court documents released in litigation over his deal to buy Twitter.
“Depends on how you define ‘huge’!" Mr. MacAskill responded.
Mr. Bankman-Fried happened to be worth $25 billion at the time, according to the Bloomberg Billionaires Index. He credited those huge amounts of money to a high tolerance for risk.
“If your goal is to maximize the amount of impact that you have on the world, that has pretty strong implications for what you end up doing," he said this year. “You should be pretty aggressive with what you’re doing and really trying to hit home runs rather than just have some impact—because the upside is just absolutely enormous."
As it turned out, so was the downside.
Mr. Bankman-Fried’s business came undone gradually, then suddenly. After a report from the crypto-news site CoinDesk revealed the extent to which Alameda depended on a token created by FTX—a colossal risk for both companies—the founder of Binance, the biggest crypto exchange, announced that he was unloading more than $500 million worth of the token. The tweet from Changpeng Zhao started a run on FTX, as customers who kept their money on his exchange worried their accounts weren’t safe. Two days later, Binance struck a deal to buy FTX, its rival. The next day, Mr. Zhao backed out. By the end of the week, Mr. Bankman-Fried’s companies had crumbled.
There was so much destruction in so little time it was easy to forget why Mr. Zhao said he was reducing Binance’s exposure to FTX.
“Risk management," he wrote.
In another series of tweets last week, Mr. MacAskill accused Mr. Bankman-Fried of using effective altruism to launder deception. “Yes, we want to make the world better, and yes, we should be ambitious in the pursuit of that," he wrote. “But that in no way justifies fraud."
Mr. Bankman-Fried’s view of risk was a risk of its own. It was a stunning demise for someone who cozied up to regulators and reassured them about the risks of decentralized finance. In fact, during his first congressional hearing last year, Mr. Bankman-Fried bragged about FTX’s risk prevention, which now sounds like Enron gloating about transparency.
He even drew a contrast between his exchange and the banks that were fried in the 2008 crisis.
“No one knew how much risk was in that system," Mr. Bankman-Fried told lawmakers, “until it all fell apart."
