Happy Sunday, and welcome back to Dry Powder.

It’s early innings, and the story is still unfolding, but the spectacular collapse of crypto exchange FTX may go down as ignominiously as Enron or Lehman. Billions of dollars have been lost (and as of Saturday morning, at least $1 billion in customer funds has reportedly “vanished.”) The S.E.C. and D.O.J. have already opened investigations. In today’s issue, I work my way around the story as it currently stands, looking at precedents, surveying the Wall Street consensus, and exchanging notes with people who were close to this fiasco when everything came crashing down.

The story is still unfolding and will continue to unfold. Reuters reported on Saturday morning that “at least $1 billion” in customer funds had “vanished” and the loss could be as much as $2 billion, after Bankman-Fried “secretly transferred” $10 billion of customer funds to his hedge fund, Almeda Research, through a “backdoor” channel. (Sam texted Reuters that FTX did not “secretly transfer” any money and claimed that it was an “internal labeling” issue.)

With a little luck, the bankruptcy court will appoint an examiner, as it did in the Lehman bankruptcy, and then we’ll know for sure what happened to FTX and its supposedly once-in-a-generation founder. But that will be months away, at the earliest. In the meantime, billions of dollars have already been lost. That means all those supposedly brilliant venture capitalists, hedge fund investors, and celebrities around the world, such as Paradigm, Sequoia Capital, Softbank, Temasek, Dan Loeb, Paul Tudor Jones, Tiger Global, Ontario Teachers’ Pension Plan—and yes, Tom and Gisele and Steph—who collectively ponied up a total of $1.8 billion, at various valuations, will likely lose it all. The investors in FTX’s $8 million seed round, in August 2019, were the relatively obscure Race Capital, Consensus Lab, FBG and Galois Capital. “Sam has assembled a fantastic team of experienced Wall Street traders and Silicon Valley alumni,” gushed Chris McCann, at Race Capital, at the time. That turned out to be a questionable observation at best.

Sequoia Capital, for one, did not even wait for the bankruptcy filing to write down to zero the value of its roughly $213 million investment in FTX. That’s a lot of money to flush down the drain in 18 months or so, even if it’s not material to the fund’s performance. “We are in the business of taking risk,” Sequoia said in a tweet on November 9. (Thanks for that helpful insight, guys.) “Some investments will surprise to the upside, and some will surprise to the downside,” the firm continued. This is a very different tune from what Alfred Lin, the Sequoia partner who championed the firm’s investment in FTX, said in June 2021, when Sequoia first invested. In a letter about Bankman-Fried that has since been removed from the Sequoia website, Lin relayed this interchange with S.B.F., as he is universally known.

“I want FTX to be a place where you can do anything you want with your next dollar,” S.B.F. told the Sequoia crowd over Zoom, apparently while playing the video game League of Legends on a separate screen. “You can buy Bitcoin. You can send money in whatever currency to any friend anywhere in the world. You can buy a banana. You can do anything you want with your money from inside FTX.”

According to Lin, “Suddenly, the chat window on Sequoia’s side of the Zoom lights up with partners freaking out.”

“I LOVE THIS FOUNDER,” typed one partner.

“I am a 10 out of 10,” pinged another.

“YES!!!” exclaimed a third.

S.B.F. was a charmer, no doubt about it, although not in any conventional sense. I spent an hour or so last December interviewing him for the documentary film I am working on about the cryptocurrency phenomenon. It was a cold December night and S.B.F. had just flown in from the Bahamas to New York—I assume via a private jet of some sort, befitting the wealthiest person in the world under 30 years old. It was actually very cold out. Sam showed up in his standard uniform of a T-shirt and shorts and waxed hypnotic on the possibilities of crypto, Bitcoin, and what his trading platform enabled investors to do. He not only wowed the media—Fortune put him on its August/September 2022 cover wondering if he were the next Warren Buffett while Forbes had him on its cover in 2021 He also wowed the Democratic Party establishment. He was the second largest donor to Joe Biden in the 2020 election cycle; only George Soros gave Biden more.

He also seemed to have nearly every lobbyist in Washington on speed dial, trying to influence whatever regulation of cryptocurrencies and crypto exchanges came down the pike. One non-profit Washington-based Wall Street watchdog, Better Markets, turned down S.B.F.’s “seven figure” donation, when he came calling looking for its support. “No one should be shocked by FTX’s demise,” Dennis Kelleher, the co-founder of Better Markets, wrote on Sunday in a statement sent to me. “The fiction (if not fraud) of crypto and its collapse were not hard to see as long as you weren’t on the payroll of FTX/crypto (either directly or indirectly) and didn’t let FOMO and greed cloud your judgment.”

Of course, no crypto legislation has yet materialized, but there’s little question anymore that such regulation and legislation is needed, in the wake of this disaster, when many billions of dollars could very well be lost. Sam has said he’s facing a cash shortfall of some $8 billion and was supposedly trying to find someone to fill that hole. It was no surprise he couldn’t, making the bankruptcy filing inevitable.

According to the bankruptcy filing, there are more than 100,000 FTX creditors and the company’s liabilities are between $10 billion and $50 billion, making it one of the largest bankruptcies of all time. And then there are the “unauthorized transactions” that occurred on Friday—a hack, according to a FTX account administrator—of about half a billion dollars in assets that were converted to ether and have seemingly disappeared. In other words, it’s a total mess.

Nevertheless, S.B.F. dressed shabbily, claimed to be a vegan, and was at least superficially committed to the monastic grad student shtick. He showed up for a visit to see Anthony Scaramucci, as I reported back in September, driving a somewhat beaten down Toyota Corolla. Earlier that month, S.B.F.’s investment arm, FTX Ventures, had bought 30 percent of the primary stock of Scaramucci’s hedge fund, Skybridge Capital, for $45 million, valuing SkyBridge at $150 million. Skybridge then invested $40 million of that capital into an unidentified basket of beaten-down cryptocurrencies, including FTT, the FTX house crypto token, which has lost 92 percent of its value since the beginning of November.

Over the years, The Mooch and S.B.F. became friendly. He had recently accompanied S.B.F. to the Middle East for a fundraising trip, as a good partner would, trying to introduce S.B.F. to his contacts around the world. As the crisis for FTX started unfolding last weekend, The Mooch decided to fly down to the Bahamas to pay S.B.F. a visit last Tuesday.

“The original idea was this is a rescue finance situation,” The Mooch told Andrew Ross Sorkin, on CNBC, on Friday morning, shortly before FTX filed for bankruptcy and he was off to Singapore. “And could we somehow help, which would obviously help the entire industry. And then when I got to the Bahamas, it became clear at least from some of the people that worked on the legal team and the compliance team that perhaps there was more going on than it being a rescue situation.” (Later that evening, most of the legal and compliance staff quit.)

The Mooch left the island a few hours later. “I was actually distressed,” he continued. He said Sam was “certainly contrite” about what was happening. He said he thought there were two groups of employees at FTX, those who were in Sam’s “inner circle” and knew everything about what was going on, and those who knew very little. The latter group, The Mooch said, had “a level of shock on their faces in terms of what they saw.”

He also revealed that he had listened in on the firmwide Zoom that Sam conducted with employees. “He was contrite,” The Mooch continued, “and he was trying to explain that they were going to fix whatever the problems were that they had and whatever the miscalculations that they had. He was spending a lot of time with the legal team. So I certainly didn’t want to be there to bother anybody. I was there to help. But you could see there was dissembling going on amongst his staff, which was causing a lot of distress.”

In his Thursday tweet-storm, he attempted to explain what happened. He wrote that “poor internal labeling”—whatever that means—led him to “substantially” underestimate the amount of margin debt. “I thought it was way lower,” he wrote. In actuality, he said that he discovered the “leverage” to be 1.7x FTX’s liquidity and 0.8x the $5 billion of customer withdrawals requested on Sunday. “...The largest by a huge margin,” he wrote. “...Because of course when it rains it pours.” He took the blame as C.E.O. “At the end of the day,” he wrote, “I was responsible for making sure that things went well. I, ultimately, should have been on top of everything. I clearly failed in that. I’m sorry.” On the instantly infamous version of a balance sheet that S.B.F. put together to try, unsuccessfully, to raise new capital before filing for bankruptcy, he also wrote, “There were many things I wish I could do differently than I did but the largest are represented by these two things: the poorly labeled internal bank-related account”—the $8 billion—“and the size of the customer withdrawals during a run on the bank”—the $5 billion. This is borderline laughable.

On CNBC, the Mooch seemed genuinely shocked by what had transpired. “I don’t want to call it fraud at this moment,” he said, “because that’s actually a legal term. And none of us know. And we have to leave it up to the regulators. We also have to give people a presumption of innocence. But I have to tell you, I’m distressed about it. I don’t like it for the industry. And I would implore Sam and his family—he has two wonderful parents, Joe Bankman and Barbara Fried—I would implore them to tell the truth to their investors. Get to the bottom of it… get themselves in front of a regulator and explain exactly what happened. And if there was fraud, let’s clean it up to the extent possible and repair the accounts at FTX.” (Why The Mooch mentioned S.B.F.’s parents, both of whom are law professors at Stanford, is a bit of a mystery.)

As for The Mooch, he said he was going to try to buy back the equity that FTX Ventures just bought in Skybridge. He said the “good news” for Skybridge investors is that his funds had no assets in custody at FTX. “But the bad news is, and I’ll say this very candidly to everybody, I liked and like and trusted Sam,” he told Sorkin. “And that violation of trust didn’t go just to me, but 20-plus venture capitalists, people around the world that trusted the brand and trusted the technology.”

He implored Bankman-Fried, as if pleading with a kidnapper, to drop the charade: “Speak candidly, directly and honestly, so that we can clean this up immediately.” Later, from his flight to Singapore, where he was off to lead the latest SALT conference, The Mooch shared with me that it had been “a rough week” and that he had “to shake it off.” He added that what happened to FTX was “really [a] shame. That one hurt.”

It remains unclear at the moment how this all happened and whether fraud was involved. “I’m piecing together all of the details,” S.B.F. tweeted on Friday, after the filing. “But I was shocked to see things unravel the way they did earlier this week. I will, soon, write up a more complete post on the play by play, but I want to make sure that I get it right when I do.” That’s certainly a wise approach, and one that I am sure Flumenbaum would endorse, if he lets him say anything further at all. In a statement posted to Twitter, Ray wrote that the debtors “continue to make every effort to secure all assets, wherever located.” Good luck with that, John, especially since most of the assets on the FTX balance sheet that S.B.F. was hocking seem like crypto Monopoly money.

Of course we don’t know what S.B.F. actually knew, and when. And The Mooch expressed the right note of caution on CNBC. It’s only fair to presume innocence as the regulators do their jobs. But some on Wall Street are thinking ahead. “He will go to jail,” one of my Wall Street sources wrote to me on Thursday. “He may be worse than Elizabeth Holmes.” Another wrote, “I had a feeling he could be a scammer.” and made a Madoff comparison. Both, though, seem a tad preliminary at this point. Theranos and Madoff were scams that lasted for years and years, maybe even since inception. FTX, for all its staggering and overnight losses, has only even been around since 2019, and we still don’t know exactly what occurred yet or for how long. We will soon enough, I’m sure. (Flumenbaum, at Paul Weiss, did not respond to a request for comment.)

Not all financial tragedies are ever really the same, and I’m not convinced that S.B.F. is going to jail—yet. Sure, executives from Worldcom, Enron, and Theranos went to prison. But no one in the MF Global saga went to jail, and that’s the one that most closely resembles what appears to have occurred at FTX. No one at WeWork went to jail. (On the contrary, Adam Neumann just got big bucks for his new gig from a16z.) No one at Lehman Brothers or Bear Stearns or Merrill Lynch went to jail for what happened in 2008, mostly because the U.S. Attorney in the Southern District of New York, Preet Bharara, chose not to prosecute them. (The U.S. Attorney in the Eastern District of New York did bring a criminal case against the two Bear Stearns hedge fund managers but lost.)

Whatever happened at FTX, as bad as it looks right now, remains to fully unravel. We have to wait and see where the facts lead. The Delaware bankruptcy judge should appoint an examiner as soon as possible to figure out what happened and why. I nominate Anton Valukas, the senior partner at Jenner & Block, in Chicago. Older readers will recognize his name: 14 years ago he was the examiner in the Lehman Brothers bankruptcy case and did a spectacular job.