The Credit Strategist Blog
Bubbles are by definition extreme events. This week we saw some of the most dramatic extreme events in years.
The first example is the inexcusable but foreseeable collapse of Sam Bankman-Fried’s FTX crypto exchange and affiliated trading firm, Alameda Research. It now turns out that FTX loaned billions of dollars of customer assets to fund risky bets at Alameda, a reckless practice guaranteed to cause the implosion of both businesses. FTX used money that belonged to customers - not to itself or to Mr. Bankman-Fried - to make high risk bets on other cryptocurrencies, a practice so unspeakably irresponsible that it could only be undertaken by an unregulated business run by a 30-year old with virtually no business experience and no adult supervision.
On Wednesday, Mr. Bankman-Fried told investors he needed $8 billion of emergency funding. The odds of that financing materializing are zero. As Hannibal Lecter told Clarice Starling, Mr. Bankman-Fried has no more vacations to sell. He has no real collateral to offer. His FTX tokens are worthless. They were always worthless because he was running a Ponzi scheme. Losses could exceed $10 billion when you add FTX and Alameda together. Only the bankruptcy lawyers will profit from this debacle.
The question is how some of the world’s savviest investors went along for the ride. We know the answer with respect to the usual suspects like Softbank and Tiger Global who threw money at anything tech-related with a pulse without performing more than five minutes of due diligence (about enough time to page through the PowerPoint presentation and email back their multimillion commitments). Those two should never be mentioned in the same sentence with the word “savvy” again (but there are many other words to describe them that my late beloved mother will not let me use).