Tuesday, November 29, 2022

But Tom Brady Said....

 

If you watched the baseball World Series last month, you might have noticed the umpires sporting the letters “FTX” on their uniforms.  Or maybe you’ve seen an ad for “FTX” that featured Tom Brady, Steph Curry, or another celebrity.

FTX is (or maybe at this point I should say “was”) a cryptocurrency exchange based in the Bahamas that rocketed to fame and apparent success thanks to its flamboyant 30-year-old founder and CEO, Sam Bankman-Fried.  His business model seems to have been to hobnob with big shots in the financial world, propose and institute bold—if unwise—practices for his operation, freely throw money around, and court endorsements from celebrities in exchange for a stake in his company—all while acting the part of the offbeat MIT-graduate whiz kid, dressing in khaki shorts and tennis shoes while hosting cocktail parties on the beach and meeting with the more staid colleagues in the financial industry.

Perhaps it was that iconoclast image, the brilliant rebel reputation, that attracted all the followers—and investors—to his company.  He pitched a new approach to the futures market at the Futures Industry Association (FIA) meeting last year.  Evaluated objectively, his proposal bypassed the structure that is meant to protect investors and thereby introduced new risks to the market.  But that didn’t seem to faze many or even most of the people listening to his pitch.  He was offering a “gateway to the crypto world” (in the words of the Washington Post), with FTX operating like a bank in that it maintained customer accounts, exchanged currencies, and made loans and other investments with investors’ money.  But it operated without the tough regulations and oversight of a normal bank or exchange.

As Adam Levitin, a Georgetown University law professor and expert on cryptocurrency issues astutely observed, “People invested billions in an unregulated financial institution based in a Caribbean island.  How could this end well?”

Now FTX has collapsed, Bankman-Fried has lost his entire $16 billion fortune, the money of nearly one million investors has disappeared, and several celebrities are facing lawsuits for their part in hyping what many are saying amounted to a Ponzi scheme.

I can’t say that I have a lot of sympathy for the people suing those celebrities.  Well, maybe for some of the small-time investors.  But how many times does this have to happen; how many too-good-to-be-true investments have to fold in bankruptcy; how many celebrities whose fame is in sports, fashion, or just about anything other than finance, will endorse an investment that will supposedly make us rich but turns out to be fool’s gold, before we learn the lesson?

As with nearly any bad investment, there were people who were raising red flags about FTX, including the FIA itself.  Maybe not waving those flags as vigorously as they could or should have, but they saw problems with the model on which FTX was based and steered clear of it.  But the hype, the novelty, the celebrity….it overcame most hearers’ good sense.  According to the New York Times some big firms like BlackRock backed FTX.  And Bloomberg flatly wrote, “Many sophisticated finance pros were duped by Bankman-Fried’s wacky charm.”

Common sense, everyone.  As the saying goes, “If it sounds too good to be true, then it probably is.”  And the rule applies not only in high financial circles but in our everyday decision-making.  Our culture seems to always steer us to be in pursuit of the big—and fast—buck.  Instead of slow-and-steady investing and seeking sound advice, we let a Victoria’s Secret model or a sports superstar tell us where to put our money.  Or maybe we should listen to them—then do the opposite of what they suggest.  I expect that would work out much better for us in the end.

Until next time,

Roger

 

“For where you have envy and selfish ambition, there you will find disorder and every evil practice.” James 3:16 NIV*

*Scripture quotations taken from the Holy Bible, New International Version® NIV® Copyright © 1973,   1978, 1984, 2011 by Biblica, Inc.™  Used by permission.  All rights reserved worldwide.

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