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Nov. 28, 2022 - Doug Collins Podcast
31:41
FTX: Beyond the Headlines
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Georgia GOP Congressman Doug Collins.
How is it?
The greatest thing I have ever heard in my whole life.
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Because we won an election.
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Hey everybody, it's Doug Collins.
Welcome back to the Doug Collins Podcast.
You know, I've been getting a lot of pings, a lot of questions, a lot of folks wanting to know about this FTX issue, the crypto.
We've had, you know, information on the podcast more about what cryptocurrency is, what some of this stuff is doing and how it goes about.
But then all of a sudden, you know, here we have what is being described by some is bigger than Enron.
I mean, Ponzi scheme gone wild.
I mean, you just, you name it that's been out there.
So I've had a lot of folks ask me to say, let's Find out what's happening, how is it happening, and what can we do?
So, you know, when I do this, folks, I go to the experts.
I go to the folks who can give you the best answers.
And John Berlaw is here today, Competitive Enterprise Institute, to give us the lowdown.
John, it's good to have you back on the podcast.
So good to be on, Doug.
Thank you for having me.
Happy Thanksgiving.
Happy Thanksgiving.
We got some good stuff going on here as we go.
Okay, let's just start off as we do a lot of things when it comes to, again, to this issue of crypto, this issue of a lot of things that people are beginning to know about but they don't know about.
Start us off with basically what FTX is, was, how this got mixed up with this gentleman who is very interesting in his own right.
How did this all come about?
well ftx had built itself in a very short time um into uh one of the largest crypto exchanges uh in the world um based on as we now know you know questionable uh uh well uh basically you know a false picture i will i will say that of its of its assets in in large part and Was affiliated,
and this is important because of the funds going back and forth, also with a trading firm called Alameda Research, both founded by Sam Bankman Freed, who is, I don't think, I think he may have just turned 30 this year, but young guy, sort of wunderkind, sort of like, a little bit like, this story's a little bit like Elizabeth Holmes of Theranos, where people were just oohing and aahing, and he was able to charm wealthy investors.
He and FTX became just a presence in Washington and elsewhere with naming rights for stadiums, the Super Bowl commercial with Larry David that ran last year, involvement of other celebrities, and he became a presence in Washington.
One, because he's a Democratic donor.
And he was also making the case for more...
And this is what I find ironic, comic if it weren't so tragic, that he was a lobbyist for more extensive crypto regulation that his competitors said the type of regulation he was championing, and I think there's some green to this, would have given FTX a monopoly.
But then...
When there was a report in the crypto news site, CoinDesk, both about allegedly unauthorized lending of billions of dollars to the trading firm, you know, in his name, Alameda Research, which, you know,
hadn't been disclosed to investors there as well as to the crypto customers, and the fact that they were basically using FTX's own native token, when it was created, it wasn't something that traded independently,
like Bitcoin, as its asset, and valuing that asset to billions of dollars, it caused the rival firm Binance to sell that, which led to a run, which led into a collapse in value of that token, which led to withdrawals from the FTX exchange,
and within a matter of days since the Excuse me, CoinDesk report, FTX filing for bankruptcy, and its new CEO that's like a restructuring expert CEO, when Sam Bateman-Fried resigned, said he's never seen in his live financial statements so unreliable, and he was involved with Enron.
Right.
Well, let's break out what you just said before.
Let's just break down into parts, and then let's get back to the whole.
Sam Bateman-Fried, I mean, let's start with him.
And I love your analysis there with the Theranos issue, which, by the way, I think as we are taping this has been sentenced to prison time and all for what was going on with that.
But I think it's an interesting analogy.
How did someone...
Of his age, and I'm not taking back from age.
I got no problem with somebody with great ideas.
I don't care what your age is making a lot of money.
But how did it go, and especially in industries such as this, besides the Democratic donor base, besides some of the other stuff, they were throwing out a lot of money at places.
One, how did he gain the money, I guess is a thought that many people have.
And then how did it become so quickly marketable in the political world?
And then because there's reports that, you know, this issue has, you know, Ukrainian legs back to Democratic donors.
I mean, there's just all kinds of things going on here.
Give us a little info about him if you can.
Well, he is a pretty book smart guy and also smart at making social connections, but there's a saying, knowledge doesn't even equal wisdom.
But it also certainly helped the fact that he had prominent parents that, his name is Sam Bankman Freed, Barbara Freed, headed a Silicon Valley pact that gave to Democratic donors and also His father, Joseph Bankman helped, according to Fortune, draft tax legislation for Senator Elizabeth Warren.
So, I mean, basically, Kevin O'Leary, Mr. Wonderful on Shark Tank said, well, of course, I trust him because his parents are compliance attorneys.
But something to the effect, I'm paraphrasing, what could go wrong?
Yeah, that's like trusting the baker with all the ingredients and never watching, because nobody ever would think the baker would put something in there, you know?
Exactly.
Trust but verify, as Ronald Reagan said, in everything, in politics and in business.
I love it.
Well, I mean, he gained this, and then we bring into account this Alameda group as well in which he was funneling off money, however you want to put this into this.
But this also lends itself to a really different part of this because the Alameda group was headed by a young lady Who had a relationship with him.
I mean, this can't get any more confusing, especially when you get into this, quote, polymorphic couples.
I mean, this...
Did anybody just see this, or did all this just come to light recently?
Well, people did see it.
This is the thing.
The FDIC, Federal Deposit Insurance Corporation, warned them in August, but this is the bank regulator as it was deposit insurance, that they were deceptively advertising that their accounts had deposit insurance.
That should have been a warning.
Also, short seller Mark Cohodes was saying, you know, things like in August that nothing fits here.
Here are, you know, 10 guys in the commune in the Bahamas running like, you know, a multi-billion dollar financial exchange.
So, yes, there were a lot of things there, but, I mean, one of the other things that Sam Bankman-Free did is he wrapped the FTX, environmental and social governance mantra, where they were saying they were talking about being carbon neutral and, and favoring coins with what's called proof of stake that supposedly wasn't as much harmful to the environment.
So he wrapped himself in there.
So it's clear.
I mean, I've written about other ESG firms that are being shorted, that ESG could be a mantra for environmental and social governments can be poor financial governance.
And the SEC At the same time, when they had warnings about this, we're instead trying to make companies disclose how ESG or woke they were in pushing things that had nothing to do with fraud.
At the same time, this fraud apparently was raging at FTX. Well, on a quick detour here, because you brought this up, and I was just reading this this morning, this environmental,
you know, government's issue that we're talking about here, issue stuff, is there's a lot of concern among Wall Street right now, especially going into directors' meetings and elections of directors and some of the rulings that they can't block the groupings of, here's the directors, you know, that the The company is pushing.
Here are the ones that the activists, if you would, push.
Is this something that, again, and it sort of branches off from what Sam McAfee was doing, is this a concern or is it just mainly just fear of companies, but is there a real concern that activists and others who are pushing these agendas Could get footholds on some of these large boards, bank boards, and others.
There is a real concern, and it's going to be on top of Sarbanes-Oxley, which is the regulations that were rushed through after Enron, which I've written about.
I'm going to talk to you earlier.
And Dodd-Frank, it's going to mean less companies go public in the first place, or only go public when they're very big.
And who loses out from that?
Mom-and-pop investor.
And again, these agendas are going to be at the expense of the financial well-being of You know, Joe and Jane 401k.
So it's kind of two sides of the same coin.
They allowed, the SEC allowed fraud at an ESG firm to, apparent fraud at an ESG firm like FDX to Fester, and they're having, they're encouraging all these agendas that harm investor return.
Well, and I think this brings us sort of to this concern.
Let's just say, before we get into where it's headed, what's lived, if you were using the FTX or you were invested in FTX or there were things...
Basically, are you just out now?
Crypto is fairly new.
Blockchain, all these others, they're good things about what's going on there.
But then there's also the concern of what it's backed by, what it's not backed by.
Where are you at if you were part of this?
You just bought into the hype, so to speak.
That is a very good point.
It's interesting.
We talked about Elizabeth Holmes and Theranos.
Not every fraud causes contagion to the rest of the economy.
I mean, Elizabeth Holmes, her investors, who were well-to-do anyway since it was a private company, although there may have been some pensions invested in it, lost, but it really didn't cause harm to the larger economy.
What really tends to do that, ironically, is, you know, sort of the rush to either bail out or regulate when you have it in the financial crisis when, you know, Bear Stearns got a bailout, everybody expected a bailout, you know, and then Dodd-Frank with Rush Roots or Sarbanes-Oxley after Enron.
So from what I've been told, or what I've read, FTX, there was a pause of withdrawals, but now, I mean, that has resumed even in bankruptcy, although there are different reports of that's what's going on.
Some other websites, either with exposure because of panic, have temporarily paused withdrawals.
But generally, the crypto market itself has stabilized.
You know, it fell about 20%.
Bitcoin was trading at 20, went to 16,000.
It seems to have stayed there.
There have even been a couple cryptocurrencies that have risen, like the spinoff of Bitcoin called Bitcoin Cash.
It's actually gone up slightly in price because of positive developments there since, you know, the FTX bankruptcy.
So just like Madoff didn't mean you should sell every stock because the stock market was inherently corrupt.
I think cryptocurrencies have been around For 15 years, and you can't predict, just like you couldn't predict with internet companies which one would succeed, but they're going to be around somewhat.
Unless regulators make a misguided attempt and legislators make a misguided attempt to do something, I don't think it's going to really tank the whole crypto market.
Of course, I'm not offering financial advice here.
Well, exactly.
Neither one.
We're just saying, here's what's happening.
Well, it brings up an interesting question, okay?
Because a year ago, if you just look back on the year-to-date charts and whether you're just a simple investor on TD Ameritrade or anywhere else, you can look at the crypto charts and you can see that last year at this time, Bitcoin itself was $60,000.
It's now $16,000.
And last year at this time, Facebook was $350, and now it's trading about $100.
So both stocks and cryptocurrencies have had a steep decline.
Well, and I think that you made a great point, that just because of the results of one doesn't carry the results of all.
But the curious question here, though, is as opposed to, say, a Facebook stock, which has thousands of other stocks out there, you know, of similar like and kind, if you would, Crypto is still considered new.
Crypto is still considered...
I mean, if you ask a man on the street, 10 people, I would be amazed if you got four people that actually understood crypto and Bitcoin and others and the markets, how it works to start with, possibly less than that.
I understand what you're saying about it not affecting others, but the reality is, I think, for newer investors, for those who are looking at it, don't you think this could actually affect, and if not, have we settled a little bit?
I mean, maybe Facebook shouldn't be at $300, it should be at $100.
Maybe Bitcoin shouldn't have been at $60, it should have been at $16.
Where do you see that?
I think the big issues, I mean, going up and down generally, stocks and cryptos will go up and down.
And that really isn't an issue for, it's an issue for the, maybe an issue for the individual investor.
That's why it's important to diversify, but it's not an issue for public policy.
One of the issues with cryptocurrency is that with exchanges, just because of the way the law is structured, you don't have the same rights as far as being able to access the crypto at whatever value it is.
I mean, some exchanges are now doing things like proof of reserves, but generally if they go bankrupt, You know, you're like an unsecured creditor rather than, you know, having access to that.
And there are things that can be done like, you know, allowing banks and trust companies to offer trust accounts where there is what's called segregation of assets.
But generally now the choice is either doing that on an exchange where, you know, there are less controls about what they do with customer assets.
And as far as legal rights, or holding it in a wallet, what's called a cold wallet, a digital wallet, where you don't have the risk of the exchange losing it or going bust, but then you have other risks like remembering your password, a very long password.
So if there was something, and in a way, I mean, Part of that is the SEC's and other regulatory agencies' fault for not approving things like trust accounts, like exchange-traded funds that could give people a less risky exposure to the sector than they have in other countries like Canada.
All right.
Well, then that brings us to this, you know, we've gotten here.
I think you're going to see more and more as the bankruptcy, you know, now head of the company basically saying he's never seen anything this bad.
And I think we're going to hear more and more of the Extracurricular, everything going on at FTX, Alameda, the rest of it.
But this brings us to the, I always like to try and have the, okay, here's the problem, but what is the future?
And this brings us to, I think you and I both would agree, to a concerning point.
Is this a point?
You just pointed out that there were some things the SEC could have done, you know, prior to that could help in this area of Bitcoin and with the exchanges.
But also, there's going to be a very hard look, as you well know, from DC, because the only thing they can do is pass something to, quote, make it right.
What's the concern now that the bad actor of FDX I think that's a very strong concern, and it's actually a concern for the market, too, because the government regulation, if you outlaw a certain type of crypto or exchange, that can help or spread or fuel contagion.
We should learn, hopefully, from the rush after After the Enron and WorldCom implosions with Sarbanes-Oxley that made it so much harder for smaller companies to go public and mom-and-pop investors to grow wealthy with them, Bernie Marcus was able to go public in the 80s with Home Depot.
They had just four stores, and he said that would be impossible now and that he may have never...
You know, been able to get Home Depot off the ground and that he was able to go public when they were just a four-store Georgia chain.
So we kind of don't want, you know, cryptos or the use of blockchain, which they can provide.
There was, for instance, a conservative website called Odyssey that was putting up some of the videos that YouTube censored and used a token and the token called Library.
And The SEC spent its time, you know, going after that and not even alleging fraud rather than even, because it said it was an unregistered security, rather than, you know, to the time it could have been, you know, looking at FTX. So enforce the laws that they have.
I think other things, there are just, you know, long things as far as, you know, Disclosures could be improved, certainly, but also enabling things that would make it actually safer with consumers that would have guarantees, like being able to put...
Crypto in a trust account at a bank or trust institution in the same way you put your jewelry in the safe deposit box of the bank or having like an exchange traded fund like for gold or stocks where the others would, you know, would have a contractual obligation to keep custody, having that and improving that rather than just having a rush to regulate, enforce the laws we have now and look at, you know, what updates are necessary.
But SEC had ample authority to go after FTX simply because of the fraud against its investors, even though it wasn't a publicly traded company, in the same way that it was able to go do that because of the defrauding of the private investors in Theranos.
It's interesting to me here, John, and this is, you know, Machiavelli's famous quote was that there's never more interesting, anything more perilous or intrepid than the introduction of new things.
And this would be, you know, crypto, blockchain, however you want to do it, it's still, even those that understand it, they get it, but for the vast amount of Americans and the world, for the most part, they don't get it.
And most of us are still learning when it comes to this.
And I think that's going to be the key is what, you know, because, I mean, you had, what was it, El Salvador basically Turned almost everything over to crypto, and now they're really, you know, having a struggle through Bitcoin because of, you know, the price that it once was the price that it is now.
I mean...
Well, now, I mean, the president is still, you know, resolute.
He's going to say he's going to buy a Bitcoin a day, and that's going to boost his treasury, and he's been popular there.
I may not have done it perfectly, but that's...
So, I mean, they're...
People are still seeing that as an asset.
In going forward, I know the trust accounts and other things.
What's the fear here?
Do you fear that the SEC, because there was a lot of concern from Friedman himself, that he was looking more for regulatory burden that would make him a monopoly.
But there is a lot of concern in this regulatory space that there is needed to an extent, but not to stifle the innovation.
Is there a middle ground to be split here?
I really think there is.
Well, one of the middle ground is just that investors should be protected from fraud and not protected from risk.
I would say there would be a middle ground where you might give an agency like the Commodity Futures Trading Commission power over exchanges in return for Limits to the SEC's power, which I argue the SEC is exceeding its power, right?
But, I mean, the legislation in Congress now from Senator Stabenow, Democrat, and Senator Boozman, Republican, which Sam Bankman, free champion, would give the CFTC that power, but still, you know, let the SEC rage.
So I think that really needs to be fixed before we rush into it.
And we certainly should wait, you know, not rush, do anything in the lame duck and wait until, you know, the voters wishes are realized when the new Congress convenes.
But one of the things I have been warning about since 2019 that could set a bad precedent, not just for crypto and other sectors, is the SEC.
Most cryptocurrencies don't offer a promised return on investment or a share in a company.
They just will go up in value the same as any collectible or other things.
The SEC, starting with Jay Clayton, President Trump's appointee, who was a disappointment and frequently clashed with other of President Trump's appointees on there, but accelerating with Biden's appointment, Gary Gensler, is taking the case that most cryptocurrencies are actually securities simply because they will go up or they're bought as investments.
Well, you think about that, a lot of consumer items Are bought as investments.
So our comic book securities, our baseball card securities, our gold coins, and now that you have what are called non-fungible tokens that would sort of validate like a collectible comic book or piece of art, then that's an issue because the SEC, it could be a power grab over everything.
And never to be put aside from that part.
So the last thing as we look at it, does this go back to just, you know, there's always the issue of due diligence.
Everybody, you know, you hear it in your investments, you know, always do your own research, always do this kind of stuff.
Was there any way, I mean, because this cast of characters, I mean, there is a TV movie, you know, or a full-length feature film waiting to be made about this.
I mean, at some point in time.
Was there really any way, I mean, when you look at the ten of them living together in this interesting relationship, Alameda being run by basically what now appears to be someone completely incompetent of running an investment kind of firm, you know, Was there any way for me or you, and especially I don't say me because I'm completely, you know, out of the flip, to have done what we would have normally called due diligence?
I think there would be.
One of the ways that you should watch is I think Enron proved this, many, many other things.
The subprimes is Pay attention to what the short sellers who have their own money are doing.
In this case, I had mentioned, you know, in Enron, you had shorts like Jim Chano's warning about this.
And in this case, you had Mark...
You know, as early as August, maybe before then, saying this, you know, doesn't make sense.
And he was shorting companies that were publicly traded companies that were involved with this.
So pay attention.
Look at what, not just what the Longs or the Bulls, but what the Bears are actually doing.
And then, of course, you know, there's always, you know, don't have all your money in one place.
I mean, it's...
In this, you know, there are unique risks to crypto because of the way the regulatory structure now both in having it in exchange and in like a cold digital wallet where you need to, you know, remember the password.
You have cases with lost passwords.
But just know, I guess, know the risks of the sector and what could happen and plan accordingly, whether to have, you know, money in different places, not putting it.
Some risks are unavoidable.
And just pay attention to what the short sellers are doing.
And policymakers should pay attention to the short sellers.
And right now, I've written at CEI.org about that a lot of so-called green stocks, ESG stocks, are being shorted by one of the same guys who shorted Enron.
So, you know, that's the thing.
Pay attention to the shorts and just, you know, don't, you know, Put all your assets on one place.
Again, I'm not offering financial advice because everybody's situation is different.
But it still goes back to, you know, doing due diligence, looking at the whole market, looking at everything else.
Look, this story is nowhere close to, I don't think, being over.
I think there is a legitimate concern that Washington in And again, have been there for a number of years myself.
It's almost like you desire to see something and you want to do something, whether it works or not, just so you can say you're doing something.
I think that's become the concern that I have on situations like this as we go forward.
But John, thanks for keeping us up to date here.
This gets us a little bit more.
I'm sure we'll probably come back in a few weeks or so and say, okay, where are we at now?
There is more to this story, and the more it just keeps leaking out, it's just been amazing to me.
Thank you so much for having me on, Doug.
CEI.org is our website, and if I could put in a good gift for Christmas and holidays and Hanukkah and other holidays, my book, George Washington Entrepreneur, talks about how our first president in his private business dealings was very wise with money and diversified as far as, you know, They couldn't trust the fiat currency in his day, so he put a lot of his assets in land.
Exactly.
And if you want to know more about that book, you can go back on the previous Doug Collins podcast where we had John talking about that book.
It was a great podcast, well worth the listen.
John, thanks so much for being with us.
We look forward to having you back again.
Thanks for having me on to talk about both crypto and my book, George Washington Entrepreneur.
I love it.
All right, folks, that's the Doug Collins podcast for today.
We'll see you next time.
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