Why were the media hypnotised by Sam Bankman-Fried?

John Naughton in The Guardian

So Sam Bankman-Fried (henceforth SBF) was eventually arrested at his multimillion-dollar residence in the Bahamas, a tax haven with nice beaches attached. The only mystery about this was the unconscionable length of time that it took the Bahamian authorities to measure him for handcuffs. The police said that he was arrested at the request of US legal authorities for “financial offences” under US and Bahamian laws connected with the FTX cryptocurrency exchange that he co-founded in 2019 and Alameda Research, a hedge fund that he set up in 2017. On Tuesday, a local court denied him bail, which suggests that an extradition request from the US will be granted and he will soon be appearing in a New York courtroom.

The grisly details of what SBF is alleged to be guilty of will emerge in forthcoming criminal proceedings. But already expectations are high: Amazon has announced that it is working on a series about the scandal in partnership with the Russo brothers, the makers of Marvel movies.

For the moment, though, a brief outline will have to do. FTX was a cryptocurrency exchange that provided an easy way for people to buy and sell these virtual currencies. Many people had invested billions of “real” money in it to facilitate their participation in the crypto casino. But in early November, rumours of problems with FTX surfaced after Binance, another crypto exchange, dramatically refused to bail it out, citing “corporate due diligence” and reports of “mishandled customer funds”.

There then followed, as the night the day, a run on FTX, as panicking investors tried to withdraw their money, which in turn led to its insolvency and a filing for bankruptcy. The big puzzle, though, was why couldn’t FTX have just given its investors their money back? The answer appears to be that it wasn’t there; in some way, SBF’s hedge fund had been treating FTX as its piggy bank, possibly even playing the hedge fund market with investors’ money.
The thought SBF might be as manipulative as any oil mogul or tobacco executive never occurred to the poor dears

Once it was clear that this particular game was up, SBF then embarked on an astonishing apology tour on every media outlet he could find. In almost every interview he was touchingly apologetic while at the same time maintaining that he had no knowledge of potentially fraudulent activities at his own company, including using billions of dollars of customers’ deposits as collateral for loans for other purposes. He had, he explained ruefully, been out of his depth. On some occasions, he also seemed to be trying to deflect blame on to Caroline Ellison, the former CEO of his other company, Alameda Research.

The biggest question prompted by this apology tour is: why did so many apparently serious media outfits let him get away with it? The interview questions were often softball ones, occasionally toe-curlingly so. Some interviewers confessed apologetically that they knew nothing about the complex businesses he had run and allowed themselves to be bemused by the incomprehensible bullshit he was emitting. Often, they seemed hypnotised, as many otherwise sensible people had been before the crash, by this tech wunderkind with big hair and baggy shorts who had, until recently, been promising to give away his phenomenal wealth to good causes, while in fact he had seemingly been presiding over the vaporisation of billions of dollars of other people’s savings.

But this embarrassing failure of mainstream media was really just the encore to an even bigger failure – their wilful blindness to what had been going on while SBF was in his prime. It turned out that earlier in the year the Securities and Exchange Commission (SEC) had written to FTX seeking to determine if the company was as flaky as some observers (mainly on the web) had suspected. As Cory Doctorow pointed out, the SEC never got an answer, because eight US lawmakers – four Republicans and four Democrats – wrote a letter to the SEC chairman demanding that he back off. And five of these eight, according to Doctorow, had received substantial case donations from SBF, his employees, affiliated businesses or political action committees.

There was a real story here, in other words, long before FTX imploded. But it wasn’t told because the mainstream media were so invested in the founder-worship that is the curse of the tech industry, not to mention some of those who cover it. The thought that “the poster child for the libertarian ethos that crypto profits accrued to those most capable”, as one commentator described SBF, might be as politically manipulative as any oil mogul or tobacco executive never occurred to the poor dears. Sometimes, societies get the mainstream media they deserve.

General Electric’s accounting tactics bared in SEC settlement

 Industrial powerhouse underlines risk of short-term, market-orientated approach to management writes Sujeet Indap in The FT 

In 2015, Larry Fink, the BlackRock founder and chief executive, released a public letter pressing fellow CEOs to eschew making business decisions based on short-term considerations. 

“It is critical, however, to understand that corporate leaders’ duty of care and loyalty is not to every investor or trader who owns their company’s shares at any moment in time but to the company and its long-term owners,” he wrote. 

One company that BlackRock was a major shareholder at the time was General Electric with a stake of nearly 6 per cent. Around then, Jeffrey Immelt, the chief executive of GE, appears to have been overseeing just the kind of instant market gratification management effort that Mr Fink was condemning. 

The industrial group “misled investors” and “violated antifraud, reporting [and] disclosure controls”, according to a recent US Securities and Exchange Commission order. In early December, GE agreed with the regulator to pay $200m to settle charges that it had misled investors about its financial condition in between 2015 and 2017.  

In statement, the company noted that no financial statements required correction and that it had neither admitted nor denied guilt as a part of the SEC settlement. 

Five years after Mr Fink’s letter, there has been a continued rise in “stakeholder capitalism” and investing for better environmental, social and corporate governance standards. But this coda to the GE saga of the 2010s is an ugly reminder of the world these new principles are attempting to replace. 

The SEC’s order alleged GE pulled forward future profits and cash flow and, separately, delayed reporting big losses in order to boost immediate results. Damningly, the SEC described how Wall Street pressure and undue attention to the company’s stock price appeared to drive the company’s actions. 

In 2015, GE announced that its once high-flying but controversial GE Capital unit would shrink by $200bn worth of assets. While highly profitable at times, the banklike entity was volatile and its heavy losses during the 2008 financial crisis had nearly sunk the entire company.  

Mr Immelt wanted to reposition GE as an industrial powerhouse with aviation, healthcare, energy and oil and gas units that were supposed to help the developing world become urbanised. In late 2015, the group would close its $15bn acquisition of France’s Alstom to boost its power plant business. 

The power division, according to the SEC, would become the home of accounting mischief. Maintenance contracts with customers that ran several years required estimates of costs and the reduction of such inputs allowed GE to boost its book profits. Separate alleged manoeuvres included selling receivables to GE Capital, allowing for commensurate gains in cash flow. 

The company had announced in 2015 that it would seek to hit $2 per share of earnings in 2018. It appears that precise and ambitious figure effectively became the central organising principle of the company. 

“GE was aware of investor and analyst concerns that its cash collections were not keeping pace with revenue and that its unbilled revenue was growing in its industrial business,” wrote the SEC. 

It said executives at GE Power and GE Power Services cited analyst reports when they discussed internally the need to show improved cash performance. In one 2016 presentation to GE senior management, the SEC said, one executive posited that GE’s stock price could reach $40 if operating cash flow performance improved. It averaged about $30 during that year.

At the same time, the pieces of GE Capital the parent company had retained would prove to be another time bomb. GE kept an interest in long-term healthcare insurance policies that had been sold decades earlier. Those policies proved to be more expensive than had been anticipated, a reality that became clear in 2015. 

In 2016, as it became evident that higher losses were going to need to be realised, one executive called the situation in the insurance business a “train wreck”. 

It seems GE only came clean with investors about its accounting practices in the power division in 2017 while also eventually taking a $22bn impairment to goodwill related to the Alstom buyout. 

And it finally took a $9.5bn charge related to insurance liabilities in 2018 and committed to plug another $15bn of capital into shoring up the GE financial services unit. 

A spokesperson for Mr Immelt said GE sought to comply with all standards for financial accounting. “To achieve this goal, it put in place strong processes with multiple checks and balances,” the spokesperson added. 

BlackRock continues to hold a stake of about 6 per cent in GE shares, which currently hover around $10. A recovery to the peak of nearly $33 seen in 2016 will undoubtedly require a very long-term orientation.