A Finance Professor’s Perspective on Sam Bankman-Fried and FTX

Facts:

Scam Bankrun Fraud (“SBF”) was born into privilege. His lawyer parents went to the most prestigious schools in the world. He went to a top high school, then MIT, studying physics and math. He worked on Wall Street, then an “effective altruism” charity for one month, before starting his own hedge fund, called Alameda. Next, he started a cryptocurrency exchange call FTX. He was admired for being one of “the smartest guys in the room.” He impressed his investors with his low risk, high returns from bitcoin arbitrage, and his something he called his “risk machine.” He quickly grew to carry an aura of responsibility as an industry leader who was shaping emerging regulations and had bought or rescued failing crypto companies.

He donated a ton of money to Democrats and has said that he donated dark to Republicans. He’s been associated with this movement of “effective altruism,” which I’ll just call the science of doing good. His girlfriend described her polyamory as “Chinese haram.”

He was brought down this November by CoinDesk and his old compadre Binance. Coinbase (journalists) got a hold of his balance sheet that showed he had too many crypto coins, not enough real US dollars. Then Binance, another other behemoth of the industry that had supported each other, announced on Twitter that it would sell all of its FTT, the FTX cryptocurrency, which crashed the currency, which was holding up SBF’s empire. When more documents were leaked, we learn of the comingling between SBF’s companies (including $10b lent to Alameda), and then someone stole a ton of money. It’s fraud to his investors, it’s securities fraud, it broke their internal controls with bespoke software, and he’s defied any legal common sense by going on a media tour. He was arrested on Dec 12, feast of the Virgin of Guadalupe (only meaningful to me, personally) and if Bankman-Fried doesn’t spend the rest of his life making amends, then there’s no justice. Hint: there is not.

Narrative and the Why do we care?

Why is it interesting? Fear of contagion. The story has scale, betrayal, sex, money, political donations, celebrities, the veneer revealed hypocrisy of do-gooding, hypocrisy in the new transparency movement, the fall of the rich (see Batman Returns,) and a villain actively embarrassing himself.

Why do I care? Mostly because I think others will. People have texted me for a run down. It lowered the price of Bitcoin, which I hesitantly believe in. It hurt the crypto movement… let me rephrase that… the damage to the crypto industry is an opportunity to rebuild stronger.

My take? It’s as if Beanie Babies and Dutch tulip bulbs had been backed by the power of the internet and math. Of course, crypto is a Ponzi scheme in a bubble. It exists mostly on the greater fool theory as it has no cash flows from solving a problem. It’s speculative, more of slot machine (all luck) than a horse race where the gambler can benefit from research and skill in addition to luck.

Ask:

This collapse shines a light on a few points I want to make regarding human biases that we should know about to be better truth-seeking thinkers; halos, how we want to believe, “desirability bias,” and mental shortcutting by outsourcing our decision making (I vote Kim’s guide, there’s no substitute for experience). Professionalism matters. Your books (financial records) matter. Financial thinking matters. Critical thinking matters. Skepticism matters. Honesty matters. Math is truth. Culture matters.