A White Knight in Crypto Thinks on Moral Hazard

Sam Bankman-Fried is seen as something of a savior. His firms have thrown lifelines to cryptocurrency companies caught in a liquidity trap, while a plunge in valuations across financial companies has made it possible for him to consider mergers and acquisitions on a broader scale.

After Bloomberg broke that the billionaire’s crypto exchange -- FTX -- is exploring whether it could acquire Robinhood after the brokerage’s market value tumbled to about one-ninth of its 2021 peak, Bankman-Fried joined me in an exclusive television interview. While he’s unlikely to explore a takeover that’s, say, $30 billion:??

“In terms of would we do a large acquisition if it did make sense and if all the parties are aligned on it, we could in theory. We have a few billion on our balance sheet right now, we are profitable, we are able to further capitalize if we need to..

We’re in a place where I think we could make a significant acquisition to the extent that that fit the business.”

He said he sees a chance to grow faster now that valuations have come down, with a plunge in prices playing a big role in his desire to start buying. Take BlockFi. On Friday alone, FTX struck a deal for the option to buy crypto lender BlockFi for $240 million along with providing a $400 million credit facility. That company sought a valuation of about $5 billion one year ago -- and $1 billion in a down round in recent months, according to The Block.

He said he recognizes that some companies should never had the valuations they’ve hit last year.

“The prices things that things are at play a real role...

There are some businesses that I think have a really bright future in front of them and you know, may or may not be hitting a speed bump here, but have a really, really compelling medium- to long-term vision for the company that I think has huge upside.

I think others were probably just always over-hyped, never made a ton of sense and were mostly froth. And a lot of what we’re trying to do when we look at potential partners is figure out: Who is it that we’re really excited about, and really respect here?”

There are a number of crypto companies facing serious tumult. While BlockFi has been able to avoid freezing customer accounts, Voyager Digital said late on Friday that it has become the latest to suspend withdrawals, deposits and trading, and that it’s hired Moelis & Co. and Consello Group as it explores strategic alternatives. Voyager has recently also turned to a separate Bankman-Fried firm, Alameda, for a credit line.

Crypto hedge fund Three Arrows Capital is set for liquidation, while crypto lender Celsius is also considering transactions or restructuring its liabilities. Babel Finance is facing similar strains.

So I asked whether extending funds to an industry facing such severe balance-sheet issues would create a moral hazard. While Anthony Scaramucci has told Bloomberg’s Yueqi Yang that Bankman-Fried is the new John Pierpont Morgan in a sweeping bailout that could save the industry’s future, the 30-year-old crypto executive voiced his way of thinking about it:

“What you’re getting at there is: Does that bail out a company that really should have failed? And teach the wrong lessons to that company? And I think what I would say to that is two things. First of all, I’m way more excited to bail out customers than shareholders. The focus of this is not how do we deliver as much shareholder value to troubled assets as possible, it’s how do we protect customers, and I think those imply pretty different things.

One of those is way more important to the ecosystem and the other is the one that has the biggest moral hazard. The other thing is that we are trying to find who were the responsible players who were building out the good business, had a sustainable model and could use short-term liquidity and that could protect customer funds, and fundamentally built a real, valuable, business that has something real to offer to customers -- rather than which companies should never have existed, probably. And as of today, maybe we should just let them sort of die a quiet death. I do think that is something we have been thinking about, and that does play a fairly significant role in which specific companies we end up deciding to work with.”

More on Wall Street

• Buy now, pay later firm Klarna is in talks to raise money at a $6 billion valuation -- a far cry from its most recent $45.6 billion print.
• JPMorgan cuts its economic outlook for the US such that it’s “perilously close” to a recession. While employers may be reluctant to shed workers, there’s an anticipated slowdown in consumer spending.
• Toronto-Dominion is said to consider an acquisition of Cowen, my deals colleagues report. It would help the Canadian bank boost its investment-banking and prime-brokerage presence.
• Grayscale Investments is suing the SEC after the agency slapped down its efforts to convert its popular Bitcoin trust into an ETF.
• A more than 20% stocks tumble in the first half of the year is historic -- with a rout in a six-month span being the worst since the 1970s.
• Surging financing costs are starting to make investors and buyers balk at LBO financing.
• Goldman Sachs, Wells Fargo and Morgan Stanley led the banks on dividends after smooth stress tests, while the latter announced a big buyback plan. JPMorgan held its dividend flat as it guided toward higher capital requirements ahead, while Citi was also stable. The Morgans are the only ones trading well above book value, however -- the rest of the big banks are either trading at about book value or below.

Hoping you have a great holiday weekend in the US. I’ll be at Sun Valley to cover Allen & Co.’s meeting of the media moguls, large investors and, this time around, fintech and crypto executives as well. Keep an eye on Bloomberg Television for continuing coverage, and send all tips and opinions to [email protected].