The Greek tragedy unfolding in the financial press over the past week is the story of Sam Bankman Fried, the would-be cryptocurrency magnate and political kingmaker whose multi-billion dollar empire sank like the Titanic after its encounter with the iceberg.

Bloomberg put it this way: “Bankman-Fried’s assets plummeted from $16 billion to zero in days.”

The story under that headline stated that the entire Bankman Fried fortune had been “wiped out” in “one of the greatest destruction of wealth in history.”

However, something does not count here. It’s $16 billion in assets that simply can’t be gone in a matter of days — not if they were real in the first place.

Bankman-Fried either had $16 billion in assets at the start of last week and still owns a large share of them today, or zero now and close to zero then. Both things cannot be true.

Based on reports that Bankman-Fried and his cryptocurrency exchange, FTX, are now under investigation by federal prosecutors and securities regulators, I’m voting that $16 billion was myth and zero is the right number.

This is not the narrative being sold wholesale by the financial press and investment experts. Their story is that Bankman-Fried had it all, and then lost it all. He played in this novel himself, trans Tweets series Last week he apologized for, among other things, overestimating the amount available to him to pay clients who want to withdraw their money from FTX.

“*I*, in the end, should have been on top of it all,” he wrote on Twitter. “Obviously I failed at that. I’m sorry.”

In other words, things were running smoothly, until FTX hit the hole. Bankman-Fried says he’s as surprised as you are.

really?

What is known so far, according to FTX Balance Sheet Reported by the Financial Times, is that the company recently had about $900 million in liquid assets against nearly $9 billion in liabilities. This means that FTX, the core of the alleged Bankman-Fried fortune, was up to $8 billion in the hole.

Not all of these liquid assets are valuable as far as the balance sheet states. He mentions about $472 million in the stock of brokerage firm Robinhood. But Robinhood shares are down in price about 20% over the past 11 days, so that number could be optimistic about $100 million.

When initial reports of FTX’s flipped capital structure leaked recently, clients initiated an exchange trade, requesting withdrawals of billions of dollars in deposits that FTX was unable to provide. FTX has now filed for bankruptcy, and Bankman-Fried has stepped down as CEO.

Reports also surfaced that FTX lent client assets to its related trading arm, Alameda Research, which it used to fund risky investments of its own. If FTX is regulated by the same rules that traditional stock and bond brokerages must follow, client assets must be kept separate from the brokerage assets.

Among the assets the balance sheet describes as “illiquid” or “less liquid” — that is, possibly not available to cover liabilities — are cryptocurrencies allegedly worth billions of dollars, including $554 million in FTT, a crypto token created by FTX itself.

Another cryptocurrency, Serum, was listed with a value of $2.2 billion as of Thursday. Last week, the highly volatile cryptocurrency was valued at $5.4 billion, according to the balance sheet. Serum, by the way, is another crypto token created by FTX, so even its $2.2 billion value on the balance sheet is to the fullest Doubtful.

Much of this was unknown to the financial community, because FTX made no public disclosures. What was known, however, was that Bankman-Fried’s alleged wealth was derived from cryptocurrencies, which were notorious for their volatile prices. So why did he get a fortune worth billions of dollars?

One reason is the tendency of the financial press and other investment followers to accept their subjects’ claims to wealth at face value. Forbes has fallen into the same trap as Bloomberg, ranking Bankman-Fried 41st in its 2022 list The 400 richest Americans, with an estimated net worth of $17.2 billion as of September 27. Both estimates were based on a speculative valuation of FTX at the time of its $420 million investment round in January.

But that’s a fine stalk on which to base multi-billion dollar estimates.

One would have hoped that the financial press had learned a lesson from its previous foray into naming a new billionaire. Such was the case of Elizabeth Holmes, creator of The scam known as Theranos.

Intrepid Holmes deceived illustrious old men – Among them are George Shultz and Henry Kissinger — to join the board of directors of her company, which claims to have created a new blood-testing method that will “disrupt” the old, flawed healthcare business. In reality, Theranos didn’t have a winning technology, just an engaging story.

Among those hosted were the staff at Forbes, who placed Holmes first on its list of America’s richest self-made women in 2015, giving her a net worth of $4.5 billion. The following year, after the Theranos scam was exposed, Forbes revisited W She put her fortune at $0.

It should be clear that Holmes did not have $4.5 billion. The magazine’s estimate was based on its 50% ownership of Theranos, which has raised $400 million from venture firms taking 4.4% of the company with this investment. But Theranos didn’t have $9 billion; I only invested 400 million dollars.

A small number becomes a big number through the magic of venture capital math: If a 4.4% stake in a company is worth $400 million, then 100% of it should be worth about $9 billion.

The flaw in this logic should have been obvious: If the next round of investors asked for 50% of the company for $400 million, the venture would suddenly be worth only $800 million. And what if there are no new investors at all?

The basic problem has been that private equity valuations are inherently suspect. Shares in private companies cannot be sold in the public market, which gives public investors an opportunity to acquire shares at an agreed price; Instead, private companies are only worth as much as their new investors think they are, and their opinion can change in the blink of an eye.

The same is true of the cryptocurrency space. Like private companies, the value of cryptocurrencies can be placed anywhere. They do not produce an income like bonds, and their prices cannot be linked to liquid markets such as those in which public company securities are traded. No one has ever explained what cryptocurrencies are beneficial to, other than paying scammers who hold databases or computer systems hostage in ransomware attacks.

like I recently reportedEven Bankman-Fried admitted that claims about cryptocurrency’s usefulness involve “a lot of hand-waving”.

At some point, Bankman-Fried must have had real money. He has contributed nearly $40 million to the Democratic Party’s campaigns in the current election cycle.

FTX paid $135 million for the naming rights to the NBA Miami Heat Arena (Local Miami authorities say they have returned the naming rights to the FTX Arena up for auction), and has spent hefty sums to produce and air a TV commercial featuring Larry David during this year’s Super Bowl.

Add up all known expenses, though, and you don’t come close to $16 billion.

Bankman Fried’s rise and fall in public esteem is linked to our culture’s habit of compiling lists that rank anything and everything — the best electric toothbrushes, the highest-yielding savings accounts, and the richest people.

The reasons for many of these rankings are always murky or at least subjective, even when they seem to arise from hard numbers, as in the wealth lists of Forbes and Bloomberg — some of those numbers are shrinking, shrinking.

It’s hard to fathom what turned Bankman-Fried into the darling of the chatty classes in finance, journalism, and politics. For some, his lineage might be — he’s the son of two law professors and holds a degree from MIT.

For others, it might be his commitment to “effective altruism,” a vague philanthropic principle that seems to boil down to a justification for making as much money as possible in business and finance, because in the end you’ll give everything away.

In May, while presenting the House Committee with a proposal to ease the crypto industry from strict regulations, he claimed to have promised to Donating 99% of his wealth to charity (Obviously, an easy commitment when you don’t have the wealth.)

The most striking aspect of Bankman-Fried’s accolades as the richest and truest of the new billionaires is how very little of it has been based on solid information. Venture firm Sequoia Capital put $150 million into FTX, and followed it up with the publication A slave-ridden essay about Bankman-Fried on its website.

The article stated that Sequoia Partners decided to make their investment after a one-on-one “last-minute” Zoom call with Bankman-Fried, known to movers and shakers as “SBF.” The article’s author, Adam Fisher, recounted that after his first interview with SBF, “I was convinced: I was talking to a future trillionaire.”

Added Fisher, who claims to have decades of experience speaking to start-up entrepreneurs: “I don’t know how I know, I just know. SBF is a winner.”

Sequoia cleaned the article from its website (retrieved it from the Internet Archive). The company also assured its investors that its $150 million stake in FTX, which it has now reduced to zero, was Never a big deal – Sequoia said it’s only about 3% of one fund that was parked, and 1% of another.

The company assured its supporters that its investment in FTX was the result of “extensive research” and a “rigorous diligence process.” (That must be some Zoom calls!)

Someone is snowing here. Maybe Bankman Fried was icing himself, or maybe he just knew he was living a lie. The truth will probably become clearer with time.

But all the talk about Bankman-Fried losing his entire fortune is not designed to explain to ordinary people what happened to FTX. He’s designed to hide the fact that his fans and investors made a huge mistake. They trusted someone who didn’t earn their trust. This isn’t the first time, and the saddest thing about this fiasco is that it won’t be the last.