Hubris, Nemesis, and Cryptocurrency
Some cheap moralizing by yours truly on the implosion of FTX and SBF
Greetings,
I have some thoughts on the news story that has been obsessing me of late and providing a much need distraction amidst a lot of family medical drama.
The FTX Implosion
Bankruptcy law is one of the various worlds that I inhabit, and in this world the biggest story of late has been the spectacular implosion of FTX, the crypto-currency “exchange” run by Sam Bankman-Fried, SBF as he’s known in the industry, the billionaire wunderkind turned disgraced former CEO. In theory, FTX was an online platform where you could deposit money and then use that money to speculate in various crypto currencies. Think E*Trade for Bitcoin. However, in a real exchange customer deposits are held in safe, highly liquid assets like bank deposits, money market accounts, or cash, so that customers can always get their money back on demand. The exchange makes money by taking a small commission on each trade. We thought that this was basically FTX’s business models with some bells and whistles attached.
This was not FTX’s business model.
We know this because a few weeks ago there was a “run” on FTX. News sources reported troubles at the company, customers started asking for their money, and FTX told them it didn’t have the money to pay them. In a real exchange this should never happen because customer deposits are always “sitting there” as it were waiting to be withdrawn. When the dust settled it looked like FTX was over $8 billion in the hole.
It’s a bit murky, but the most charitable reading of events is that SBF used customer deposits in an unsuccessful and completely unauthorized – the contracts with customers specified that FTX would not lend out their deposits – effort to bail out the supposedly separate but in-fact-joined-at-the-hip crypto-hedge fund Alameda Research also owned by SBF. These loans were secured by an internal crypto-currency created by FTX that seems to have had a market price largely set by Alameda trading on the FTX platform and in any case valued in excess of its “market” value. In other words, the loans were secured by nothing. Alameda is now also in bankruptcy, the billions in customers’ deposits having gone its not entirely clear where. All this amounts to gross breach of contract and violation of fiduciary duty amounting to embezzlement. But there are other even more complex and nefarious theories, such as the suggestion that Alameda Research was pumping up the value of derivatives on FTX by standing in as the counterparty on losing trades in order to attract new investors, which is a complicated way of saying “literally running a Ponzi scheme.” We don’t really know at this point.
Aside from venality or worse on a massive scale, FTX also seems to have been a shockingly sloppy operation for a company that in theory was moving literally billions of dollars worth of assets. There was no internal accounting department, the outside auditor seems to have been a decidedly sketchy “metaverse” accounting firm, and various FTX insiders were using the firm as a piggy bank for expensive homes and other goodies in the Bahamas without even going through the decencies of formally structuring them as loans to be written off later for tax purposes. (This would be shocking enough if the millions involved weren’t chump change compared to billions sent down who knows what rat hole at Alameda.)
Trust me, this is not what your garden variety bankruptcy looks like. It’s not even what a spectacularly messed up bankruptcy looks like. This is the bankruptcy that makes you think that at least Enron was a fraud that had some substance at the bottom of it and had the self-respect to buy off a real accounting firm to make the fraud work. Arthur Anderson, as you will remember, was a top accounting firm in the real world before it shredded its integrity on the way to oblivion. In other words, even Enron looks less shady that this fiasco. The whole thing is wildly entertaining and sordid if you have the good fortune not to have lost your savings in the disaster.
The Wunderkind
Up until a few weeks ago SBF and FTX were seen as the responsible face of crypto currency. SBF threw money around Washington (overwhelmingly to Democrats but also to some Republicans) and testified before Congress on the need for regulation. He self-consciously positioned himself as the trustworthy alternative to those other nutty crypto brohs. He was on the cover of Forbes as the visionary young genius who was going to shake up the world of high finance with technology and genius. Sequoia Capital, the legendary Silicon Valley VC firm that helped to fund FTX, had a fawning biography of SBF on its website (since removed) that recounted how he had made his initial video conference pitch in brilliantly articulated paragraphs while playing video games. Such a genius. He wore shorts and t-shirts while sharing the stage with ex-presidents and others of the great and the good. No stodgy suits for him.
In addition, SBF was a man with a monumentally oversized social conscience. A convert to the Oxford-University-spawned effective altruism movement, SBF believes that one’s ethical obligation was to make as much money as possible and then give the money away in ways that would maximize human happiness over the long term. It’s essentially classical utilitarianism on steroids harnessed to the quantitative tools of modern finance. To his credit, SBF walked the walk as well as talking the talk on effective altruism (at least for a while) donating millions of dollars to various causes, albeit at times with a suspiciously techno-utopian tinge such as the huge donations to research dedicated to keeping AI from becoming evil.
Some Cheap Moralizing From Yours Truly
There is a temptation to project one’s pre-existing biases onto this story, seeing it as a vindication of your views of whatever evils you were already convinced were at work in the world. This is what I am going to do here. As more comes out, there will be other lessons to learn from this fiasco and those lessons will be grounded in a more solid understanding of the facts. In the meantime, I offer my first-draft moral response.
SBF, it seems to me, is the distillation of a certain bundle of problems with contemporary meritocracy. The first is a strange combination of contempt and obsequiousness toward established power. On one hand, FTX was built on disdain for existing business and financial structures. Cryptocurrency bills itself as an alternative to traditional finance. (I am skeptical that blockchain can produce anything of real value without ultimately being linked to that traditional world but that’s another issue.) Everything about SBF’s video-game-playing-with-investors-in-shorts-and-t-shirts schtick was meant to signal that he wasn’t like the pinstripe fuddy duddies in business or even the business casual guys in fleece vests. In practice this style created the incredibly chaotic business structures at FTX, a place that was too “revolutionary” and “disruptive” and “Web 3.0” for such trivialities as a properly audited financial statements. (There is every reason to believe that part of SBF’s problem is that he literally did not know what his company was worth because the accounting of assets and liabilities was so abysmally bad.)
At the same time, he had the polite obsequiousness toward authority that a life-time of success in elite education brings. His parents were both Stanford law professors, and SBF was the kind of smart, driven, and obsessively groomed child who excels at school and did very well at MIT. Having spent some time in that world, I can testify to two truths. First, success requires brains and incredible discipline. Second, success also requires the ability to ingratiate yourself with the authority figures that can advance you to the next level. In the case of SBF this can be seen in his assiduous cultivation of the titans of capital, politicians, and regulators. There was something very telling in his final plea to investors for additional capital as he frantically sought to stave off bankruptcy. He told them that he would be “extremely grateful” if they would pony up an additional $8 billion for his floundering business. He asked ever so nicely. (The titans of capital declined to give him more money without collateral that was, you know, actually worth something.)
I can’t help but think that there is something deeply unstable and unhealthy about a persona that simultaneously combines both enfant-terrible and such-a-nice-young-man. Yet it seems to me that this contradiction is very commonly bred into the upper echelons of our meritocracy. You are expected to be both a bold upsetter of a status quo and the consummate petitioner of benefits from that same status quo. If one can pull this schtick off the rewards can be immense. And in fairness, those who can manage this kind of split personality are often fearsomely productive and at times can do great good in the world. But it seems to me that there is something inherently juvenile in this stance, and I can’t help but think that it is a kind of prolonged adolescence that our meritocracy with its wildly contradictory messages breeds. I suspect that there is a kind of moral and spiritual stunting at work here. Certainly, there is something awesomely juvenile about the chaos disclosed in the FTX bankruptcy filings.
I also can’t help but wonder if the idea of effective altruism created a permission structure for SBF’s misbehavior. It seems to me that there are two basic objections that can be made to EA. The first is the objection that can be made to all utilitarian systems, namely John Rawls’s claim that they fail to take seriously the differences between people. They treat society – or in the more ambitious form taken by EA all of humanity living and yet to live – as a single entity whose collective utility function is to be maximized. This stance creates the temptation, perhaps the moral requirement, to trade off the benefits to the many against the costs to the few. And when the many includes not only the entire planet but all of humanity yet unborn there is so very much good that can be weighed against petty wrongs. The second objection is that the utility calculations required to rigorously do the greatest good for the greatest number in the way demanded by EA require that the effective altruist have a vast store of information from which to make an extremely complex set of moral calculations. The effective altruist is invited to take a God’s eye view of the human condition.
But we are not gods. What is lost here, it seems to me, is a respect for morality on a human scale. This is the humdrum decency of an honest business person trying to turn a profit without exploiting customers. It’s the simple morality of not lying, not taking others’ property to fix your problems, and of paying one’s debts on time and in full. This is all pretty pedestrian and embarrassingly bourgeois stuff. It’s not glamorous or transformative. It is, however, the spiritual guts of commerce and what can make it an engine of prosperity. I would gladly take it over FTX and TED talks on how to save the world.
Until next time.
Nate