The Former Chair of the FDIC Draws Parallels Between FTX and the Ponzi Scheme Operated by Bernie Madoff and Sam Bankman-Fried
Sheila Bair, who served as a top U.S. regulator during the financial crisis of 2008, stated in an interview that she gave to CNN on Monday that there are eerie parallels between the rise and fall of FTX and its former CEO Sam Bankman-Fried and that of Bernie Madoff. She said that the similarities include the fact that both men were involved in Ponzi schemes.

Between the years 2006 and 2011, Bair served as the chairman of the Federal Deposit Insurance Corporation (FDIC). Paxos, a company that specializes in blockchain infrastructure, now has her serving on their board of directors.

She added that both Bankman-Fried and Madoff were skilled at convincing smart investors and authorities to disregard warning signs that were in plain sight. Both were able to accomplish this successfully. Last Monday, FTX submitted its petition for Chapter 11 bankruptcy, and Bankman-Fried resigned from his position as CEO.

According to Bair's description, "charming regulators and investors can divert [them] from delving in and discovering what's actually going on." He elaborated on this statement as follows:

In that respect, it reminded me a lot of Bernie Madoff's schemes.

Madoff was responsible for the biggest Ponzi scam in history, which was estimated to be worth around $64.8 billion. He assured investors that they would receive significant returns, but instead of investing their money, he placed it in a bank account and met payment obligations by drawing from the accounts of both current and new investors. Following his conviction on charges of fraud, money laundering, and other offenses in the same vein, he was given a sentence of one hundred fifty years in federal prison. On April 14 of the previous year, at the age of 82, Madoff passed while while incarcerated.

Bankman-Fried is suspected of using a "backdoor" to conceal the movement of around $10 billion in client cash from FTX to his other trading business, Alameda Research. This was done in order to prevent accounting red lights from being triggered.

FTX was able to achieve its current valuation of $32 billion as a result of investments made by significant corporations and venture capital organizations such as Blackrock, Softbank, and Sequoia. Bair made the following comment:

You can develop a herd mentality, in which you feel as though you have no choice but to invest if all of your colleagues and notable personalities in the venture capital industry are doing so. Additionally, this lends credibility with the decision-makers in Washington. Everything is sustained by itself.

Because crypto is still a relatively small part of the overall economy and financial market, the former chair of the FDIC is not concerned that the implosion of FTX will threaten the entire financial system in the same way that the failure of Lehman Brothers in 2008 threatened the entire financial system.

Despite this, the cryptocurrency industry is still largely unregulated, leaving investors exposed in the event that something goes wrong. Bair emphasized that:

People are getting injured, therefore it's time to decide on a regulatory framework for cryptocurrencies and figure out who is responsible for what kind of regulation.

In addition, the former regulator warned investors to exercise prudence and maintain a suspicious attitude. "If it seems too good to be true, it generally is," she added. "If it sounds too good to be true, it probably is."

Do you concur with the previous head of the FDIC's assessment that there are parallels to be drawn between the collapse of FTX and Sam Bankman-Fried and the Ponzi scheme that Bernie Madoff operated? Share your thoughts with us in the space below titled "Comments."