FTX’s crypto collapse was predictable. Investors just had to see.

Everything looked ideal, until it didn’t. A supposed MIT-branded whiz kid who had made a small fortune in currency-price arbitrage invited investors to make much larger fortunes using a special trading sauce whipped up for a new, new financial arena. He created a workplace offshore – but didn’t everyone work remotely anyway? He had a chubby face, a serious demeanor and an impressive family pedigree.

Sam Bankman-Fried even looked the part tech guru, dressed in classic sweats and cultivating a reputation for long office hours and an ascetic lifestyle. He also claimed that he earns huge sums of money mainly to help others and make the world a better place. He spoke inspiringly about how his trading company would soon be accepted as a depository for savings and a place for low-cost transactions. Revenue was reported to have jumped from $90 million in 2020 to more than $1 billion in 2021.

Bankman-Fried’s firms — FTX and Alameda Research — spectacularly imploded after a nine-day downward spiral in November that wiped out billions of investors’ dollars, led to his arrest and forced him to relinquish control. The courts will determine Bankman-Fried’s legal culpability. He has pleaded not guilty. But as far as investors are concerned, the FTX saga is hardly the first time investment assets have evaporated on this scale amid abundant signals that mischief was afoot, a lesson that hasn’t fully sunk in and could easily be missed again.

Bernie Madoff’s Ponzi scheme defrauded thousands of investors out of tens of billions until he was arrested in 2008. Bankman-Fried’s operation mirrors an operation set up 17 years earlier by a Texan named Allen Stanford, who set up trading operations on an island, hired brought in his former college roommate as a manager, arranged off-the-books loans from his firm, and proceeded to fleece thousands of investors out of some $7 billion, some of which he spent on real estate and other lavish perks. In 2012, Stanford was convicted of defrauding customers and sentenced to 110 years in prison.

Watching another major scandal unfold—followed by congressional investigations in the middle of regulatory distraction—raises new questions about whether the financial system is so shaky and reliable corporate data so sparse that ambitious investors are simply doomed to lose their shirts on a regular basis. Investors looking at recent crypto losses have reason to question whether the FTX fiasco could have been foreseen, and whether the problems now dogging Bankman-Fried lurk elsewhere.

A third of members of Congress — who recent figures indicate took in roughly $93 million in political donations from FTX employees over the past two election cycles, funds they were asked to return by the end of February — apparently did not the difficult questions. But a closer look at FTX’s history makes it clear that there were red flags that could have raised alarms for potential investors, regulators and politicians, if only they had done a serious research effort and paid attention to the results.

To begin with the basics, Bankman-Fried was candid long before his indictment about his poor preparation for creating Alameda at age 25. His undergraduate degree was in physics. He wrote on Twitter in August 2020 that he had struggled in school and “spent most of my life learning to be okay-but-not-very-good” at online games. At FTX, he was actually known for gaming during business meetings, including during a digital appearance in February 2022 at the Economic Club of New York. His habit fostered his reputation as an oddball savant, but should instead have been seen as a sign of inattention to basics—a serious shortcoming for someone forging a new path in an unregulated financial sector.

Bankman-Fried admitted in the same 2020 Twitter thread that a year after founding Alameda, the company was beset by internal strife, leading to “some really bad times.” A management dispute I didn’t know how to solve boiled over and a bunch of employees quit early in 2018.” One of those who left was Tara Mac Aulay, an Alameda co-founder who so in a November tweet that the termination was “in part due to concerns over risk management and business ethics.” In all, at least sixty-six FTX employees left the company before September 2022 and posted resumes on LinkedIn, creating a reservoir of information about the firm that potential investors could have tapped.

The staff that remained at FTX and Alameda after these departures were noticeably young and inexperienced. In 2021, the first year that FTX pulled in more than $1 billion in revenue, FTX and Alameda co-founder Caroline Ellison, 28, tweeted that there is “nothing like regular amphetamine use to make you appreciate how stupid a lot of normal, unmedicated human experience is.” Alameda, which she ran, steadily lost money during its short existence, accounting for its ultimately fatal reliance on FTX bailouts. None of this should have been a surprise. “We don’t usually have things like stop losses,” she said in a podcast last May. Stop loss is a tool for managing trading risk.

The atmosphere was more like a college fraternity than a multi-billion dollar business. FTX’s head of engineering, Nishad Singh, was a high school friend of Bankman-Fried’s younger brother, and Singh’s girlfriend was FTX’s human resources manager; Singh took out a $543 million loan from Alameda, according to court documents. Singh has pleaded guilty to multiple criminal charges.

FTX’s sales efforts sometimes followed a notorious boiler room model, a circumstance that escaped widespread attention because no one seems to have talked to customers. After the implosion, the New York Times revealed that when Bankman-Fried circulated specific investment opportunities to regular clients, he attached 24-hour deadlines to qualify for the best rates. As one investor told the paper, the terms of the offers seemed like “code for saying ‘no diligence’.”

No press scandal review appears to have compared Bankman-Fried’s public claims of personal loss and devotion to philanthropy to his actions. He told a reporter that he planned to keep just 1% of the proceeds. But the $190 million in total donations made by FTX’s charitable foundation through the end of 2022 was essentially a rounding error (seven-tenths of one percent) for someone with a personal fortune — premeltdown — estimated at $26 billion to $32 billion. The gap was another sign that beneath Bankman-Fried’s claim to great business acumen was a genuine talent for excessive self-promotion, a goal he has acknowledged in several post-bankruptcy media interviews. A court document filed in the Bahamas on Feb. 8 makes clear that FTX spent more on fancy properties and vehicles used by his employees — $257.4 million to be exact — than the FTX foundation funded by Bankman-Fried and his executives spent on philanthropy. Data of this type is routinely recorded in retrievable public registers.

Some of Bankman-Fried’s and FTX’s expenses were not public, or reported, because his company, like Allen Stanford’s, chose to operate under much lighter disclosure rules than those governing firms in the United States or other industrialized countries. In itself, the offshoring of his work – first in Hong Kong and then in the Bahamas with retained Hong Kong connections – was a red flag, signaling that neither regulatory authorities nor the threat of public embarrassment from negative accounts placed real burdens on FTX. for most of its existence. The absence of information, as any Sherlock Holmes fan knows, can be significant. And at FTX Group, as the company’s bankruptcy trustee John J. Ray III has testified, there were virtually no “audited or reliable financial statements.”

Not everything alarming about the company was hidden; it was instead largely ignored. FTX’s US branch had a transparently bumpy relationship with financial regulators, for example, including a clear conflict with authorities over the company’s trust and credibility. Last August, the Federal Deposit Insurance Corporation publicly ordered FTX US to stop claiming that its products or accounts were federally insured.

The company’s US president – whose statements were specifically cited by the FDIC – said “we really didn’t mean to mislead anybody.” But the exaggerated claims could have been read as signs of an unscrupulous corporate culture and a harbinger of shortfalls in revenue and profits. The FDIC’s letter went to FTX’s president and chief regulatory officer, Dan Friedberg, who had an easily visible, spotty employment record. Friedberg had been an adviser to online poker site UltimateBet in the mid-2000s when it tried to limit payouts to customers who were cheated by the firm’s software.

To summarize, those bewitched by Bankman-Fried or simply unable to search for evidence of his low qualifications ignored the inexperience of his team, the alarming nature of his work habits, the wide gaps between his promises and actions, the absence of sourdough executive influences or meaningful independent oversight, and a history of major clashes between Bankman-Fried and employees or regulators. All this was discovered before the bankruptcy.

Was FTX’s fall predictable? You bet it was. And there is good reason to believe that the next big downturn will also have been predictable.

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