Notable Critic: Jim Chanos
Short seller Jim Chanos, renowned for his history of betting against financial frauds such as Enron and Wirecard, took to social media to express his disappointment with Lewis. Specifically, Chanos criticized Lewis for echoing claims that FTX’s downfall was solely caused by a run on the bank.
Chanos drew a parallel between this defense and Enron’s similar stance during its own collapse. He argued that both FTX and Enron were not just illiquid but massively insolvent, making the bank run explanation unfounded.
The Bank Run Narrative
Bankman-Fried initially attributed the collapse of his crypto empire to a run on customer deposits. This explanation came after the group of companies filed for bankruptcy protection in November, following an unexpected unraveling.
While it is true that FTX experienced a significant outflow of $6 billion in customer deposits, a presentation filed in March during the bankruptcy court process revealed an even larger $6.8 billion deficit in the balance sheets of associated companies.
Cryptocurrency Price Appreciation
It should be noted that the increase in cryptocurrency prices this year has somewhat mitigated the impact of these deficits. Court filings made by the company’s attorney indicate that the value of some assets has been positively influenced by the rise in cryptocurrency prices.
In conclusion, despite the backlash faced by Michael Lewis for his interview with Sam Bankman-Fried, it is essential to consider multiple factors influencing FTX’s collapse and not solely focus on the bank run narrative.
The Trial of Sam Bankman-Fried: Charges and Criticisms
Sam Bankman-Fried, the former crypto prodigy behind FTX, will face multiple charges including wire fraud, securities fraud, and money laundering in his upcoming trial at Manhattan federal court.
Lewis made a striking comment, referring to Bankman-Fried’s downfall as leaving a “Sam Bankman-Fried-shaped hole in the world.” Furthermore, he suggested that had there not been a run on customer deposits, FTX would still be flourishing financially.
Financial analyst Jim Chanos and others highlighted an important distinction regarding FTX’s situation. They pointed out that the firm wasn’t just facing liquidity issues but was in fact insolvent.
It is crucial to understand the difference between illiquid and insolvent firms. An illiquid firm possesses high-quality assets that can be either sold or used as collateral for loans. In contrast, an insolvent firm lacks such assets.
As an example, Alameda Research’s balance sheet, as initially reported by CoinDesk before the collapse of the group of companies, consisted mainly of the FTT token. This token was issued by Alameda’s sister company, the FTX exchange, and its value experienced a significant decline leading up to FTX’s collapse.
For more intriguing anecdotes shared by Michael Lewis about Sam Bankman-Fried, refer to “The 5 Weirdest Sam Bankman-Fried Stories” on the ’60 Minutes’ episode.