Sunday Reads #167: How to get away with murder - FTX Edition.
How Sam Bankman-Fried is triggering mass cognitive dissonance.
Can’t believe it’s December already! COVID has warped our sense of time (or at least mine). Time now passes much too fast for my liking 😓.
I’ve also been doing a fair amount of “revenge work travel”. Can’t wait to get some rest at the end of the year!
Today, let’s talk about FTX again. I’ve been watching events unfold over the last weeks, with a lot of interest… and even more shock. Let me tell you why.
1. How to get away with murder.
It's been a crazy few weeks in the FTX saga.
First, some context.
I wrote about the sudden collapse of FTX, in The shitstorm that is FTX.
From a valuation of $32B on Monday to bankrupt on Friday.
Over USD 8Bn of consumer funds lost. To hubris, stupidity, and some theft too.
Hope you were not too affected by this. An expensive reminder of the old crypto adage: "Not your keys, not your coins."
Trung Phan has the run down, in FTX: The $32B implosion.
Here's a simple analogy, from Alex Tabarrok.
And if you'd like to know more about what happened, here's the "definitive thread on FTX". (it's actually quite good!)
Now, let's be clear about one thing, despite what you're hearing in the media.
The story of FTX is a story of fraud.
The level to which Sam Bankman-
Fraud Fried mismanaged FTX, beggars belief.
John Ray III has been named the temporary CEO of FTX after it declared bankruptcy, to sort out the situation.
He was the person who cleaned up the mess at Enron, and he said this is the worst situation he's ever seen. Worse than Enron!
“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.”
Some of the most outrageous things he noted in his court filing (more here):
Alameda Research (FTX's sister company) gave Sam Bankman-Fried a $1 billion personal loan. It also loaned Director of Engineering Nishad Singh $543 million.
Corporate funds were used to purchase real estate for personal use. And executives put their names on homes purchased with company funds.
FTX had no cash management system. Management had no idea how much cash was on hand at any given time, or even where all their cash was.
No cash management system? What does that even mean!
The team didn't even keep track of FTX's investments. When Ray probed, the answer was: "Why don't you Google it? There may be some newspaper articles about the investments we made."
In case you're a little lost, let me remind you. This is not a sitcom. This is not satire. It's a trading platform that was worth $32 billion!
To be honest, once the dust settles and all the dollars and shekels are irrevocably lost, the biggest surprise isn't the sheer lack of corporate controls.
The biggest surprise is how gargantuan a company can become, before the absence of any management whatsoever becomes a factor.
Anyway, to recap, here is what we know Sam Bankman-Fried did:
Took $10B of customer deposits, and moved them to a company he owns 100% (Alameda).
Later, moved some of the funds ($1B+) to himself.
For good measure, also bought property for himself with company money.
Created an absolutely chaotic accounting system. Which had the nice side-effect of keeping his embezzlement hidden.
As clear a case of fraud as you'd find.
Matt Levine thinks so:
If a troubled company has a few days to beg potential investors for a bailout before it files for bankruptcy, and it sends those investors its balance sheet so they can consider investing, and they all pass, and then the company files for bankruptcy, of course the balance sheet was bad. That is not a state of affairs that is consistent with a pristine fortress balance sheet.
But there is a range of possible badness, even in bankruptcy, and the balance sheet that Sam Bankman-Fried’s failed crypto exchange FTX.com sent to potential investors last week before filing for bankruptcy on Friday is very bad. It’s an Excel file full of the howling of ghosts and the shrieking of tortured souls. If you look too long at that spreadsheet, you will go insane...
A spreadsheet listing FTX international’s assets and liabilities, seen by the Financial Times, points at the issues that brought Bankman-Fried crashing back down to earth. It references $5bn of withdrawals last Sunday, and a negative $8bn entry described as “hidden, poorly internally labled ‘fiat@’ account”...
I don’t actually think that you’re supposed to subtract that number from net equity — though I do not know how this balance sheet is supposed to work! — but it doesn’t matter. If you try to calculate the equity of a balance sheet with an entry for HIDDEN POORLY INTERNALLY LABELED ACCOUNT, Microsoft Clippy will appear before you in the flesh, bloodshot and staggering, with a knife in his little paper-clip hand, saying “just what do you think you’re doing Dave?” You cannot apply ordinary arithmetic to numbers in a cell labeled “HIDDEN POORLY INTERNALLY LABELED ACCOUNT.” The result of adding or subtracting those numbers with ordinary numbers is not a number; it is prison.
So. Why is Samuel not in prison yet?
Because truth doesn't matter. What matters is the narrative.
And SBF has managed the narrative to perfection.
Even before his house of cards came crashing down, he was controlling the narrative like no other. Most other big founders have faced the techlash at least once. But not SBF. He of the savior complex that you should have too.
The kind of coverage SBF got doesn't just happen.
No. It was a deliberate campaign.
He funded politicians on the Left and on the Right (but publicized just the ones on the Left). He bought some media companies and invested in others.
And, as Lulu Cheng Meservey says here, he told a damn good story.
The disheveled mogul earning to give all his money away, "touched every journalistic erogenous zone".
And here's the thing: he's still continuing to control the narrative. With complete mastery *chef’s kiss*.
It started with his twitter DMs with a journalist. His comments (read all the screenshots) are shocking, tragic, and yet, hilarious.
This is my favorite one:
Turns out I wasn't alone. it was everyone's favorite part of his confession.
And seeing the reaction, he's now doubling down on this narrative.
"Aw shucks, I guess I screwed up. Sorry" 🤷♂️.
I must agree. "Sorry, I'm stupid" is a thousand times better than "I'm a fraud, send me to jail I guess...".
But as we laugh, let's also remember. This is the same guy who was blowing people away with his brilliance, less than a month ago!
This meme summarizes it best:
It's a smart play, I must admit. Not stupid at all.
As I said on Twitter:
SBF is weaponizing Hanlon's Razor.
Hanlon's Razor: Never attribute to malice that which can be adequately explained by stupidity.
He's twisted it on its head.
Let's call it Bankman's Blunderbuss: If you call yourself stupid often enough, people will forget your malice.
And he’s done it so well! It’s shocking how quickly people are lapping it up, as he embarks on a media tour.
Almost like they're suffering from mass cognitive dissonance.
My tone might seem ranty. But make no mistake: I am in awe.
[PS. This thread by punk6529 is a good read, on how the media is getting played.]
Before we continue, a quick note:
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2. Golden Nugget of the week.
There was a question on Hacker News recently: What is the most impactful thing you've built?
The answer by "jiggawatts" was quite illuminating:
During a centralisation of public school local servers to a data centre, I created a consolidated library enquiry system. It served over 2,000 libraries, had 330 million titles, and had about a million users. It was efficient enough to run off my laptop, if need be.
AFAIK it was one of the top five biggest library systems in the world at the time.
I was asked to add some features that would have been too difficult in the old distributed system. Things like reading competitions, recommended reading lists by age, etc…
I watched the effect of these changes — which took me mere days of effort to implement — and the combined result was that students read about a million additional books they would not have otherwise.
I’ve had a far greater effect on the literacy of our state than any educator by orders of magnitude and hardly anyone in the department of education even knows my name!
It's a helpful reminder:
Efforts don't have to correlate with outcomes.
Just because something is valuable doesn't mean it's hard to get. There ain't no such thing as a free lunch, but some lunches can be quite cheap!
Applies to the converse too. Just because you work hard for something doesn't mean it's valuable.
3. This made me laugh out loud 😂.
What to say when your spouse asks you how much money you've lost in crypto.
4. Keep calm and... marvel at the enormity of the universe.
The moment you die, a thousand stars will explode in anguish.
5. Coming up next week: An amazing - and scary - new AI chatbot.
OpenAI has released a new Chatbot, ChatGPT. And it's taken the interwebs by storm.
More detailed thoughts next week, but in the meantime, here's a compilation of the coolest stuff it's done so far.
You can sign up to ChatGPT at the link above, to take it for a spin. It’s free for now, but won’t be for long!
That’s it for this week. Hope you enjoyed it.
As always, stay safe, healthy and sane, wherever you are.
I’ll see you next week.