(Bloomberg) — Before the world began to grasp the truth about Sam Bankman-Fried — before the panic, the investigations and, at last, the brutal collapse — an inkling of doom began to spread through his convoluted crypto empire.
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All across FTX, the exchange that had transformed his mere initials into a symbol of a new kind of wealth and power, one question came up again and again: Where is SBF?
Bankman-Fried, current and former employees say, seemed to have disappeared. Then, without explanation, a department nearly missed October payroll. Something was wrong.
Just how wrong is only now becoming blazingly clear. On Friday, after one of the most harrowing weeks in the young, freewheeling world of cryptocurrencies, his digital-asset empire — 130-plus entities in all — spiraled into bankruptcy.
The scandal has shocked the crypto players who giddily celebrated Bankman-Fried as the J.P. Morgan of their times and left them grasping for parallels.
Is this crypto’s Lehman Brothers, a tale of unbridled risk? Or is it something darker: an Enron-style fiasco that could now expose rot and wrongdoing? Federal authorities are investigating just that.
As the Chapter 11 filings landed Friday morning, questions were piling up, including the big one: Will some 1 million FTX customers ever get their money back? Some traders sensed trouble long before and ran for the exits before everyone else. Big names in Silicon Valley who embraced Bankman-Fried seem certain to suffer humiliating losses.
By now many of the broad outlines are widely known. Bankman-Fried’s sinkhole of debt, blurred business interests and investigations into whether he misused customer funds. The unsteady assurance and the desperate race to raise money. The rivalry with Changpeng Zhao and Binance, which threw FTX a lifeline only to take it back a day later.
But interviews with more than a dozen employees, former workers and people with direct knowledge of FTX and its sister companies paint a picture even more dire than previously realized. Bankman-Fried, 30, with his perpetual bedhead, tube socks and pledge to give away his fortune had venture capital royalty, politicians and media personalities all fooled.
And he might have fooled himself along the way, too.
Roughly two months before his unraveling, Bankman-Fried was having trouble with a question that for most people would be simple: Where do you live?
“I, uh, so, sorry, I — I’m hesitating because I mostly sleep on a bag,” he said, in apparent reference to his beanbag chair. Bankman-Fried was on a Zoom call, responding to questions from a group of reporters about the boundaries between FTX and Alameda Research, the crypto-trading firm that functioned as his family office.
“I live, I don’t know. Technically I live alone, but don’t sleep there. I mostly sleep on couches and beanbags,” he said. He was widely known to share a home in the Bahamas with roommates, including Alameda leadership.
Left unsaid back then: there were few boundaries between the two companies. Bankman-Fried at times dated Alameda CEO Caroline Ellison, 27, crypto news site CoinDesk reported this week, citing people familiar with the matter.
An FTX spokesperson could not be reached for comment.
The ties between FTX and Alameda are at the heart of Bankman-Fried’s downfall. The US Securities and Exchange Commission is investigating how closely intertwined his businesses were and whether FTX mishandled customer funds.
The two companies played different roles: FTX was for trading, allowing customers to deposit funds and buy more than 300 tokens, using big loans to make larger, higher-risk bets.
It was also Bankman-Fried’s brand. FTX’s logo was plastered on a Miami arena and patched on the uniforms of MLB umpires. It had star power: Gisele Bundchen and NFL quarterback Tom Brady held equity stakes and appeared in its Super Bowl ad, where they encouraged a cast of characters to join the fold of digital assets with a two-word question.
Alameda, by contrast, mostly operated out of the spotlight. It had just about 30 employees, but minted $1 billion in profit last year. Bankman-Fried founded Alameda first, in 2017, after leaving quant trading firm Jane Street, where he was a trader who peers considered smart, if unspectacular. FTX came into existence two years later.
Pairing up a trading firm with an exchange is risky. To keep customer funds safe, these functions are separate in more regulated markets — rules that don’t exist in crypto.
To some, it was an open secret that the two businesses had intricate financial ties. A person who raised money from Alameda Ventures, its VC arm, described receiving funds from FTX instead.
It was ultimately concerns about Alameda that threw Bankman-Fried’s empire into crisis.
Reports of an Alameda balance sheet showing outstanding debts to FTX through its FTT tokens made investors skittish by the end of last week. Panic fully set in on Sunday, when Binance CEO Zhao, also known by his initials CZ, tweeted that his exchange was liquidating its holdings of FTT, worth more than $500 million.
Zhao offered to take over FTX on Tuesday, only to bail almost as quickly as he offered a rescue.
“The issues are beyond our control or ability to help,” Binance said on Wednesday.
CZ called it a “sad day.” And added a crying emoji.
Signs of Trouble
While FTX’s issues only spilled out into the public view in recent days, Bankman-Fried’s behavior had been worrying direct reports for weeks.
Inside FTX, Bankman-Fried disappeared for at least a month from top deputies, according to people familiar with the matter. One department had trouble meeting payroll weeks ago, with little explanation as to why, one of the people said.
It wasn’t the first time that happened. Issues with pay started as early as the spring, when bonuses were delayed. That was around when some crypto projects and investors started to buckle, including the algorithmic stablecoin TerraUSD, hedge fund Three Arrows Capital and lender Celsius.
All the while, the company pushed to have pay packages put in FTX equity, which is now worth next to nothing.
At the first sign of a liquidity crisis, and even earlier, the smart money headed for the exits. Prominent market makers and hedge fund traders began withdrawing millions of dollars from FTX, according to people familiar with the matter.
One red flag: Withdrawals that normally would take seconds required hours to go through, adding to concerns that something was off, one of the people said.
Still, large shareholders were blindsided. Many investors said they only found out about FTX’s problems when Binance extended its offer on Tuesday.
Even as the drama between FTX and Binance first unfolded, some investors and employees remained optimistic enough about FTX’s future that they were unwilling to sell their shares to prospective buyers, according to documents reviewed by Bloomberg. As of Monday, there were prospective FTX buyers who were unable to find willing sellers in the secondaries market, the documents showed.
That optimism quickly soured as the FTT token entered an 80% freefall over the next 24 hours, leaving VC firms rushing to tally the damage. Sequoia Capital, one of FTX’s best-known backers, marked its stake down to zero, sharing its losses on Twitter.
Alongside customers, FTX employees described internal chaos as the crisis intensified. One said the balance sheet they’d seen hadn’t shown signs of liquidity problems, leading to fear there was a separate set of books.
Bankman-Fried had come to embody two key tenets of the crypto industry — transparency and decentralization. But behind the tweet threads and assurances about FTX’s position, those within the firm started to doubt what they really knew about him.
“There was this cult of personality around Sam Bankman-Fried, where he was viewed as this kind of visionary, once in a lifetime mind,” said Molly White, a 29-year-old software engineer and blogger behind “Web3 is Going Just Great,” which for more than a year chronicled stories of grift in the world of virtual assets.
“People often ascribe genius to people who are just very wealthy, and I think that may have been a little what was happening,” she said.
As for that burning question — where was SBF as his empire collapsed? — it’s only starting to become clear.
Bankman-Fried spent time in the Middle East desperately trying to raise capital in late October, holding meetings with Saudi Arabia’s sovereign wealth fund and Abu Dhabi’s Mubadala Investment Co., according to people familiar with the matter. PIF and Mubadala spokespeople declined to comment.
Anthony Scaramucci, who sold part of his SkyBridge Capital to FTX Ventures in September, helped raise capital.
“We were embarking upon helping him fundraise. He had purchased 30% of my business and so as good citizens we were trying to help him around the world,” he said in a CNBC interview Friday.
The talks failed to progress after FTX began its rapid implosion.
Meanwhile, with the boss away, some employees took matters into their own hands, looking for any way to raise cash.
Everything was up for grabs: FTX US Derivatives, an early platform for trading assets, clearing firm Embed, which handles trades, and even the naming rights to the Miami Heat’s arena. Voyager, saved from bankruptcy by Bankman-Fried, put out calls to investors in an attempt to buy itself back, according to a person familiar with the matter.
Though the companies FTX.US approached figured they could offer cents on the dollar, several backed away and began ignoring the calls, according to people familiar with the matter. It looked too risky to contemplate a purchase, especially once bankruptcy was put on the table this week, they said.
If Bankman-Fried was out of his depth earlier this year as the crypto industry began to teeter, he didn’t show it. But the departure of two members of his inner circle from Alameda and FTX.US earlier in the summer drew attention within the firms.
Bankman-Fried, who ran both Alameda and FTX until last year, handed the reins to Ellison and Sam Trabucco as co-heads in October 2021.
But Trabucco left in August under scantly explained circumstances, tweeting that he had “significantly reduced” his role in the company for months — suggesting he was heading for the exits after just entering the role. He said he was unsure of how he’d spend his time, but that he’d bought a boat.
Brett Harrison, who ran FTX.US, left shortly thereafter, also without immediately saying where he was headed.
By Thursday night, with his supporters dwindling, Bankman-Fried seemed resigned to his fate. Despite tweeting earlier in the day about letters of intent and term sheets, he hadn’t secured a financing plan.
Bankman-Fried canceled an investor call, putting out one more short note for a lifeline.
“Realistically we’d need to be able to have at least $4 billion committed by morning if this pathway was going to work,” he wrote. “And I’m not optimistic about that. So unless someone has a billion at the ready to sign on an hour’s notice,” speaking with investors didn’t make sense, he said.
On Friday, Bankman-Fried’s downfall was complete. He resigned as CEO of FTX Group after putting his empire in bankruptcy. Worth an estimated $15.6 billion at the start of the week, his major assets now have zero value, according to the Bloomberg Billionaires Index. Charities counting on his money appear likely to be left in the lurch.
Regulation, which the crypto industry has long sought to avoid, appears inevitable. Congressional leaders are wondering about when to send subpoenas, according to a person familiar with the matter.
“A lot of people have compared this to Lehman. I would compare it to Enron,” former Treasury Secretary Lawrence Summers said in a Bloomberg TV interview. “The smartest guys in the room. Not just financial error but — certainly from the reports — whiffs of fraud.”
John J. Ray III, who was appointed to replace Bankman-Fried as CEO, is a turnaround and restructuring expert who previously served senior roles in bankruptcies — including Enron’s.
All the while, about 1 million customers will likely remain in limbo, wondering when, if ever, they’ll get their money back from the curly-haired boy genius they trusted to lead them into a new frontier of finance. The fact that investors and employees were equally duped will likely be of little solace.
Despite all that’s transpired, a few true believers are still betting on Bankman-Fried.
On Polymarket, a crypto platform for wagering on event outcomes, users are betting on the question “Will SBF be federally indicted by end of year?” Odds are about 80% that he’ll avoid indictment.
There appears to be less optimism in the Miami offices of Bankman-Fried’s US exchange. By Thursday, someone had removed the small-lettered signage on the office door of FTX.US.
–With assistance from Katie Roof, Giles Turner, Ben Bartenstein, Felipe Marques, Hema Parmar, Hannah Miller, Anna Irrera and Gillian Tan.
(Updates with other crypto collapses in 30th paragraph.)
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