Hedgeye’s Keith McCullough laments lack of outrage in DC and media to the FTX meltdown
One of the most dramatic corporate catastrophes of this year has been the collapse into bankruptcy of FTX, the world”™s third largest cryptocurrency exchange, which has resulted in a $32 billion loss for its more than 1 million customers.
As business stories go, it doesn”™t get bigger than this. But something very peculiar is going on with the reaction to the FTX debacle within the federal government and the mainstream media. While the U.S. Department of Justice, the Commodities Futures Trading Commission (CFTC) and the Securities and Exchange Commission have begun respective investigations, there has been no direct comment whatsoever from the Biden administration and from the vast majority of lawmakers on Capitol Hill ”“ a House Financial Services Committee hearing has been scheduled for December, shortly before the current Congress expires. But no specific date has been set and it is unclear if Bankman-Fried, who lives in the Bahamas (where FTX is headquartered) will return to the U.S. to testify.
As for the mainstream media, the story has been reported in a curiously anodyne manner that shields FTX”™s founder, Sam Bankman-Fried, from the suggestion of fraud. Indeed, some of the media coverage has gone out of its way to position Bankman-Fried in a manner that makes him seem like a victim of the company”™s downfall rather than the central player in its misfortune ”“ the Washington Post ran several articles highlighting his “altruism” in funding pandemic vaccine research while the New York Times thoughtfully asked how he was sleeping during this period and noted how he used the video game Storybook Brawl to occupy his time ”“ but what was not mentioned was Bankman-Fried is scheduled to speak at a Nov. 30 New York Times-sponsored conference “The DealBook Summit” that also features Treasury Secretary Janet Yellen, New York Mayor Eric Adams and Facebook founder Mark Zuckerberg.
Several media outlets have published in-depth pieces that cast a harsh light on Caroline Ellison, Bankman-Fried”™s ex-girlfriend and the now-fired CEO of Alameda Research, the hedge fund founded by Bankman-Fried. The Wall Street Journal reported FTX tapped into its customers”™ money and loaned Alameda billions of dollars to engage in risky investments and trades. In the U.S., brokerages are required by law to separate their customers”™ funds from their trading capital ”“ but that didn”™t apply to the Bahamas-based FTX.
Alameda Research was among the multiple FTX Group-linked entities caught in a financial domino effect that resulted in bankruptcy filings. But the low-profile Ellis and not the high-profile Bankman-Fried is being castigated in this coverage ”“ a Business Insider article focused on Ellis”™s acknowledgement via Twitter of having regularly used amphetamines but did not emphasize that Bankman-Fried owned 90% of Alameda Research and was fully aware of what was taking place.
The fraying of FTX was forewarned by Keith McCullough, founder and CEO of Hedgeye Research, the Stamford-based investment research company at a time when Bankman-Fried was still being hailed as a financial genius. In October, McCullough”™s HedgeyeTV ran his interview with Marc Cohodes, former head of the $1.5 billion hedge fund Copper River and a prominent short seller ”“ Cohodes detailed how he tried but failed to get Bloomberg interested in investigating the problematic business practices that Bankman-Fried and FTX were undertaking.
But as details of what Cohodes shared on HedgeyeTV are only now becoming public knowledge, McCullough decried how Bankman-Fried”™s financial and political influence is shielding him from being held up as a fraudster. Bankman-Fried was the second largest donor to the Democratic party in 2020 with $36 million in contributions ”“ he was a guest at the White House as recently as May ”“ and he also gave campaign contributions to several prominent anti-Trump Republican leaders including Sens. Mitt Romney, Lisa Murkowski and Susan Collins.
For McCullough, Bankman-Fried”™s deep pockets and wealthy political friends is keeping him from being held up as a problem. White House Press Secretary Karine Jean-Pierre relayed the administration’s call for “prudent oversight of cryptocurrencies” based on “recent issues” without identifying Bankman-Fried directly.
“I think the most basic thing that I’m not seeing is the compensation that they all receive from it,” McCullough said. “I think that that’s the main conflict of interest here.”
McCullough also observed the unusually polite coverage Bankman-Fried is receiving in the media is because “a lot of these traditional media outlets were paid massive ad revenues from all of these crypto players. And to me, it’s very obvious they’re not going to challenge or bite the hand that feeds them until the hand has gone.”
For McCullough, there is a disconnect between genuine pain felt by investors who lost money via FTX and the political and media entities who give the impression of trying to downplay or ignore the story. For example, the House Financial Services Committee announcement of a hearing into the matter did not commit to a specific inquiry date and blithely stated how FTX was “just one out of many examples of cryptocurrency platforms that have collapsed just this past year” ”“ as if cryptocurrency chaos is a new normal.
“The interview between Marc Cohodes and I have almost 5 million views,” McCullough continued. “It”™s not like the gorilla in the room isn’t being viewed ”“ there’s plenty of outrage. A lot of people have lost an unbelievable amount ”“ and in some cases, all ”“ of their money.”
McCullough detailed how he recently walked into a Starbucks in Norwalk, not far from his Stamford office, when a man recognized him from his interview with Cohodes.
“This one guy who was sitting by himself stands up, shakes my hand and says, ”˜Thank you, and thank Marc for me ”“ at least I got my money out of these accounts before it all happened,”™” McCullough recalled. “And then he went on to ask me the same questions you’re asking ”“ he”™s like, ”˜How could these people on CNBC and Bloomberg not be outraged?”™ And I said, ”˜Because they’re all getting paid.”™”
One figure that McCullough has been frustrated with is Kevin O”™Leary, the high-profile investor and self-proclaimed “Mr. Wonderful” who offers commentary on CNBC and co-stars on the long-running TV show “Shark Tank.” O”™Leary was a paid spokesperson for FTX and was ebullient in multiple interviews about Bankman-Fried and his company ”“ for example, in August 2021 O”™Leary told the Benzinga financial news site that “FTX has the largest infrastructure and best compliant platform an institution”™s ”¦ internal compliance department can work with and external auditors can audit.”
In reality, FTX”™s infrastructure could charitably be described as a mess. John J. Ray III, who replaced Bankman-Fried as CEO in the bankruptcy process, stated, “Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here. From compromised systems integrity and faulty regulatory oversight abroad, to the concentration of control in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals, this situation is unprecedented.”
Last June, Anthony Scaramucci, the financier who runs Skybridge Capital, reacted to a Bloomberg story about Bankman-Fried offering credit lines to troubled cryptocurrency companies by tweeting, “Sam Bankman-Fried (@SBF_FTX) is the new John Pierpont Morgan ”“ he is bailing out cryptocurrency markets the way the original J.P. Morgan did after the crisis of 1907.” Three months later, Reuters reported FTX bought a 30% stake in Scaramucci’s $2.2 billion company, which has more than $800 million in digital-related assets under its management.
Both O”™Leary and Scaramucci are among the guest speakers at a Benzinga-sponsored cryptocurrency conference to be held next month in New York City, and McCullough was concerned about their influence on unsuspecting attendees.
“I’m very outspoken about the company that people keep,” he said. “If you are witnessing a fraud and you still engage with those frauds ”“ and, moreover, don’t have the courage to be outraged ”“ then you’re part of the fraud. Scaramucci is a very good example because FTX is his business partner.”
Cryptocurrency as an industry has gone through a very rough period this year and the FTX debacle is the proverbial salt in the wound. McCullough is wondering how this industry could move forward in the wake of the FTX crash.
“I have been trading and risk managing and analyzing markets for almost 25 years,” he said. “So, I’ve seen the dot bomb crash. I’ve seen Enron. I’ve seen Madoff. We finally saw Elizabeth Holmes indicted at Theranos and she’s going to jail. But I have not seen anything relative to this interconnected web of what I call the mother of all bubbles and Ponzis that is crypto.”
“I would separate crypto, potentially from Bitcoin, but I’m not sure ”“ Bitcoin is a different network,” he added. “I’m talking about the old school Ponzi game of pump and dump where you are paid as a promoter like ”˜Mr. Wonderful”™ Kevin O’Leary, which is not wonderful ”“ it’s disgusting he”™s paid to pump FTX as a spokesperson, and he owns equity in it. I’ve seen every pump and dump scheme there can be in 25 years, and I’ve never seen anything that has been this interconnected ”“ meaning both Washington and mainstream media. Nothing, nothing remotely close.”
Photo of Keith McCullough by Phil Hall