SYLVIE DOUGLIS, BYLINE: This is Planet Money from NPR.
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NICK FOUNTAIN, HOST:
If you are like most people, the world of cryptocurrency just sort of exists in the periphery. Every once in a while, though, you spot a glimpse. Like, did you notice how all the Super Bowl ads this year were celebrities hawking crypto startups?
MARY CHILDS, HOST:
Or have you noticed that your friend got really rich off bitcoin and bought a mansion in Puerto Rico?
FOUNTAIN: Hold up. Does that Lambo parked in the handicapped spot without a placard really have the vanity plate BUYNFTS?
CHILDS: Ugh. But honestly, this is a fine relationship for you to have with crypto. It is fine to avoid dipping your toes into the crypto space because, quite frankly, for now at least, it has existed outside of our everyday economy.
FOUNTAIN: One man was set to change that, a 30-year-old with kind of big, goofy hair who, in the last five years, made billions in crypto and became the face of respectability in an industry usually associated with less-than-respectable characters.
CHILDS: His name - Sam Bankman-Fried, the founder of a company called FTX. And even if you were actively trying to ignore crypto, you probably heard of him because Sam was the crypto nerd who broke through into popular culture. He and FTX were everywhere - on the rooftops of stadiums, on TV, on billboards, on magazine covers - until last week.
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JON SARLIN: How fast could you lose $15 billion? Well, for Sam Bankman-Fried, the answer is in a single day.
MIRANDA DEVINE: The major cryptocurrency exchange FTX, which is run by Sam Bankman-Fried, has collapsed and declared bankruptcy.
KATE ROONEY: We are starting to see more collateral damage from the high-profile blowup of FTX overnight.
SARLIN: That's because all hell is, once again, breaking out in crypto world.
CHILDS: Last week, Sam Bankman-Fried's empire came crashing down. Just how and why and what does it matter for the rest of the world - this is one of the moments when it's helpful and actually quite interesting to look over at the periphery and take stock.
FOUNTAIN: Because the story of Sam Bankman-Fried is the story of crypto so far.
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FOUNTAIN: Hello, and welcome to PLANET MONEY. I'm Nick Fountain.
CHILDS: And I'm Mary Childs. That is our show today, the story of Sam Bankman-Fried.
FOUNTAIN: We'll hear how he made his billions and what he was spending them on, how important he became not just to the world of crypto, but to the regular world, too. And we're going to talk to one of the journalists who exposed the house of cards at the center of his empire and hear how it all fell down.
CHILDS: There will be exactly one swear.
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FOUNTAIN: We reached out to Sam Bankman-Fried through his companies but did not hear back. Understandable. His empire has collapsed. His companies have filed for bankruptcy. There are reports of criminal inquiries.
CHILDS: He's busy. So to tell his story, we're going to rely on public statements he's made, of which there are many. And we're going to phone a friend.
NICK BAKER: I am Nick Baker, and I am the deputy editor-in-chief of Coindesk.
CHILDS: And, Nick, we know each other. We met when you hired me after an internship when I was a baby. Is that right?
BAKER: Baby is overstating it a little bit. And did I hire you? I maybe said a good word 'cause you were...
CHILDS: You hired me.
BAKER: Did I? OK.
CHILDS: Nick, who definitely did help hire me at Bloomberg, was behind the story that ended up taking down Sam's empire. But before we get there, it's helpful to look at how that empire was created because it says a lot about the short history of crypto.
FOUNTAIN: Yeah, we're going to tell it in three parts. The first part is Sam's crypto origin story, which begins, at least as he tells it, in 2017. It wasn't the beginning of crypto, but Nick says it still felt like the early days.
BAKER: It was new. It was inefficient - few, if any, rules. It was the wild west. And so anything goes. I don't know if that's totally fair to say that, but pretty darn close.
FOUNTAIN: Pretty darn close. And for an enterprising young trader, nothing is better than inefficiency. Inefficiency just means money to be made if you can spot the opportunities, which Sam did.
BAKER: He saw prices for crypto that were wildly different than the prices you could get elsewhere.
CHILDS: In particular, he saw that the price of bitcoin was way higher on Japanese exchanges than it was on U.S. exchanges.
BAKER: And anytime you have that in markets, if you can buy in one place and sell in another place at vastly different numbers, that's easy money.
FOUNTAIN: Buying something low and almost instantaneously selling the same thing high is any trader's dream. It's called arbitrage. And Sam, looking at the price difference between bitcoin in Japan and the U.S., had the perfect arbitrage opportunity.
CHILDS: Well, I mean, kind of. Because in practice, the mere existence of an arbitrage opportunity probably means that there is some hidden friction, some part of the puzzle you might not be seeing.
FOUNTAIN: And why was Sam well-positioned to figure out his way through this puzzle, these inefficiencies?
BAKER: He came from a company called Jane Street.
CHILDS: Jane Street, a very nerdy and very profitable company that focuses on how money flows through the pipes of financial markets and figures out how to profit from the complexity.
BAKER: Look, I've been looking at them for ten years. Their whole thing is let's figure out little quirks in how the structure of markets work and let's figure out ways to make money off that. And so someone who comes from a place like Jane Street is going to really grasp, how do you make this work?
FOUNTAIN: So Sam saw this huge opportunity in Japan. But in order to make it work, he needed a few things, starting with a company.
CHILDS: And the way he went about naming his company is kind of instructive. He talked about this on a podcast last year and said that he specifically chose a name to avoid scrutiny from bank employees.
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SAM BANKMAN-FRIED: Especially in 2017, if you named your company like We Do Cryptocurrency Bitcoin Arbitrage Multinational Stuff, no one's going to give you a bank account if that's your company name. Among other things, it's a terrible company name. But also, they're just going to be like, yeah, no, we've been warned about companies with this name. You know, you're going to have to go through the enhanced process. And I don't want to bother with that right now; it's almost lunchtime.
CHILDS: So Sam came up with a clever solution. He called his company, his hedge fund, Alameda Research, which has an air of legitimacy.
FOUNTAIN: And that was just the name. The next big thing Sam said he needed for his Japanese arbitrage was a way to get Japanese yen converted to U.S. dollars and then out of Japan, which meant, he said, finding Japanese residents who also happened to be U.S. residents to open up bank accounts and then asking them to literally stand in line at Japanese banks sending wire transfers.
CHILDS: Which, at scale, Sam said, did kind of have an air of money laundering.
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BANKMAN-FRIED: And finally sent the wire, and they're like, wait, you sent this yesterday. This is a mistake. Like, no, no, no. We're sending again. Like, no, no, no. You sent this exact one yesterday. Like, yeah, that's right. We're sending it again. And now they're like, wait, you're telling me that two days in a row, you're sending an international wire transfer across currency, across continent, in the same direction for the same size with no transfer coming the other way. That's sketchy as s***, right? Where is your money coming from? And we're like, well, it's fake internet money. And they're like, oh, that makes us feel better.
CHILDS: Sam said there were dozens of other really annoying hoops they had to jump through. But once they did, they made boatloads of money. According to Sam, he was making 10% per day on hundreds of millions of dollars of bitcoin. So he was making tens of millions of dollars a day for many days.
FOUNTAIN: The Japanese arbitrage was the stuff of trading legend. But arbitrages generally do not last very long. Other people figure them out, too, and the gap closes. And so ended the wild, wild west, wild, wild profits, first chapter of Sam's crypto career.
CHILDS: Chapter 2 - crypto gets respectable and gets its elder statesman.
FOUNTAIN: Yeah, just like Sam saw an opportunity in Japan, next, he saw a market in respectability because part of Sam's whole thing, his lore, is that he was not just your average crypto millionaire spending his money on yachts and mansions. From early on, Sam said, he was inspired to get filthy rich not for himself, but for others.
CHILDS: The story he told was he was amassing a fortune in order to give it away. He was giving money to animal rights charities, to pandemic preparedness and artificial intelligence research. He was a major donor to Democratic candidates. He said he was prepared to give away 99% of his wealth.
FOUNTAIN: All of this in the name of a movement that he eventually became the face of called effective altruism, which Nick says basically means don't just give away money to the causes you care about; donate in the most effective way, the way that benefits others as much as humanly possible, like, to save the most lives.
BAKER: You need to do the thing that has the maximum benefit, the maximum expected benefit. That's how a trader would think about. You do things that - if I spend a certain amount of money and has a certain expectation of success, I'm going to do the one of the two scenarios that has the higher expected value of success - for a trader, the biggest profit.
FOUNTAIN: And so Sam's idea was, I should make billions and billions of dollars so that I can effectuate change in the world for what I see as good. And to do that, what did he need to do?
BAKER: He needed to take big swings.
CHILDS: To take those big swings and make the big money to give away, Sam would need what he'd learned at Jane Street, the market structure company where he'd grown up. But looking around, he found there wasn't really a place or an exchange, as they're called, where he could do all the fancy things that he wanted.
BAKER: So in 2019, he created an exchange called FTX. And FTX was kind of built to accommodate the needs of a trading firm like his.
CHILDS: He built the exchange he wanted to see in the world.
BAKER: That's right.
FOUNTAIN: FTX allowed traders and Sam to trade in crypto futures and more complicated derivatives.
So this is, like, him kind of dragging crypto from the wild, wild west era that you described into the sort of more sophisticated era of crypto.
BAKER: I think that's definitely part of that move, right? This looked familiar to conventional finance people.
FOUNTAIN: Sam brought the respectability and know-how of traditional finance to this new crypto space. And with it, the institutional money came. FTX got big-time investors. One of their fundraising rounds, they took money in from the likes of the Ontario Teachers' Pension Plan, the enormous investment firm BlackRock, and the famed Silicon Valley venture firm Sequoia Capital.
CHILDS: Because Sam came across as credible, unlike some of the big names in crypto where they seem like they're, you know, empty shells trying to further just their self-interest, Sam seemed to be in it for good reasons like pure market structure nerdom and altruism.
FOUNTAIN: Suddenly, Sam was everywhere including Capitol Hill. Whereas most crypto people despise regulation - it's actually kind of their whole thing - he was happy to testify right in front of Congress about exactly the types of regulations he wanted to see.
CHILDS: He was on the cover of Fortune magazine. He was in Vogue, on billboards, on so many podcasts - all hyping FTX.
BAKER: They were all over the place in 2022. There was a Super Bowl ad featuring some comedian guy named Larry David.
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LARRY DAVID: Nobody's going to the moon ever.
UNIDENTIFIED ACTOR: (As Katherine Johnson) Why not?
DAVID: It's too far. It's really far.
FOUNTAIN: Tom Brady and Gisele Bundchen, they were equity investors...
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GISELE BUNDCHEN: What do you think? Are you in?
TOM BRADY: You know what? I'm in.
FOUNTAIN: ...And made some noise around that. They had the naming rights for the Miami Heat stadium.
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UNIDENTIFIED PERSON: It's the Heat and the Charlotte Hornets inside FTX Arena in Miami.
FOUNTAIN: They were going for it in terms of getting their name out there, big time.
CHILDS: Big time. If you didn't know anything about crypto, this was probably the moment when you started to wonder, am I missing something? If Tom and Gisele and Larry are in, should I be?
FOUNTAIN: Let the record show that if you ever started asking yourself, should I invest because my favorite quarterback or supermodel or sardonic comedian is, maybe there's a bubble. Because this summer, things in crypto-land started to go south.
CHILDS: As economic data started to look iffy and the Fed kept hiking interest rates, the price of many cryptocurrencies started to fall. And this put many, many cryptocurrency companies in peril.
BAKER: That's where the story starts to get especially interesting because he's already someone people are paying attention to. And then, because crypto prices were crashing early in 2022, it destroyed lots of companies, right? They were struggling. They needed a bailout. They needed someone to swoop in to save the day. And there was Sam.
FOUNTAIN: It seemed like every time there was a crypto company failing, there was Sam swooping in to buy it or to offer a lifesaving loan.
BAKER: And so he got this reputation as, like, a modern-day J. Pierpont Morgan, like, the guy who's going to come in, in the middle of a disaster and save everybody.
CHILDS: J.P. Morgan, the very rich guy who, before the creation of the Federal Reserve, was functionally the backstop to the American banking system, who, when there was a bank run, would swoop in and bail everybody out. People started calling Sam JPEG Morgan. Get it?
CHILDS: You get it?
BAKER: I will admit to editing and publishing stories that talked about him as - now, jokingly - but, like, he was the white knight. He was the person who came in to help the industry earlier this year.
FOUNTAIN: And this was probably peak Sam Bankman-Fried. He was crypto's biggest celebrity, its 30-year-old elder statesman worth $16 billion on paper a couple weeks ago and planning to spend most of that on philanthropy.
BAKER: He was seemingly flying high, tweeting. And everything seems like it was - everything normal and hunky-dory.
FOUNTAIN: How fast was his fall?
BAKER: Never seen anything like it.
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BAKER: It's nuts. It's not something I could have ever contemplated.
FOUNTAIN: Coming up, down - things go way, way down.
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CHILDS: So Sam Bankman-Fried was the J.P. Morgan of crypto, saving everyone, heroically lobbying for responsible regulation, making the industry safer, friendlier to institutions and making boatloads of money to save boatloads of lives. Things couldn't be better. Here comes the last chapter.
FOUNTAIN: Yeah. This is when, last week, our friend Nick Baker, editor at CoinDesk, logs on one morning and sees a message from his reporter, Ian Allison, in Scotland. Nick says Ian is a very chill, laid-back guy, like, maybe too laid back, because when he got this big scoop that kicked everything off, this is how he told Nick, his editor.
BAKER: His first message to me was, hi, Nick. I'm looking at some stuff to do with Alameda if you want to chat this week. No mad rush.
CHILDS: No mad rush?
BAKER: Oh, my God. That's so good.
CHILDS: Because what Ian had his hands on was mad rush-worthy.
BAKER: He had gotten a copy from a source of Alameda Research's balance sheet as of June 30 of 2022.
CHILDS: The balance sheet, the financial diary of Alameda Research, Sam's hedge fund.
BAKER: Well, we're looking through it. There's, you know, a page of information. And there were three letters in particular that stood out, FTT.
BAKER: Do you know what FTT is? FTT is a cryptocurrency issued by Sam's exchange, FTX. It's Sam's Monopoly money that people trusted and used and thought was great. But there was a lot of that Monopoly money on the balance sheet. It was the majority of their net equity, was this thing invented out of thin air.
FOUNTAIN: The document showed that Alameda was worth billions of dollars. But the majority of that was FTT, the Monopoly money Sam had created to fund his other company, FTX.
BAKER: That's what was supporting much of the balance sheet. That is weird. That is weird. And there's really no question about that. Is that your company should fall apart weird? Not necessarily. Not at all. But is it possibly your company is going to fall apart bad? Yeah.
CHILDS: Like, if most of the money is Monopoly money, at the very least, that raises some big questions.
BAKER: Is this empire insolvent? Is it a house of cards that's going to collapse?
CHILDS: But in crypto, it seems like people are always asking if everything is a house of cards. And somehow, the answer is always yes. But the cards keep standing. And people keep putting more cards on top. So who cares?
BAKER: So the story came out on Wednesday. And Sunday is when things started to take off. Sunday is when the CEO of Binance - another exchange, a bigger exchange - tweeted that he was going to sell the FTX monopoly money that he owns.
FOUNTAIN: And he owned a lot of that Monopoly money. So his announcement pretty quickly made the price of FTT drop, which meant Sam's holdings started losing value fast.
CHILDS: So a lot of the cards that were the foundation for Sam's empire are now gone, and those that remain look increasingly wobbly. And suddenly, this becomes a very familiar dynamic when imported directly from traditional finance - a bank run. All Sam's customers, everyone holding his monopoly money, they're suddenly like, oh, God. The price is plummeting. I better cash out before it falls further, which forces the price down even further. We've seen this movie a thousand times - "It's A Wonderful Life."
FOUNTAIN: This puts Sam in a bind because his company didn't have enough money on hand for all the customers demanding it. And Nick says there really isn't anyone at this point who could save him, no matter how big a deal he was or the implications for the industry if he fell.
BAKER: You know, there's no Federal Reserve who's going to step in and backstop the industry to save it, right? In conventional finance, I mean, it seems pretty clear that we survived the 2008 financial crisis as we did because there was a central authority that stepped in to save the day. Crypto doesn't have a central bank. No one's going to step in. And they filed for bankruptcy a few days later.
FOUNTAIN: Sam's companies filed for bankruptcy on Friday, just over a week after CoinDesk's big scoop.
CHILDS: So how did Sam Bankman-Fried get to a point where his empire was resting on all these flimsy internet money cards? Honestly, we don't really know yet. Even Sam has said publicly he's still piecing it together.
FOUNTAIN: But there are a few stories you can tell that could explain his downfall. There's the effective altruism story. In an effort to make big change, he took big swings - maybe too big - and got caught on the wrong side of huge bets. Then there's the JPMorgan story where Sam wanted to be the white knight of the industry. And he came in to save all those crypto companies, but that left him overextended.
CHILDS: Or maybe he's just a regular fraudster with effective branding. Like, there's reporting coming out now that he tried to fill that huge hole in his balance sheet with client funds - which, if true, could be crime.
FOUNTAIN: There are already criminal investigations. And there will certainly be lawsuits from Sam's customers, from people who lost their savings, from pension funds whose stakes in the company are now valued at zero.
CHILDS: And this whole fiasco has caused an existential crisis in the industry my friend Nick Baker covers.
So, Nick, did you story yourself out of a job? Are you going have a job in six months?
BAKER: Why would you ask me that question? Yeah. Who knows? I mean, the industry is in a lot of trouble at this point. Like, that is an irony built into this. We did a great story that, sure, puts into question crypto for sure. I actually don't think crypto is going away. But there's some serious, serious, serious, serious - how many times should I say it...
BAKER: ...Soul-searching that needs to go on in crypto as a result of this.
FOUNTAIN: More soul-searching. Like, how does this keep happening? For an industry allegedly built on transparency, why does its best use case seem to be making off with funds that aren't yours?
CHILDS: And if that's the best use case, why is this thing - an FTT or a bitcoin or a doge - worth much of anything at all?
BAKER: The value of money anywhere in any form - whether it's magic internet money or if it's regular money - is confidence, right? If people are not confident in the United States, the dollar might have a problem. I mean, that's kind of how money works, I think, right? Some of that is just magic. I think that bitcoin has a similar thing where it is confidence - confidence in this thing. You just decide it's got to be worth something. And if enough people decide it's worth something, well, it is.
CHILDS: Or at least that's what we've decided for right now.
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FOUNTAIN: We'd love to hear from you. You can send us an email at firstname.lastname@example.org. Or we're on many social media platforms, usually @planetmoney.
CHILDS: Almost always. And we are working on a show that could use your help. Do you have a favorite part of the tax code, a subsection you can't stop talking about at cocktail parties? Maybe it's benefited you personally or appalled you personally. Whatever it is, we want to hear about it. Send us a voice memo - email@example.com. Thank you.
FOUNTAIN: Today's show was produced by Sam Yellowhorse Kesler, with help from James Sneed. It was mastered by Catherine Silva and edited by Jess Jiang. Thank you to the "Real Vision" podcast, where we got those clips of Sam Bankman-Fried. And thank you very much to Wailin Wong of The Indicator. You're the best. I'm Nick Fountain.
CHILDS: And I'm Mary Childs. This is NPR. Thanks for listening.
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