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“Let’s say there’s a game: 51%, you double the Earth somewhere else; 49%, everything disappears. Would you play this game? And would you go on playing like that, double or nothing?’
Most of us wouldn’t risk playing this game even once. After all, it seems morally cruel to take a 49% chance of all of human civilization disappearing for a 51% chance of doubling the value of our civilization—essentially a coin toss.
Yet when asked just that in a March 2022 podcast with Tyler Cowen, Sam Bankman-Fried (SBF) was very willing to play this game – and keep playing it over and over again. Cowen asked SBF about the high probability of destroying everything by making double out of nothing in a series of coin flips. The SBF responded that it was willing to make that trade-off for the chance to throw coins into “an extremely valuable existence.”
Listening to this podcast made me realize that this high-risk, high-reward decision-making philosophy is what made his wealth possible—but also fragile. In fact, he was worth $26 billion at the height of his wealth. He was the golden boy of crypto: lobbying and donating to prominent government figures, giving high-profile interviews and rescuing failed crypto projects. In fact, it was called the JP Morgan of crypto.
His decision-making philosophy worked for him—until it didn’t.
FTX filed for bankruptcy on Nov. 11, along with 130 other entities related to it. This filing stems from the disclosure of some very shady bets and deals that led to stock market crashes and federal fraud investigations.
SBF resigned as CEO as part of the bankruptcy filing. His wealth – all tied to FTX and its affiliates – has shrunk to almost nothing. His coin flipping luck finally ran out.
As his financial empire crumbled, SBF tweeted: “I screwed up…poor internal labeling of accounts linked to the bank meant I was way off my sense of consumer margin.”
Of course, we shouldn’t just take the SBF’s word for the current situation, given the circumstances. Yet at least the cruel accounting part of the explanation and the over-optimism about consumer funds is supported by the only external investigation of the matter so far.
Binance, the world’s largest cryptocurrency exchange, initially offered to buy FTX as it collapsed. However, after looking at FTX’s books, Binance saw that the problem was too big to solve. Binance backed out, citing revelations of “misappropriated client funds” and describing the “books” as a “nightmare” and a “black hole,” according to a person familiar with the matter.
Messing with customer funds is a big no-no. The Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), and the Department of Justice (DOJ) are investigating FTX’s handling of client funds. Specifically, they are investigating whether FTX complied with securities laws related to the separation of client assets and trading against clients.
Reuters reported that SBF built what two senior FTX officials described as a “backdoor” into FTX’s accounting system, created using custom software. This backdoor allowed SBF to execute commands that would not alert others, whether in FTX or external auditors. The two sources told Reuters that SBF allegedly “secretly transferred $10 billion in client funds” from FTX to SBF’s own trading company, called Alameda Research.
In talks with investors, SBF reportedly described its decision to lend $10 billion to Alameda as “poor judgment.” This coin toss landed on the wrong side. Double or nothing became nothing.
The main story here is about a fundamental failure of compliance and risk management. The inner circle of executives of FTX and related companies such as Alameda lived together in a luxury penthouse and had very strong personal and romantic ties. Fortune spoke to several former and current FTX employees, who described the inner circle as “a place full of conflicts of interest, nepotism and a lack of oversight.” Naturally, this context of personal loyalty at the top makes control and risk management difficult. This allows things like secret software backdoors, shady accounting and mishandling of client funds to flourish.
Such indifference to risk management stems mainly from SBF’s philosophy of making decisions about high-risk, high-profit bets. SBF is undoubtedly a visionary and a financial genius. One of the world’s most prominent venture capital firms, Sequoia Capital, has invested $210 million in his company, and a partner at the firm said SBF has a “real shot” at becoming the world’s first trillionaire. Yet it ignored the serious dangers of SBF’s decision-making philosophy.
SBF is not the only multi-billionaire to ignore risk management and oversight. Consider Elon Musk’s approach to Twitter.
After taking over the company, he fired most of the existing executive team, as well as the Board, and replaced them with a select inner circle loyal to him. He then began experimenting with various Twitter features, most notably selling blue check verification badges for $8 per month without any mechanism to verify a user’s true identity.
Previously, Twitter offered verification — for free — only to those who had some sort of public status and could prove it. After Musk’s proposal, thousands of new blue-tagged accounts appeared impersonating real people and companies, such as an account that looked like Eli Lilly, which claimed insulin was now free. Musk seemed very surprised by this result and responded by pausing the paid blue tick program.
The result of the introduction of paid blue badges was clearly predictable. Yet there was no meaningful risk management and oversight oversight over Musk’s actions, just as there was none over SBF.
The result of Musk’s risk-taking on Twitter could be bankruptcy, which will mostly be a loss for some big banks and investors. The result of taking SBF risk in FTX is definitely bankruptcy. This bankruptcy not only hurts big investors: it also destroys the savings of many thousands of ordinary people who keep their money in FTX.
SBF’s abuses also harm the many worthwhile charitable causes it donates to, such as pandemic preparedness. A dedicated philanthropist who has already given away many millions focusing on evidence-based charities, SBF has raised hopes of inspiring billionaires to give away their wealth quickly, just like Mackenzie Scott. However, many charity projects to which he pledged funding are now in limbo, having had their funding withdrawn. Employees at SBF’s grantmaking body, the FTX Future Fund, resigned amid revelations of abuses at FTX, saying they were concerned about the “legitimacy and integrity” of SBF’s business operations, which funded the grants.
Such detrimental consequences resulting from a lack of oversight and risk management underscore why it is critical for founders to have someone who can help them make good decisions, manage risks, and address blind spots.
Risk managers should be in a strong position, able to get on the Board of Directors – which should have real control over the CEO, not have the CEO be able to fire the board, as Musk did. When serving clients in this role, I insist on having access to a supervisor as part of my consulting contract. I almost never have to use this option, but having it helps me curb the “double or nothing” impulses of brilliant founders like SBF or Musk, since they know I have the option.
If you decide to make an investment with a seemingly brilliant entrepreneur, do your due diligence on risk management and oversight. If the entrepreneur seems to have no one to curb their impulses, be cautious. They will take excessive risks and you are gambling rather than investing your money wisely.
Gleb Tsipursky, Ph.D., is CEO of the boutique future-of-work consultancy Disaster Avoidance Experts. He is the best-selling author of seven books, including Never Act on Your Instinct: How Pioneering Leaders Make the Best Decisions and Avoid Business Disasters and Leading Hybrid and Remote Teams: A Best Practice Benchmarking Guide for Competitive Advantage. His expertise comes from over 20 years consulting for Fortune 500 companies from Aflac to Xerox and over 15 years in academia as a behavioral scientist at UNC-Chapel Hill and Ohio State.
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