Celebrity author Michael Lewis spent months shadowing Sam Bankman-Fried, founder of the failed crypto exchange FTX, and apparently came away convinced that SBF was just the victim of misfortune:
This isn't a Ponzi scheme. Like, when you think of a Ponzi scheme, I don't know, Bernie Madoff, the problem is— there's no real business there. The dollar coming in is being used to pay the dollar going out. And in this case, they actually had-- a great real business. If no one had ever cast aspersions on the business, if there hadn't been a run on customer deposits, they'd still be sitting there making tons of money.
WTF? It's true that FTX wasn't a Ponzi scheme. After FTX's bankruptcy, John Ray was appointed to clean up the mess and he called it correctly:
New FTX head John Ray III is asked to compare FTX to Enron. “[Enron crimes] were highly orchestrated financial machinations by highly sophisticated people to keep transactions off balance sheets. This (FTX)... isn't sophisticated whatsoever, this is just plain old embezzlement."
— Paul McLeod (@pdmcleod) December 13, 2022
"Plain old embezzlement." In a nutshell, here's what happened: one of SBF's companies (Alameda Research) borrowed $10 billion from another of SBF's companies (FTX) and then "loaned" SBF $3 billion. In other words, garden variety embezzlement. And that's not even counting the fact that the initial loans were wrong in the first place. The Alameda loan depleted FTX's treasury, which was supposed to be just a boring guardian of funds that its customers were using for trades. When customers found out it had lost $10 billion, they started asking for their money back and FTX didn't have it. This wasn't some irrational, panicky run. It was completely sensible based on the fraud that was obviously going on.
In the end, what doomed FTX was the same thing that doomed so many other crypto enterprises: They accumulate vast sums of money by promising stratospheric returns to investors, but there's no way they can make good on that. As reality starts to close in, they start making riskier and riskier market bets in the desperate hope that maybe one of them will pay off.¹ But they never do, and the business finally goes up in smoke.
But not before the founders make off with a billion or three. This is the story of dozens of big crypto firms. The whole industry is a scam based on the "greater fool" theory: crypto itself may have no value, but you'll be OK as long as you buy low and then find a fool willing to pay more for your tokens before the whole thing collapses. It's made up out of thin air, and to thin air it eventually returns.
¹This is the story of Alameda Research, which was a hedge fund. The twist is that as their risky investments failed they borrowed $10 billion from FTX and then lost that. So both companies ended up bankrupt.
The Effective Altruism angle is really interesting. Here:
https://www.pushkin.fm/podcasts/whats-your-problem/sam-bankman-fried-revisited
So here's something you need to know about Michael Lewis; whatever his past work or other virtues, when it comes to crypto, he is not to be trusted.
He was completely taken in by the crypto bros, utterly bamboozled. (I genuinely believe he was a mark, not a mastermind.) He was all in on crypto, going to conferences and festivals, partying at clubs with these guys, genuinely, passionately on board with "yeah, we're gonna stick it to the big banks and disintermediate finance and it'll be great!" He lent all the weight of his reputation as "author of The Big Short" to crypto.
Now, the second crypto imploded, Lewis ran for the hills and started doing a combination of "dish dirt to rebuild my bonafides" with a pinch of "blow some smoke to try and obscure what really happened with some of the biggest disasters" mixed in.
Basically, we can't consider him anything but compromised.
Zeke Faux has the goods in his recently-published history of the rise and fall of crypto, Number Go Up. Michael Lewis was even taken in by Celsius. Celsius! Whose business model was "lend at five percent, but pay interest on deposits at fifteen."
That's good to know, because that quote from him Kevin cited is pretty mind blowing. They outright stole billions, but it's a great real business? And it's not like Lewis isn't well aware of the facts of the case.
The problem isn't just that Michael Lewis got hornswoggled by the crypto bros. It's that Michael Lewis's entire business model, going back to Liar's Poker, is to get interviews with people by assuring them that he will make them look like heroes. That's been the modus operandi for every book he's ever written. So, of course he's going to try to make SBF look as good as possible.
They stole customer funds that they were entrusted with, to try to salvage their failed business. In a "classic" financial collapse like Lehman Brothers (which was finally fully liquated last week), the customers received 100% of their holdings, secured lenders were fully paid out, unsecured lenders got $0.41 on the dollar, and the equity was fried. This is what is suppose to happen when there isn't embezzlement or fraudulent transactions, just plain old bad risk management.
Yes, good old days
" ...The whole industry is a scam based on the "greater fool" theory:"
That is not actually true. There is also the fact that crypto is a great tool for laundering money. This means there will always be substanial flow of money into it from criminals that are ready to lose some money provided what they are left with is "white" money.
The only thing that can stop this is proper regulation.
"you'll be OK as long as you buy low and then find a fool willing to pay more for your tokens"
Isn't this also a description of a Ponzi scheme?
Hence, it's not a plain old embezzlement scheme, it's the gross incompetence and the attempt to cover it up by way of embezzling scheme.
The "greater fool" theory is the basis of all speculative financial markets.
A Ponzi scheme is based on selling an ever increasing number of shares to pay the dividends on shares you already sold. This is different than just selling a fixed number of shares for an inflated price greater than you paid for them.
Sam Bankman-Fraud.
I think Kevin is right that the main point with SBF is embezzlement. But I have to stop at: "they actually had-- a great real business." I am no expert, but I have genuinely tried to find the best case for crypto, and as far as I can tell, it doesn't exist. I.e., there appears to be no vaguely persuasive argument for it as a product/commercial enterprise. It can assist with certain financial crimes and criminal enterprises, and it can rip off naive people, but that's about it. I think it's telling that the political debate in the US is whether it should be regulated and how, whereas it seems like it should just be banned? It has no real social value, has major costs to the economy, rips people off, assists with crime, and has bad environmental effects. I'm not sure that's the right answer, but I have no idea why no one even seems to address it as the potentially right answer.
If you're confident of your thesis I take it you're shorting crypto stocks?