FTX investment passed twice, says former Treasury Secretary Mnuchin

The second time we looked at the FTX, it was rated five times higher than the first time: Mnuchin

Former US Treasury Secretary Steven Mnuchin believes the correction in stock markets has turned positive, particularly for tech companies that have “gone insane” and are now offering some good opportunities. But one overrated tech bet he never liked was bankrupt crypto trading firm FTX, which collapsed spectacularly from a $32 billion valuation to a bankruptcy filing and criminal investigations into allegations of misappropriation of client assets.

“We looked at the investment twice and passed both times,” Mnuchin told CNBC Board of Technology Summit in New York on Tuesday.

Mnuchin, who has managed private equity investments since leaving the Trump administration, stressed that his decision was unrelated to recent allegations that FTX misused client funds, which he called “concerning,” but said he had first heard about it in the press. “There’s a lot to understand and I’m just looking outside now. I didn’t expect it to unravel nearly as quickly and when there has indeed been a misuse of client funds, these are very serious problems,” he said.

Mnuchin declined to go into details regarding his decision-making on FTX in an interview at the TEC Summit with CNBC’s Melissa Lee, but said that the second time he made an investment, the crypto trading firm was “five times the valuation” was it before.

“We were a bit surprised by the overall rating,” Mnuchin said.

Last week, venture capital firm Sequoia reduced its investment in FTX to zero, among the major institutional investors caught up in the collapse. According to Mnuchin, there’s nothing new about top investors fearing missing out on the hype cycle. “We’ve seen in a lot of tech companies where we’ve had very smart investors investing at ridiculous valuations,” he said.

In the recent bull market, this FOMO spread well beyond crypto. “They had people investing in technology every day,” Mnuchin said at the CNBC event. “I just don’t understand how you can make 300 investments a year and think you can scrutinize them and pick winners from losers,” he said. “The reviews reflected that everything in the world is perfect.”

But now, he added, “it’s a much better environment for investing.”

The former Treasury Secretary believes we have seen inflation peak and the Fed’s rate hike cycle could end at 4.5%, slightly lower than the market’s worst-case scenario. Those rate hikes will take some time to work their way through the economy and contribute to further potential downside in markets, but the correction in equities and tech stocks has been a healthy one, said Mnuchin, whose private equity firm owns Liberty Strategic Capital a focus on technology investments.

Mnuchin, who once held a top tech post at Goldman Sachs, continues to believe in and invest in the underlying blockchain technology, which he believes has interesting applications.

“We’ve been more focused on the infrastructure side of crypto than the asset and trading side of the business,” he said.

He also believes there is a middle ground in regulation after the FTX implosion.

“The problem is that there needs to be more clarity in regulation,” he said, citing a recent U.S. approach that delegates regulatory authority to bodies like the FTC, SEC, and Treasury Department — where he focuses on crypto market transparency and money laundering focused.

He also pointed to the offshore companies involved in the FTX situation, saying while it has a US company, crypto remains an industry where “people are in a game of “regulatory arbitrage” from jurisdiction to change jurisdiction”.

The most important finding, Mnuchin said, is that the US is not going from one extreme to the other, from under-regulation to over-regulation. “There are very important innovations in this industry,” he said. However, he added that the allegations of misuse of client funds in the FTX case point to a fundamental principle of financial regulation. “We need a segregation of customer funds. That’s one of the fundamental premises that we rely on,” Mnuchin said.

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