It is time we take seriously the inverse relationship between a real business and one talking all the time about how good it is.
It is time we take seriously the inverse relationship between a real business and one talking all the time about how good it is.
I t wouldn’t be fair to suggest that the spectacular implosion of FTX, the most prominent cryptocurrency-exchange platform in the world, has been ignored by the media. Despite the busy news cycle over the last couple of weeks, featuring no less than a midterm election, evidence of a long-awaited inflation reversal in the CPI data, a substantial stock-and-bond market rally, a meeting between President Biden and President Xi of China, and the start of the World Cup, the press has still heavily covered the remarkable and sudden bankruptcy of major crypto player FTX. Perhaps the riveting information about Tom Brady and his ex, Gisele Bündchen, being connected to FTX as influencers and investors, deserves tens of thousands of mentions. But the coverage, while understandably filled with the sensational, has missed many of the implications of this story for our national politics and capital markets. Additionally, lessons about “stakeholder” capitalism and the underlying truth about cronyism are not receiving their due attention. This is the biggest story in the world right now, for reasons entirely different from the headlines it is receiving.
First, the crypto story. Some have gone out of their way to argue that this is not a story about crypto, per se, but rather one bad actor who got carried away. And that would be fine if it were true. But, unfortunately for crypto investors, we see a bigger truth out of the actions of Sam Bankman-Fried. If, as is alleged, he blew up FTX by over-leveraging crypto investments and using customer digital assets as collateral for his own subsidiary’s leveraged buying, that explains both the collapse, and the violence of the rise in crypto values last year. In other words, underneath the hood of all this mess is a web of companies buying digital assets hand over fist with money that did not exist. The Ponzi characteristics of it all are undeniable, but they shed light not just on the nature of the bust but the nature of the boom as well. Of course, asset prices flew higher if tens of billions of dollars of buying was taking place in a leveraged mania upwards. The sheer lunacy of what transpired is reminiscent of the margin-buying of dotcom stocks over 20 years ago, except with a societal and cultural arrogance that trumps anything we have seen before. As the emperor now stands naked, crypto assets sit at a loss from their peak of -75 percent if they are lucky, and -99 percent if they are not, and the drop seems entirely symmetrical to the rise that preceded it — a wave of leveraged buying followed by a wave of leveraged selling. The mirage of it all is perhaps a bigger blow to the crypto industry than the alleged frauds now being uncovered in this FTX matter.
But the reality of cronyism is front and center in this saga as well. The effort Sam Bankman-Fried made to position himself as a high-status member of the “ruling class” is telling. FTX had all the right people in its corner to lobby for a framework that would leave it outside the normal regulatory oversight of broker-dealers dealing with margin requirements. The removal of intermediaries was heralded as an advance for U.S. investors, with promises of unique opportunity and innovation for the marketplace at-large. How does one go about convincing a regulator like the CFTC (Commodity Futures Trading Commission) that rules applied to everyone else should not have to apply to one particular entity of a certain power and prestige? Well, by leveraging power and prestige, of course. FTX lobbied for (and received) support for their framework from the who’s who of venture-capital firms (Sequoia Capital), conglomerates (SoftBank), and strategic partners (Fidelity, Virtu). But it also found high-pressure support from think tanks (Heritage Foundation) and law schools (William & Mary), and academic institutions (Georgetown, University of Chicago). And did I mention that they paid for some of this support (i.e., hard dollar payments to law-school professors to tell the regulators that this plan sounded great: What could go wrong?).
So I ask you — who among us doesn’t have the leading VC firms, market makers, prestigious university faculty, and scholars of think tanks in our rolodex, ready to tell government regulators what we want them to hear? The agenda for FTX and SBF was never to innovate in financial markets; it was to obtain favor with the powerful and prestigious so that they wouldn’t have to actually innovate. This is rent-seeking at its finest, and the only difference between this and the thousands of crony endeavors that take place every year is that this one had a special audacity in its size and scope. FTX was really good at it.
The merits of the argument (or lack thereof) that investors would be just fine with no intermediary or posted margin requirements, and that custodial requirements and capital requirements common to financial procedures and institutions were unnecessary in the new and enlightened “digital asset” space, are now getting a public hearing, and it is not going well. Now, I should be careful to reiterate that thus far the victims are the risk-takers — that contagion has been essentially non-existent (as it should be) — and that anyone is free to jump back into this world once they feel the water has warmed up. But the irony has got to be thick that the fundamental tenet of the crypto culture has been an argument against the integrity and durability of our traditional financial system and networks. Find any accusation you want against fiat money, the Fed, and fractional-reserve banking, and tell me how these people were not doing their best impression of what they accused others of. The hypocrisy and delusion is overwhelming.
Perhaps the most significant aspect of what one can learn from the FTX implosion is the never-ending red flags of a business wrapped in contemporary do-goodism. Much like the Pharisees in the gospel accounts, it would appear that the easiest way to detect evil these days is from proclamations of goodness. The brand of “effective altruism” that the FTX camp declared — the latest in a series of “save the world” mantras from cult-leader type personas at the helm of a massive business implosion — is becoming all too predictable. WeWork, Theranos, and FTX are not merely headline names surrounded by business failure and corporate absurdity, but were, rather, marinated head-to-toe in a new-age self-righteousness that would make TV evangelist telethons green with envy (in fairness to WeWork and Theranos, it appears the money set on fire by FTX is going to trump all of these other high-profile dumpster fires by an order of magnitude).
Is the connection between “effective altruism” and “fraud” an inherent one? Does everyone who talks about “saving the planet” have to be a fraudster, charlatan, grifter, or psychopath? Of course not. There surely must be some high-profile do-gooder out there who is sincere and capable and who has demonstrated a perpetuity of success and results. But I can’t think of any. Those who want to change the world do not have to build a brand around changing the world, because at its core, altruism is a selfless exercise. The most non-altruistic thing in New Testament teaching is the need to wear a sign saying how altruistic you are. In the 1990s, the sign of a dotcom fraud was the size of the party it threw. Today, the sign of a massive fraud is the extent to which you market your virtue in the public square, and the size of the party you throw. Nothing says “effective altruism” and “change the world” like fleets of Lamborghinis, south-Florida ragers, celebrity endorsements, and a never-ending series of party sponsorships. FTX was the brand embodiment of “cool” and “charitable” — the underlying aspiration of an entire generation.
This harmonization is not merely dangerous because it seems to continue leading to fraud and corporate incompetence; it is wrong on the merits. Young, talented innovators have every right to “brand” themselves as cool or to prefer a different aesthetic than their parents or grandparents. Far be it from me to believe that only the suit-and-tie wrapping of Wall Street can generate profits (even if that is what I pretty much believe). Preferences are not precepts. That said, there is an immaturity (at best) and a character flaw (at worst) that puts one’s hipness and coolness on board as a value proposition, and allows for the piety of their image and the platitudes of their virtue-signaling to be used to develop trust. Effective entrepreneurs and lasting corporate contributors build sustainable businesses over time, overcome obstacles, solve challenges, and learn from mistakes. They may be brash or confident, but they do not rely on a façade of man-childishness that is baptized in do-goodism to serve as the basis for their public reputation. The media are a cheap date, and the fact that one need not bring much more these days to secure a prime spot in their coverage and adoration than a grandiose statement about the environment and an outfit that looks like one just woke up from a three-day bender is unacceptable.
FTX and Sam Bankman-Fried have not hurt the global economy or anyone in the global economy who did not speculate on the shiny object of crypto. And much like the dotcom moment of the year 2000, this FTX implosion will prove an informative moment for many young, chastened investors. But the broader lesson for all of us need not be connected to the losses of a leveraged crypto debacle, per se, but rather a reinforcement of how dangerous the game is that plenty are playing outside offshore domiciles, crypto vernaculars, and digital opacities. Cronyism seeks to cover business inferiority with institutional favoritism. The smart ones layer on top of their crony malfeasance a healthy dose of ESG altruism.
It is time we take seriously the inverse relationship between a real business and one talking all the time about how good it is. It is time we get back to the business of business.