Former U.S. 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 downfall of crypto-currency 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.

Former FDIC Chair compares FTX and Sam Bankman-Fried to Bernie Madoff’s Ponzi scheme.

Sheila Bair, one of the top U.S. 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 Bernie Madoff.

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

She explained that both Bankman-Fried and Madoff proved adept at seducing savvy investors and regulators to ignore red flags hidden in plain sight. FTX filed for Chapter 11 bankruptcy protection last week and Bankman-Fried stepped down as CEO.

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

It was very much like Bernie Madoff in that sense.

Madoff ran the largest Ponzi scheme in history, worth about $64.8 billion. He promised investors high returns, but instead of investing, he deposited their money in a bank account and paid out of existing and new investors’ funds on demand. Convicted of fraud, money laundering and related offenses, he was sentenced to 150 years in federal prison. Madoff died in prison on April 14 of last year at the age of 82.

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

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FTX earned its $32 billion valuation through investments from large 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 policymakers in Washington. It all feeds on itself.

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

However, the crypto-currency market remains largely unregulated, leaving investors vulnerable if something breaks. Sheila Bair pointed out:

It’s time for a regulatory regime for crypto-currencies and who regulates what, because people are getting hurt.

The former regulator further urged investors to be cautious and skeptical. “If this sounds too good to be true, it probably is“, she said.

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