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FTX’s Sam Bankman-Fried built up ‘a facade of credibility,’ former FDIC chair says

Former FDIC Chair Sheila Bair joins Yahoo Finance Live to discuss the fallout from the FTX meltdown, the need for regulatory oversight and consumer protections, and the rise and fall of Sam Bankman-Fried.

Video Transcript


JULIE HYMAN: The fallout for embattled former FTX CEO Sam Bankman-Fried escalates after the company's new CEO said he's never seen such a complete failure of corporate control. Joining us to discuss the timeline of the company's downfall is former FDIC Chair Sheila Bair. Sheila, it is always good to see you. Maybe not just--

SHEILA BAIR: Thanks for having me.

JULIE HYMAN: Maybe not just issues with corporate control, but issues with regulatory control, perhaps, and that is, of course, your former purview. What went wrong? I mean, is this just an out and out fraud that would have been illegal under any circumstances? Or did the regulators fail here?

SHEILA BAIR: Yeah, so what we know-- it's a lot of investigations going on. We'll have the facts, hopefully, at some point in the not too distant future. I mean, certainly a lot of red flags suggest that there was serious impropriety, if not out and out fraud, occurring at this exchange. So, look, fraud is fraud. You can use crypto for fraud. You can use a lot of different things for fraud.

But I do think some basic regulatory oversight would have prevented much of this from happening, starting with the protection of customer assets. If you're a registered broker dealer, or on the futures side, there are different regimes, but there basically are very strong protections against customer assets.

You can only use them for your own purposes if there's a clear legal disclosure and consent by the customer, or in the case of the CFTC, you've got to keep those assets segregated. So some basic regulation, either under securities or commodities, would have at least done a much better job of protecting those customer funds.

And it's unfortunate. We don't know how many people are going to be hurt by this. But my guess is there are going to be a lot of people, young people in particular. FTX and others really heavily market crypto to young people, billing it as some kind of virtuous thing, a way to make quick money and help the world. And most of that's been just a crock, frankly. There are some good crypto companies. There are some good uses of crypto, but FTX is certainly not an example of one.

BRAD SMITH: What do you think that the FDIC needs to see in order for any crypto exchange or platform or custody platform to have the green light for the ability for customers' funds to be held and insured at the end of the day? Because the FDIC had already issued a cease and desist to FTX over the summer.

SHEILA BAIR: Yeah, well, I think this is a bit of a different issue. So most crypto is highly volatile. There's something called stablecoins, which are represented as having stable value. And like a bank deposit, you put a dollar in, you can get a dollar out. That's a bit of a different issue, and there's been some confusion about FDIC protection and misuse of the FDIC's name. And I applaud them for moving forward. This didn't really involve stablecoins. And there were some sloppy misrepresentations around the FDIC's relationship, which was 0 with FTX.

But I mean, most crypto is highly volatile. People should know that. I don't want, frankly, a government safety net to back crypto. I think that's been one of the issues around regulations, setting a regulatory structure where you have some basic consumer protections, investor protections, financial integrity requirements. But you don't expand the government safety net to them. I think that's a bad idea. And it's something as we look forward to what regulation may look like, I think that's an important distinction to make.

BRIAN SOZZI: Sheila, what does good regulation of crypto look like?

SHEILA BAIR: Yeah, so I think, first of all, clarity. I would really love for the SEC and CFTC to get together and jointly say this-- these are the ones that are going to be treated as securities. And these are the ones going to be treated as commodities. There's not clarity around that right now. To the extent they're both making sweeping statements, they're kind of canceling each other out because if it's a security, by definition, it's not a commodity, so the CFTC can't regulate it. And vice versa-- as a commodity, the SEC can't regulate it.

So some joint communication from those two agencies, I think, would be really helpful in a coordinated effort to start making this stuff come in to regulated venues, as well as the CFTC, in particular, has a very broad anti-fraud and anti-manipulation of authority over crypto as a cash market. They don't have the ability to create regulations and do supervision, but they do basic anti-fraud and anti-manipulation authority, which they should be using vigorously. And FTX sounds like-- again, we don't know until the investigations are done who is going to be a prime candidate for that authority.

JULIE HYMAN: Sheila, there's also the political aspect of this, right? Because as we know, Sam Bankman-Fried was throwing money all over the place--

SHEILA BAIR: Yeah, he was.

JULIE HYMAN: --in Washington, particularly to Democrats. What is the level of concern that that perhaps, whether consciously or unconsciously, blinded regulators to some of the wrongdoers there?

SHEILA BAIR: Well, you know, I think it's a real risk. And it's a little Bernie Madoff-like because this was what Bernie Madoff did for decades. He got away with it. He kind of knew all the right people and had all the right pedigrees and got-- met with legislators and policymakers and SEC officials and served on his advisory board, chaired in ASDR, for heaven's sakes.

So building up that facade of credibility, not because what you're doing actually has credibility, but you've got this network and these names that are investing in you and meeting with you. And so it is-- it's a longstanding problem in Washington. And, you know, but one thing I will say, I don't think regulators should be faulted just for meeting with the guy. I mean, when I was at the FDIC, I had an open meeting policy. I pretty much met with everybody. I would accommodate it because I didn't want people to represent they had some kind of special in with me.

So I had a very broad meeting policy. That was not an endorsement of anyone. And I don't think these other regulators who did have meetings with this guy should to be tagged with any wrongdoing there. You want to be open and accessible to a wide variety of people. So I think that criticism is not well founded. But that said, clearly, a lot of people were listening to him. A lot of people on the Hill were listening to them, a lot of investors.

This is what big names-- you just put them out there-- big names. It kind of makes you wonder what kind of due diligence they were doing, or whether, again, they were just kind of going with the flow while everybody else is doing it. And he's got all these great pedigrees and knows all these wonderful people. And that's not due diligence, right? No matter who they are, you need to look behind the facade and see what actually is going on in their business.

BRAD SMITH: So, with that in mind, what do you think that investors or people on the Hill saw in Sam Bankman-Fried to allow him the air space to continue either pitching for dollars or to pitch or to try and sway policy?

SHEILA BAIR: Well, it's a really good question. I've never met the gentleman. I've seen him speak a couple of times. I mean, I think he was personable. He was charismatic. He talked a good game. And so people were taken by that. And crypto, I think, is an intimidating subject. It can be hard. It's a different technology. It can be hard to break down and explain, and he was able to do that.

And, you know, especially on the Hill, the members of Congress and their staff were eager to get somebody to come in and just explain it to them. So he seemed to have fulfilled that role. And I'm sure a lot of them are regretting now the airtime that they gave him.

But lesson learned, and at least, maybe it's a wake up call. I mean, the good news is most of crypto now-- it saddens me. Most of crypto has just been used for speculation. There are good, beneficial uses of the crypto technology, distributed ledger technology. But most of it's been for speculation. And so individual investors are getting hurt, but the broader economy doesn't rely on crypto. Crypto can go away tomorrow, and we're not going to feel any impact on the real economy.

So we have this wake up call now to get some good, basic, strong regulation in there. And it should be just as strong as we have for traditional financial intermediaries and financial assets. I don't buy this that we need a lighter touch for crypto. We don't. It should be the same. But we need to have it. We need a structure. We need to apply it and apply it aggressively.

BRAD SMITH: Should Sam Bankman-Fried be in prison for what he did?

SHEILA BAIR: Oh, so I don't know. There'll have to be investigations and fact finding before any of that can be decided. I will say, regardless of what the facts are here, if some of these red flags and suspicions prove to be true, there should be very severe ramifications, not just monetary fines, but severe ramifications and personal responsibility for those who caused these terrible losses for so many investors.

BRAD SMITH: Former FDIC Chair Sheila Bair, thank you so much for joining us here today. We appreciate the time and the insight. Thanks.