At the beginning of the year, I wrote a piece for Acton on Elizabeth Holmes, the con artist behind Theranos, the fake tech startup promising a revolution in blood tests and, thus, the beginning of a solution to the problem of healthcare costs. Come the year’s end, we have, apparently, another con man vaguely associated with technology but operating on a much larger scale and a shorter timeline: Mr. Samuel Bankman-Fried, who may yet prove to be the epitome of corruption in the cryptocurrency investment field.
A young man of 30, Mr. Samuel Bankman-Fried got close to joining the global elite. In politics, he donated more than $5 million to Mr. Biden’s 2020 campaign through two Super PACs, the second largest donor to that campaign. In the 2022 congressional election, he donated more than $40 million to Democrats, which also ranked him near the top.
In terms of global “governance,” a word people with elite aspirations prefer to “government,” Mr. Bankman-Fried made his mark this spring by organizing a cryptocurrency conference together with former Trump presidential director of communications Anthony Scaramucci. The guest list included former British PM Tony Blair and former U.S. president Bill Clinton, along with various incredibly wealthy celebrities. These included quarterback Tom Brady and his then-wife, model Gisele Bündchen, who were also investors in and promoters of FTX, the cryptocurrency exchange Bankman-Fried founded and ran. Other deals intended to make FTX a trusted name through celebrity included sponsorships for chess tournaments, Formula 1 racing teams, MLB sponsorships, and even the naming rights to the Miami Heat arena. Even Seinfeld co-creator Larry David was in on the promotion.
As “brand ambassadors,” they are all now being sued for, according to Variety, “deceptively encouraging consumers to invest in the company.”
Mr. Bankman-Fried has resigned from FTX, which declared bankruptcy on November 11 after a run on its FTT coin led to a liquidity crisis that revealed other underlying weaknesses and suggested some illegalities. FTX was founded in May 2019 in the Bahamas to avoid U.S. restrictions on certain financial activities. It was raising money at a $32 billion valuation earlier this year; its American counterpart, FTX.US, was raising money at an $8 billion valuation. Mr. Bankman-Fried’s estimated worth was $26 billion (Forbes estimate); it has since plummeted to about nothing. FTX was tied to Alameda Research, a hedge fund Mr. Bankman-Fried also founded and that was run by, apparently, a paramour, and was the vehicle for the actions that led to the bankruptcy and is itself now in bankruptcy. CNBC has a provisional explanation for all this. One wonders what his political connections will do for him now that he’s being investigated by the Security and Exchange Commission, the Commodities Future Trading Commission, and the Department of Justice for various assorted financial crimes. The SEC is late to such an investigation, in a way it hasn’t been to other crypto businesses; in fact, last year Mr. Bankman-Fried testified before Congress about the kind of regulations needed in his business and the good it does.
In the field of Progressive moralism, Mr. Bankman-Fried distinguished himself as a billionaire “effective altruist,” an aspiration that combines two forms of pretense previously not considered compatible among our celebrities: the claim of being more rational and hence more effective at being moral than decent people, and the claim of being more moral than other rich people. The price tag is merely a promise to eventually give up most of one’s wealth. This is the glamorous part of his complicated attempt to become a political and moral celebrity, so that his business practices would become unquestionable and he could keep getting investors to buy into a business that may very well prove to have been nothing more than a Ponzi scheme. His success was such that even as his questionable business practices are coming to light, the New York Times is still giving him a remarkably friendly hearing, shielding him from serious criticism and from the charge of having deceived their very own readers.
I have sketched the veil of celebrity covering Mr. Bankman-Fried, and I am confident someone will do the same for the accounting and financial machinations that allowed his scheme to become as successful as it was. We will eventually learn how much investor money was wasted and how many users were despoiled. Inevitably, these stories become documentaries and TV series and bestsellers, by which point it will become obvious why someone like Mr. Bankman-Fried could become as successful as he has become. Our media and some part of our society, at elite levels as well as among ordinary people, are obsessed with narratives and care less and less for even the pretense of justice or reasonableness. People who believe that narratives can change the world are not infrequently mad, I would like to suggest, and vulnerable to the madness of others, too.
Unlike Ms. Holmes, who has already gotten her entertainment afterlife, Mr. Bankman-Fried was successful in Silicon Valley without having any previous connection to it. FTX was backed by Sequoia Capital, the most storied venture capital firm, which has just announced to its limited partners that it expects a loss of more than $200 million in this debacle. Most of the investors seem to have been very large businesses and fairly competent about their investments: BlackRock, SoftBank, Tiger Global Management, the Ontario Teachers’ Pension Plan. Large losses are not a major problem for them. But on the other hand, they seem mad to have invested, whereas the celebrities seem merely foolish—they have no knowledge of investment. Maybe the funniest thing about the FTX disaster is that it took in the professionals, whereas we are usually worried about ordinary people, typically ignorant of finance, losing money in cryptocurrency investments. Part of the dark humor is that all this investment came in 2022, when cryptocurrencies lost most of their value. These are signs that the respectable financial institutions are neither immune to the charms of new financial schemes nor better able to judge events than ordinary people. The Bankman-Frieds of the world offer a delusion their victims welcome, and I believe the uncertainty of the times encourages bad decisions even more than the need to keep up with new investment enterprises.
Now compare the prestige of those investors with the explanations Mr. Bankman-Fried made for a business like FTX. Here’s a brief clip in which he lays out this madness of believing in narratives, what you might call the social construction theory of value: If people keep putting their money into something they believe is a good investment, it becomes a good investment and it does not need an underlying product to justify their belief. This is not a matter of economics but rather of a perverse form of sociology based on the opinion that reality, or the most plausible opinions about reality, does not guide people’s investments, but instead their investments create reality. So it is not like “If you build it, they will come,” since building is not necessary; it is more like “Clap for Tinkerbell!”
Amusingly, Mr. Bankman-Fried is a child of the new academia and has used his connections for his ill-gotten success; one wonders whether these elites will be stained by his scandal. His parents are both professors of law at Stanford Law School; the mother is something of an ethicist and Democrat activist, the father was involved in raising money for FTX. Mr. Bankman-Fried attended MIT, where he studied physics and mathematics before going into trading and quickly turning around to cryptocurrencies. His academic as much as his business background suggests a certain weakness for con men in our elite institutions, as was the case with Holmes, too. His effective altruism (a recent idea straight out of Oxford) is of a piece with the rest of his “narrative,” since it encourages moralism to replace good judgment.
The fall of Mr. Bankman-Fried was brought about by a businessman of apparently much greater seriousness, Changpeng Zhao, who founded and runs the largest cryptocurrency exchange, Binance. He started the run on FTX, offered to buy it up, then dropped the deal suggesting that FTX’s problems were not related to liquidity but underlying irregularities. This may seem a shocking form of doing the work of regulation, not to say justice, but it’s remarkable primarily for its contrarian character. No authority cared to investigate Mr. Bankman-Fried until now, nor did any of his investors understand what he was doing or even suspect they might be systematically lied to. The free market and the mechanisms of competition proved much more successful than the federal government.