For investors, the collapse of FTX is a reminder to be wary of founders like SBF with an excessive risk appetite. For entrepreneurs, it is a lesson to implement oversight and risk management plans to avoid the fate of SBF and FTX. That’s the key take-away message of this episode of the Wise Decision Maker Show, which describes how Sam Bankman-Fried’s double-or-nothing philosophy caused the collapse of FTX.
Video: “FTX Fiasco Caused by SBF’s Double-or-Nothing Philosophy”
Podcast: “FTX Fiasco Caused by SBF’s Double-or-Nothing Philosophy”
Links Mentioned in Videocast and Podcast
- Here is the article: FTX Fiasco Caused by SBF’s Double-or-Nothing Philosophy
- The book Never Go With Your Gut: How Pioneering Leaders Make the Best Decisions and Avoid Business Disasters is available here
- You are welcome to register for the free Wise Decision Maker Course
Hello, everyone, and welcome to another episode of the wise decision maker show where we help you make the wisest and most profitable decisions. And today we’ll talk about the FTX fiasco caused by Sam Bankman-Fried, also known as SBF, and his Double or Nothing philosophy. So let’s talk about what this is about the dangers of this risk taking that led to the collapse of FTX coming from philosophy, hear me out hit this coming from philosophy specifically as SBFs, Double or Nothing philosophy. So he did a podcast interview saying bagman 3d, also known as SBF again, and he was asked by Tyler Cohen, in this podcast, the following so let me quote talent called Tyler Cohen said, quote, let’s say there’s a game 51% You double the earth out somewhere else? 41% that all disappears? Would you play that game? And would you keep on playing that double or nothing? unquote. The vast majority of us I wouldn’t take that risk, I think you wouldn’t take that risk, the vast majority of us wouldn’t take the risk. So it seems pretty morally atrocious, to just take the risk of 49% chance of everything disappearing all human civilization, everyone everywhere, just because you essentially flip the coin for a 51% chance of doubling its value. It’s a coin flip, right? But this high risk, high reward, and very high danger strategy is exactly what SBF pursued. He said he would play that game, and he’d continue playing it as long as he was offered that option for the possibility of flipping his way into an enormously valuable existence. Now, his willingness to take that risk, let’s be clear, that’s what led to his wealth. He was worth $26 billion in 2021. But it also made his wealth very fragile. It resulted in the collapse of FTX exchange and the rest of his financial empire of 130 entities because his luck finally ran out. So his company filed for bankruptcy as well as all the other umbrella organizations as a result of pretty shady and highly risky bets and trades he made, which led to a run on the exchange. So the ftx.com exchange, and federal investigations for fraud and the criminal trial that he’s under right now. So SBF resigned as the CEO of FTX. And his wealth shrank to nearly zero, as far as we can tell, as a result. Now, he admitted that his mishandling of client funds was a poor judgment call. So he admitted to making mistakes and labeling bank related accounts and misjudging users Well, that’s what he talked about. But external investigations also revealed very, very poor bookkeeping, very high optimism about user funds. This crisis is a huge problem. So Binance, the largest remaining exchange, backed out of a plan to buy FTX because of mishandling of customer funds and serious problems with bookkeeping. It described the books as a nightmare black hole, pretty harsh words. And now the banker Rob sees that FTX is under-revealing very serious mismanagement at FTX. So US regulators right now they’re investigating FTX and Sam Venkman for violating securities fraud relating to customer funds. Apparently SBF created a backdoor into the FTX bookkeeping system. And he was able to use it to secretly transfer 10 million funds out of the FTX exchange of customer funds into his own trading company. Alameda made a research which was used to cover the losses of Alameda research. And he called Making these funds moving the funds stolen made a poor judgment call, right? This essentially fraudulent activity, and it is now under home arrest. He is awaiting the ongoing trial. So the trial is already ongoing. He pleaded not guilty, and he’s under home arrest with album bail under $250 million of bail. And he’s done criminal charges for fraud for what prosecutors described as misleading investors and stealing money from clients. Now, the downfall of FTX and Sam Bankman-Friedwas a failure of oversight and risk management. That’s what it comes down to: oversight and risk management. The inner circle of executives that FTX we know live together in a luxury penthouse. So they have very strong personal bonds and romantic bonds, they date each other. Former FTX employees describe the inner circle as a place full of conflicts of interest, nepotism, lack of oversight, and so the personal loyalty that the inner circle had toward each other made oversight and risk management. Let’s just say it’s very different. Old and so this high risk decision making led Sam Venkman free to ignore risk management and disregard this risk management. This came from sang Backman, Fried’s philosophy, his high risk high reward philosophy, which led to the huge losses of Alameda research, which he then felt needed to be covered by the customer funds at FTX from FTX. Otherwise, Allah made the research go under, and he wasn’t willing to let it go under so he decided to take a huge risk of transferring customer funds hoping that which wouldn’t be found out but it was found out. And so this will neglect the risk management allowed by these secret software backdoors, shady bookkeeping, bookkeeping and mishandling of client funds. Now, Sam Bankman-Fried is not the only top level high level super rich person who ignores risk management. Let’s take Elon Musk as an example, when he took over Twitter bought Twitter for $44 billion, which you way overpaid for Twitter. According to external investing evaluators he fired essentially all of Twitter’s executive team, the vast majority was fired then a couple of other ones quit later on worried when they saw how Elon Musk was not doing the right things and handling Twitter security and risk management. And he replaced them with a loyal inner circle with no risk management, no oversight over himself. And so he made many decisions that turned out badly. For example, consider Twitter’s blue checkmark badges. So Musk introduced blue checkmark verification badges, which were previously restricted to people who are public figures, and to organizations, corporations, government entities and so on. And he introduced these to everyone who’s willing to pay $1 a month without verifying user identity. So that led to many many fake accounts with blue check marks. They impersonated real people, real companies, and that resulted in a lot of misinformation. So widespread criticism many advertisers abandoned Twitter because essentially, they were being impersonated companies were being impersonated. So in response, Elon paused the paid verification program, not before doing a lot of damage. And so we could see the dangers of ignoring risk management both from musk and signmaking. Treat some Musk’s risk taking a Twitter might well result in bankruptcy because there is no oversight over Musk’s actions that will and are turning out badly. Whereas with SBF, his risk taking FTX already resulted in bankruptcy, harming large investors and destroying the savings of mainly ordinary people, hundreds of 1000s If not over a million, who held their money in FTX. And so that’s right now as Bf is facing trial criminal trial with up to 115 years in prison, but he might go to jail for and so the SBF misdeeds, it also harms his charitable causes. So SBF helped inspire billionaire billionaires to donate rapidly in their lifetime, hundreds of millions of dollars. And he made commitments to many charity projects, which are now in limbo. So he already gave hundreds of millions of dollars and he made hundreds of millions dollars more in commitment. So the charity has started projects based on his commitment, but of course he’s not able to follow through right now. And so the employees at SBS philanthropic organization resigned the Future Fund due to these revelations of misdeeds at FTX, citing concerns of legitimacy and integrity of FTX as a business, because they didn’t want to be associated with it. It’s understandable why they did so. But again, this is all leading to a large, large blow to two really good charities that FTX was supporting, like pandemic mitigation risk management of strategies. So the importance of risk management for executives is really shown by both saying bagman freedom or Elon Musk, so that FTX bankruptcy resulted from FCPS excessive risk taking philosophy. And Musk’s poor decision making on Twitter is also coming from excessive risk taking by Musk that shows why it’s so important for executives to have someone to help rein them in to have risk management, addressing blind spots and having oversight. So bringing in impulsive executives is really needed. So you need to have risk managers, managers for executives, who should be in a strong respected position. So when I serve as a risk manager for executives high now I need to have an ability to credibly raising the executive, which means having direct access to the board of directors and or others large investors who can help me rein in the executive in the valley majority of cases I wouldn’t use this access, but I need to have it so I can talk to the executive and rein them in. And so that leads me to the question of how to invest wisely before investing in a company assessing how its executives handle risk management and oversight. be really cautious of executives like Elon Musk, who don’t have someone to rein in their impulsive risky actions because excessive risk taking might lead to gambling, and Elon Musk definitely gambled as did SBF rather than a wise investment of money. So you don’t want to gamble yourself. make wiser decisions by evaluating the risk management of executives and their someone’s ability to rein them in before you invest that money. Alright, everyone, I hope you benefited from this episode of the wise decision maker show. Please leave a review, whatever you checked out this podcast and make sure to subscribe to it. Reviews of course, help us really improve the show and Help others discover the show. And send me an email with your thoughts about this podcast. So that i I’ll be happy. I have read every email and I’ll be happy to respond. My name again is Dr. Gleb Tsipursky. I’m the CEO of disaster avoidance experts, the future of work consultancy that sponsors the wise decision makers show and my email is Gleb g l e b at disaster avoidance experts.com I read every email and I’ll be happy to read yours and respond to it. Alright everyone, I hope I see you on the next episode of the wisest decision maker show. In the meantime, the wisest and most profitable decisions to you, my friends.
Transcribed by https://otter.ai
Bio: Dr. Gleb Tsipursky helps leaders use hybrid work to improve retention and productivity while cutting costs. He serves as the CEO of the boutique future-of-work consultancy Disaster Avoidance Experts, which helps organizations adopt a hybrid-first culture, instead of incrementally improving on the traditional office-centric culture. A best-selling author of 7 books, he is especially well-known for his global best-sellers Never Go With Your Gut: How Pioneering Leaders Make the Best Decisions and Avoid Business Disasters (Career Press, 2019) and The Blindspots Between Us: How to Overcome Unconscious Cognitive Bias and Build Better Relationships (New Harbinger, 2020). His newest book is Leading Hybrid and Remote Teams: A Manual on Benchmarking to Best Practices for Competitive Advantage (Intentional Insights, 2021). His writing was translated into Chinese, Korean, German, Russian, Polish, Spanish, French, and other languages. His cutting-edge thought leadership was featured in over 650 articles and 550 interviews in prominent venues. They include Harvard Business Review, Fortune, Inc. Magazine, Business Insider, Fast Company, Forbes, and elsewhere. His expertise comes from over 20 years of consulting, coaching, and speaking and training for mid-size and large organizations ranging from Aflac to Xerox. It also comes from his research background as a behavioral scientist. After spending 8 years getting a PhD and lecturing at the University of North Carolina at Chapel Hill, he served for 7 years as a professor at the Ohio State University’s Decision Sciences Collaborative and History Department. A proud Ukrainian American, Dr. Gleb lives in Columbus, Ohio (Go Bucks!). In his free time, he makes sure to spend abundant quality time with his wife to avoid his personal life turning into a disaster. Contact him at Gleb[at]DisasterAvoidanceExperts[dot]com, follow him on LinkedIn @dr-gleb-tsipursky, Twitter @gleb_tsipursky, Instagram @dr_gleb_tsipursky, Facebook @DrGlebTsipursky, Medium @dr_gleb_tsipursky, YouTube, and RSS, and get a free copy of the Assessment on Dangerous Judgment Errors in the Workplace by signing up for the free Wise Decision Maker Course at https://disasteravoidanceexperts.com/newsletter/.