Former US regulator compares FTX and Sam Bankman-Fried to Bernie Madoff and his Ponzi scheme

Former Federal Deposit Insurance Corporation (FDIC) Chair Sheila Bair compares the fall of cryptocurrency exchange FTX and its former CEO Sam Bankman-Fried to Bernie Madoff’s infamous Ponzi scheme. “It was a lot like Bernie Madoff in that sense“, she said.

The former FDIC chair compares FTX and Sam Bankman-Fried to Bernie Madoff’s Ponzi scheme.

Sheila Bair, one of America’s top regulators during the 2008 financial crisis, explained in an interview with CNN on Monday that there are uncanny similarities between the rise and fall of FTX and its former CEO Sam Bankman- Fried and that of Bernie Madoff.

Sheila Bair chaired the Federal Deposit Insurance Corporation (FDIC) from 2006 to 2011. She now sits on the board of blockchain infrastructure company Paxos.

She explained that both Bankman-Fried and Madoff have proven adept at seducing savvy investors and regulators into ignoring red flags lurking in plain sight. FTX filed for Chapter 11 bankruptcy protection last week and Bankman-Fried stepped down as CEO.

The charm of regulators and investors can divert attention. [a eux] to dig in and see what’s really going on“, described Sheila Bair, elaborating:

It was a lot like Bernie Madoff in that sense.

Madoff ran the biggest Ponzi scheme in history, worth around $64.8 billion. He promised investors high returns, but rather than invest, he deposited their money in a bank account and paid, on demand, from the funds of existing and new investors. Convicted of fraud, money laundering and other related crimes, he was sentenced to 150 years in federal prison. Madoff died in prison on April 14 last year, aged 82.

Sam Bankman-Fried secretly moved about $10 billion in client funds from FTX to his other trading firm Alameda Research and allegedly used a “back door” to avoid setting off accounting red flags.

FTX earned its $32 billion valuation through investments from major corporations and venture capitalists, including Blackrock, Softbank, and Sequoia. Bair commented:

You get this herd mentality where if all your peers and the big names in venture capital are investing, you have to too. And that adds credibility with Washington policymakers. All of this feeds on itself.

The former FDIC chairman is not concerned that the FTX implosion will threaten the entire financial system like Lehman Brothers did in 2008, noting that crypto is still a relatively small part of the economy and market wider finance.

However, the cryptocurrency market remains largely unregulated, leaving investors vulnerable if something goes wrong. Sheila Bair pointed out:

It’s time to put in place a regulatory regime for cryptocurrencies and figure out who regulates what, because people are getting hurt.

The former regulator further urged investors to exercise caution and skepticism. “If it sounds too good to be true, it probably is.“, she said.

Leave a Comment