Michael Lewis on how Sam Bankman-Fried and FTX fell — book review (From The Financial Times) [2 Articles]
~ Sunday, October 15, 2023 Blog Post ~
By Brooke Masters, October 5, 2023
Lewis’s account is among four new books to explore cryptocurrency’s boom and bust, its larger-than-life characters — and the ordinary people who lost so much
Sam Bankman-Fried’s words in tweets and group chats are being used as evidence against him in his historic fraud trial. They offer a look at how he allegedly orchestrated a multibillion scheme at his FTX cryptocurrency exchange
As Sam Bankman-Fried went on trial this week on charges of fraud and money laundering related to the collapse of FTX, his $32bn cryptocurrency exchange, it feels like the right time to step back and take a hard look at the digital assets mania that has vaporised billions of investor dollars over the past five years.
What is it about financial markets that made the promoters and the promises of bitcoin and other cryptocurrencies so appealing? Why did it all go so badly wrong, and what are the consequences for society? Academics, journalists and even a moderately famous former teen idol have all tackled the subject with varying perspectives and degrees of success.
Few authors should be better positioned to take on crypto than Michael Lewis. In bestsellers such as The Big Short and Moneyball, Lewis has previously woven together the stories of compelling characters with clear explanations of market failures and other complex ideas. Asked by a friend to check out Bankman-Fried ahead of a potential investment in late 2021, Lewis frankly admits he was “totally sold” on the dishevelled wunderkind. Going Infinite became the result.
Structured as a biography-cum-fly-on-the-wall tale, the book traces Bankman-Fried’s journey from friendless nerd to unflappable Wall Street trader, business tycoon and finally accused felon — all by the age of 31. Engagingly written with the comedic touches and telling details that have long been Lewis’s stock-in-trade, it is an easy but ultimately unsatisfying read.
We learn about Bankman-Fried’s fondness for puzzles and vegan snacks, his seventh-grade views about abortion and — in one really interesting sideshow — Lewis also quotes extensively from his romantic correspondence with Caroline Ellison, the former head of his Alameda trading business. She has pleaded guilty to fraud and is expected to be a star witness against him.
Going Infinite reconstructs his subject’s peripatetic existence as he refused to give FTX employees job titles or clear reporting lines, and shifted its headquarters literally overnight from California to Hong Kong and finally the Bahamas. Lewis even rode with Bankman-Fried in his plane as the entrepreneur sought to convince Washington policymakers in July 2022 that he was the face of “responsible” crypto. Yet at the same time, FTX employees were losing track of investments and catastrophically allowing Alameda to “borrow” client money to make risky trading bets.
It’s great detail. But the author’s microscope is trained so narrowly that the book suffers. Bankman-Fried’s saga provides a window into a global crusade to shake up conventional finance that sweeps in libertarian conspiracy nuts, greedy finance bros and central bankers.
Readers would have benefited from a Lewis-style exploration of stablecoins, which are supposed to be backed one-to-one by hard currency, highly volatile currencies such as bitcoin and dogecoin and non-fungible tokens (NFTs), a kind of online art that has no real-world existence. Backers envision a freer world where decentralised digital assets will replace national currencies; sceptics fear a modern repeat of the 1630s Dutch tulip mania that will further erode social trust.
But there’s little of that in Going Infinite. Instead, Lewis dismisses the weirdly complex technology behind bitcoin, which still accounts for half of all crypto’s value, with a single broad brush paragraph. “That’s about all that Sam Bankman-Fried knew about crypto, or for that matter needed to know, to trade billions of dollars’ worth of it,” he writes in a footnote. One hopes that BlackRock, Invesco and other big companies seeking to offer bitcoin funds to retail investors understand it a bit better.
It feels as if Lewis had originally picked Bankman-Fried as a misunderstood hero and can’t quite let go of that idea
The author’s fascination with Bankman-Fried also seems to have blinded him to the man’s broader responsibilities. When FTX splashes out millions on endorsement deals, stadium naming rights and political campaigns, Lewis blithely refers to it as “Sam’s money”. Yet the company’s accounting was so poor that much of the funds allegedly came from accounts that held customer deposits. Investigators said shortly after FTX’s collapse that $9bn belonging to more than 1mn customers had gone missing, but the first sympathetic mention of someone who has suffered financial losses doesn’t occur until page 194, and even then she works for FTX.
Lewis uncovers and then excuses Bankman-Fried of multiple episodes where he kept people in the dark or promised one thing and did another: “Sam’s employees had always known that he preferred games in which the rules could change in the middle.”
It feels, in the end, as if Lewis had originally picked Bankman-Fried as a misunderstood hero and can’t quite let go of that idea. The entrepreneur’s lawyers must be hoping that his jury can be persuaded to agree.
Readers who want a broader view should turn to several other recent books that tackle the digital currency craze. Journalist Zeke Faux turns out one of the best in the form of a mystery story. Much of the charm of Number Go Up lies in Faux’s willingness to cast himself as the bumbling detective.
The book opens with a confession from the Bloomberg reporter that he spent extensive time with Bankman-Fried without noticing any financial misconduct. Faux then devotes the bulk of the saga to investigating the stablecoin Tether, only to have the bigwigs behind it refuse to talk to him and for it to prove to be one of the few survivors of last autumn’s crash.
“Back in 2021, I could have picked a company to investigate by tossing a dart . . . and whichever one I’d hit would have blown up by now. Instead I’d spent more than a year investigating one of the few that hadn’t,” he writes ruefully.
Between those two failures, Faux provides a clearly written narrative of the high and low points of the recent crypto boom and bust. He has a wry eye for details: he talks his wife into letting him buy a discount version of a Bored Ape, the hottest NFT of 2021, and then gets cold feet. “I pictured myself, 20 years in the future telling my son we might have had enough money to send him to [private college] if I hadn’t spent $40,000 on a picture of an ape.”
Number Go Up works best when Faux documents the appalling harm the boom has done to aspiring investors in emerging markets. In the Philippines, thousands of people lost their life savings trying to make money by earning resellable video-game prizes. In Cambodia, he investigates compounds where workers are held captive and forced to work as internet scammers.
Faux’s descriptions of Lewis as he and the more famous author both circle FTX reinforce the concerns about Lewis’s value as an independent observer: “the author’s questions were so fawning, they seemed inappropriate for a journalist,” Faux writes.
Crypto has a knack for attracting unusual people. Ben McKenzie, best known for playing Ryan Atwood on the teen drama The O.C., swaps the screen for the keyboard in something of a personal crusade to reveal the true nature of crypto. “I was a bored, mildly depressed 40-something-year-old man in need of adventure,” he explains in Easy Money, written with journalist Jacob Silverman. So he got stoned and decided to write a book that would warn the unwary by helping “to spread an economic counter narrative to the crypto hype”.
He provides a gallery of larger-than-life figures driven by varying degrees of brilliance and hucksterism, including some of crypto’s most colourful and notorious characters: Alex Mashinsky, chief executive of crypto lender Celsius, Tether co-founder Brock Pierce and, of course, Bankman-Fried. Their meeting, in the summer of 2022, came at the zenith of Bankman-Fried’s influence, but as McKenzie tells it, he was not taken in. “One thing was obvious,” he writes. “Sam wanted me to like him. He was desperate to find common ground . . . If this was the king of crypto, was it a kingdom made of sand?”
And yet the most poignant part of the book is McKenzie’s visit to El Salvador, where he meets ordinary people whose lives have been turned upside down by the government’s pairing of crypto and repression.
Then there is Rachel O’Dwyer’s book, Tokens, which approaches the subject with a more analytical point: for all its digital trappings, crypto rests on the same kind of trust as older methods of exchange. A lecturer in digital cultures at the National College of Art and Design in Dublin, she is primarily interested in what is happening to the way people think about payments and value in a digital age. Her surprisingly readable story takes in the clay shapes used to represent stored grain in 7,500BC, butter vouchers in 1980s Ireland and the virtual loot from World of Warcraft.
While most of the other recent books about digital currencies zoom in on particular platforms and high-profile people, O’Dwyer’s is shot through with references to philosophy, credit scores and sociological treatises on the nature of money. “Tokens are habitually tied to identity . . . to employment, to life choices and social standing,” she observes. “Whose values get written into the tokens? Who writes this script?”
She leavens the theory with interviews and stories of people who have been sucked into the digital token economy in different ways: Will, the 13-year-old who collects Fortnite loot; Jeffrey Berns, who wanted to build a blockchain-powered city in the Nevada desert; and Jérôme Croisier, an art historian turned financier who sells tokenised shares in pieces of art. She doesn’t like what she finds: “This wasn’t some beautiful escape from a grim reality. It seemed like a real shithole.”
Four books, four very different in-depth explorations of what makes the crypto crowd tick. Yet I came out of my reading binge still confused about what drove people to pay $68,000 for a single bitcoin in 2021 and why, after all the revelations and arrests, it is still selling for $27,000 today. If this is more than a collective delusion, the explanation will have to come at a later date.
Going Infinite: The Rise and Fall of a New Tycoon by Michael Lewis Allen Lane £25/Norton $27 272/288 pages
Number Go Up: Inside Crypto’s Wild Rise and Staggering Fall by Zeke Faux Weidenfeld & Nicolson £25, 304 pages
Easy Money: Cryptocurrency, Casino Capitalism, and the Golden Age of Fraud by Ben McKenzie with Jacob Silverman Abrams Press £19.99/$28, 320 pages
Tokens: The Future of Money in the Age of the Platform by Rachel O’Dwyer Verso £18.99, 320 pages
Brooke Masters is the FT’s US financial editor
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Source:
https://www.ft.com/content/d60a70fc-b805-4c18-b910-a126ac12afc3
Article #2: Group Chats, Tweets and Audio Tape: The Evidence Against SBF (From Bloomberg)
By Yueqi Yang, October 14, 2023
Sam Bankman-Fried’s words in tweets and group chats are being used as evidence against him in his historic fraud trial.
Screenshots of messages, social media posts and internal documents have been presented by prosecutors to demonstrate how the 31-year-old allegedly orchestrated a multibillion-dollar scheme at his FTX cryptocurrency exchange, along with his trading firm Alameda Research. The documents offer a look into the mechanics of his alleged fraud as well as the discrepancies between his public statements and private instructions to his inner circle.
Former colleagues — including Caroline Ellison and Gary Wang — gave jurors insight on how to decipher the documents during their testimony at the federal courthouse in New York.
Prosecutors also played audio clips from a secretly recorded meeting of Ellison with Alameda employees in Hong Kong in the final week of the trading firm’s collapse. Asked who made the decision to repay Alameda lenders with FTX customer funds, Ellison uttered, “Sam, I guess.”
ALL-HANDS MEETING RECORDING
In audio clips from a Nov. 9, 2022, Alameda all-hands meeting — days before the company filed for bankruptcy — Ellison spoke about the firm’s troubles and told them it was likely to shut down. “The basic story here is that starting last year, Alameda was kind of borrowing a bunch of money via open-term loans and used that to make various illiquid investments,” she said on the tape. In cross-examination, Ellison was asked if she was admitting wrongdoing to the employees. “Yes, I was,” she said. While Alameda employees seemed upset about the wrongdoing, they were grateful she had been open and honest with them, she said. A former Alameda software engineer, Christian Drappi, told the court that Ellison was laughing nervously during the meeting.
SEVEN BALANCE SHEETS
In June 2022, as crypto prices spiraled, Alameda’s lenders were calling in their loans. Ellison said Bankman-Fried directed her to prepare “alternative” balance sheets in response to a request for financial information from one of its lenders, Genesis. “I understood him to be directing me to come up with ways to conceal things in our balance sheet that we both agreed would look bad,” she testified. She came up with seven potential versions, and Bankman-Fried picked “Alt 7” which would conceal Alameda’s large borrowing from FTX customers. The exhibits show the main balance sheet with seven additional tabs for each alternative.
The balance sheet “alt 7” was eventually sent to Genesis. In this version, the item “exchange borrows” — referring to the $9.9 billion Alameda was borrowing from FTX — was removed. It also cut Alameda’s liabilities from $15 billion to around $10 billion. Ellison testified that the document was “dishonest.”
GARY WANG CODE
Gary Wang, FTX-co-founder and long-time friend of Bankman-Fried, testified that Alameda Research had a $65 billion line of credit on FTX, one of the ways that allowed the trading firm to misappropriate FTX customer funds. The exhibit below shows that under the column “borrow,” Alameda’s main trading account had the ability to borrow up to $65,355,999,994 from the exchange. The figure was set so high that it meant Alameda was able to make nearly unlimited withdrawals from FTX.
Furthermore, Wang, who went to MIT with Bankman-Fried, testified that his old friend had asked for an “allow negative” balance feature to be added for Alameda, and another former FTX executive, Nishad Singh, implemented the code change. This allowed Alameda to withdraw more funds than it actually had, one of the ways for it to misappropriate FTX customer funds. The exhibit below shows that this feature was added in July 2019 — only a few months after FTX was founded.
PADEL TENNIS
Adam Yedidia, another Massachusetts Institute of Technology alum who went to work at FTX, was one of the nine people living and socializing in a luxury penthouse shared with Bankman-Fried in the Bahamas. Prosecutors showed a photo of them dining to demonstrate their close-knit relationship in both professional and personal settings. He testified that in June 2022, Bankman-Fried told him “We were bullet proof last year. We’re not bullet proof this year,” when asked about the financial health of FTX. The conversation occurred at a padel tennis court in The Albany, the luxury resort where they resided, Yedidia said.
`PEOPLE OF THE HOUSE’ GROUP CHAT
Yedidia said the 10 people, including Bankman-Fried, Ellison, Wang and Singh, who lived together shared a Signal chat group called “People of the House.” The exhibit shows that when Yedidia and others raised concerns about the rent, Bankman-Fried replied he’s been “assuming that it’s basically just Alameda paying for it in the end.” The response went straight in to the heart of the prosecution’s case that Bankman-Fried was using Alameda’s money — misappropriated from FTX customer funds — to fund his expensive lifestyle.
PARADIGM EMAILS
Part of the government’s case is that Bankman-Fried not only deceived customers, but also venture capital investors who fueled his rapid ascent. Matt Huang, managing partner at crypto VC firm Paradigm, testified his firm raised concerns about FTX’s corporate governance, including its relationship with Alameda, before investing in the crypto exchange. He said Bankman-Fried reassured them there was no preferential treatment for Alameda. Read the full email here and FTX pitch deck here.
ALAMEDA SHUTDOWN
Bankman-Fried considered closing Alameda Research in September 2022, following publicity concerns about conflicts of interest between the two, Wang testified. The exhibit shows Bankman-Fried’s personal note, before he ultimately decided that he couldn’t shut down the hedge fund because it had accessed and spent so much of FTX customers’ funds that it would not be able to repay them, Wang said. The document shows that Bankman-Fried was fully aware of the reputational damage that would occur if the tangled relationships between Alameda and FTX came to light. Read the full PDF here.
THINGS SAM FREAKS OUT ABOUT
Ellison testified that she kept several Google docs on her to-do list and priorities. In the exhibit below, she wrote about “things Sam is freaking out about,” including hedging Alameda’s portfolio risks. The document showcases Bankman-Fried’s own worries about Alameda’s financial position. Mark Cohen, Bankman-Fried’s lawyer, argued in his opening statement that Bankman-Fried had become concerned about dramatic fluctuations in crypto prices months before Alameda’s bankruptcy and urged Ellison to hedge their exposure to further losses, but she didn’t do it.Fourth on the list was “getting regulators to crack down on Binance.” Bankman-Fried believed a crackdown on Binance, the largest crypto exchange and an FTX competitor, would be the best way for FTX to gain market share, she said. Read the full PDF here.
OFFER TO BUY FTT AT $22
Following the publication of a leaked Alameda Balance sheet by CoinDesk, Binance CEO Changpeng Zhao posted on Twitter that his exchange had decided to liquidate any FTT — FTX’s own crypto token — on its books “due to recent revelations that came to light.” Behind the scenes, top Alameda employees had become increasingly desperate as they tried to stabilize the FTT token price and meet withdrawal demands from FTX customers. The exhibit shows internal discussion at Alameda that led to Ellison’s Twitter post that Alameda would be willing to buy all of Binance’s FTT for $22 per token.
ELLISON AND BANKMAN-FRIED CHAT HISTORY
In the week of Alameda’s and FTX’s collapse, Ellison confessed to Bankman-Fried that she had an “increasing dread of this day that was weighing on me for a long time, and now that it’s actually happening it just feels great to get it over with one way or another.” When asked to read out her message on the stand, Ellison broke down crying. She explained that the emotional burden of carrying on Alameda’s lies had become unbearable in the months leading to the collapse. “That was overall the worst week of my life,” she said on the stand. Ellison and Bankman-Fried never met after that.
— With assistance from Emily Nicolle.
(Adds Tweet with audio)
©2023 Bloomberg L.P.
Sources:
https://www.bnnbloomberg.ca/group-chats-tweets-and-audio-tape-the-evidence-against-sbf-1.1984527
