“Madoff: The Monster of Wall Street” is a four-part documentary streaming on Netflix. This could hardly be more relevant given the dramatic implosion of Sam Bankman-Fried and his FTX Cryptocurrency Empire.
Although much is unknown about “SBF” and FTX, the similarities to Operation Madoff are striking.
Characteristics of Ponzi: Madoff operated a pure Ponzi scheme. He took money from new investors and used it to pay off old investors. Unlike Charles Ponzi, Madoff did not promise investors 100% returns every 90 days. Madoff promised a steady month-to-month increase amounting to something like 10% per year. Since Madoff was doing nothing with the money, investors could have withdrawn their fictitious profits every year for years and been paid entirely with their own deposits.
If panicked investors hadn’t started cashing in en masse during the 2008 financial crisis, Madoff could have gone on forever.
SBF and FTX operated in the cryptocurrency “industry”. This industry is a Ponzi scheme without a Ponzi. Cryptocurrency is a computer creation with no tangible value beyond what a gullible buyer will pay. Without money from new investors, old investors have no way out. Unless you can fool some people all the time, Crypto is tulip bulb mania without tulips.
Gullible Institutions: Much of Madoff’s money came from “feeder funds.” They are middlemen who take money from investors and outsource the actual investing to people like Madoff. Any in-between should have known that Madoff’s returns were too good to be true. The split strike options strategy allegedly used by Madoff was neither new nor unheard of. Although it could avoid significant losses, the strategy was unable to produce the positive returns reported by Madoff in all of the sharply declining markets.
Institutional “victims” of FTX include Blackrock, Softbank, Tiger Global, and Sequoia Capital. It’s no surprise to see Sequoia, which was bamboozled by Valeant in 2017, or Softbank, which has been a big investor in WeWork, among other disasters. But Blackrock, which manages $8.6 trillion, couldn’t figure out that a Crypto company buying out other Crypto companies was a house of cards?
Regulatory failure: The Securities and Exchange Commission received several warnings about Madoff’s operation, including a demonstration that Madoff’s fictitious trades accounted for more than 100% of options actually traded. The SEC didn’t even bother to pick up the phone and call the Depository Trust Company to verify that Madoff was trading anything.
FTX operated in a regulatory vacuum. Although SEC Chairman Gary Gensler claims that the Commission has the power to regulate Crypto exchanges, this is not the case.
Lax internal controls: Madoff was audited by a two-person accounting firm and held no assets with a third-party custodian.
At FTX, no one seems to know exactly what happened to all the money.
In the end, Madoff’s $64 billion scheme consisted of $19 billion in deposits and $45 billion in fictitious “profits.” About $15 billion of the $19 billion was recouped by recovering money from investors who withdrew more than they invested. FTX victims can count themselves lucky if they recover so much.
Jeffrey Scharf welcomes your comments. To contact him, send an e-mail to [email protected]