The rise and very fast fall of Sam Bankman-Fried-Madoff

Do you want to know the funniest thing about the whole FTX crypto collapse?  Michael Lewis, the famous business-scam tale teller who wrote “Liar’s Poker,” and “The Big Short,” and practically stood next Sam Bankman-Fried (SBF) through the rise and fall of his multi-billion dollar ride using other people’s money, couldn’t figure out how SBF did it.  Review after review of Lewis’ book, “Going Infinite,” pointed out that in his previous books, Lewis tracked the trials and tribulations of his heroes showing how they became the Guys Who Were Right All Along.  Lewis, the reviewers said, thought he was onto another contrarian genius in SBF, but when his hero was found to have not just feet of clay but feet that were never even on the ground, he didn’t know what to do.  So, he punted.

You could watch him as he lined up his punt on “All In With Chris Hayes,” one of the smartest of MSNBC’s prime time line up of shows, in early October on the day his book was published.  The interview was one of those chummy gab-fests between media-buds – you could tell Hayes had interviewed him before and they shared, shall we say, a certain world view from the tops of their respective career mountains.  It started off well enough, with congratulations from Hayes on the publication of a book that both men knew was destined for the best seller lists.  “It’s an incredible read,” Hayes said, “As all Michael Lewis works are.”  Then it got weird.

Hayes is not often confused about the subjects he covers.  His guided tour through the double-impeachments and general clusterfuck of the Trump years was a ride you could take nightly and be comfortable that you were in good hands.  But Hayes looked flummoxed right from the get-go when he asked Lewis what this crypto thing is: “When I tried to get my head around crypto,” Hayes began, encircling his head with his hands in an illustration of his frustration, “I kept having this thing of, is this a con or is it not?  I kept going back and forth.  I kept asking people, and in the end, I didn’t quite come down, and then all of this blew up, and I thought, it’s a con.  This thing, that created billions of dollars that was sloshing around the economy…”

Lewis broke in to correct him: “Trillions,” he said with a grin. “Okay, trillions,” Hayes agreed.  “What do you think of it in that trajectory?”

“Well, it’s odd,” said Lewis, professorially, “because it’s both.  The technology underneath it is real.  It actually has the promise to do things like get rid of financial intermediaries.  It may be overblown.  It was created in 2008, and since 2008, it’s had a series of sort of narratives it’s tried to sell.  But none of the narratives have been true.  It’s sort of like, it’s a solution in search of a problem.”

“That’s what it feels like,” Hayes chimed in, with his index finger pointing in agreement at Lewis.  “So, there’s real tech there, but it’s like, when it got real hot and frothy in the market, it felt like that.” 

“Yes, it did,” Lewis readily agreed.  “But…so its promise hasn’t been realized, but it’s not to say it’s just nothing.”

Aha! Lewis has convinced himself that it wasn’t all for naught, those two years following a guy around who during interviews with Lewis and even during a pitch to a group of major investors was often simultaneously playing a video game. 

But 12 jurors in a Manhattan courtroom yesterday, after just four hours deliberating on the guilt or innocence of Sam Bankman-Fried, disagreed and found him guilty on all charges.  From Molly White’s indispensable Substack, The FTX Files:   

1.    Wire fraud on FTX customers

2.    Conspiracy to commit wire fraud on FTX customers

3.    Wire fraud on Alameda Research lenders

4.    Conspiracy to commit wire fraud on Alameda Research lenders

5.    Conspiracy to commit securities fraud

6.    Conspiracy to commit commodities fraud

7.    Conspiracy to commit money laundering

“With the seventh charge,” White continues, “the jury was additionally asked to determine if he committed concealment money laundering, wire fraud proceeds money laundering, or both. They checked ‘both’. This means that they found that Bankman-Fried had engaged in money laundering for the purposes of concealing the source, nature, ownership, or location of the funds and that he had committed money laundering for the purposes of concealing the proceeds of wire fraud.”

And much of this, she might have added, Bankman-Fried did as Michael Lewis looked on and took notes, or recorded him, or whatever he did to chronicle what the subhead of his book may as well have been called,  “The Rise and Fall of a New Madoff.”

So what is crypto if it’s not nothing?  Well, as Lewis pointed out in his interview, in a Ponzi scheme like Bernie Madoff’s, “there was no business there.”  Ponzi schemes take in dollars from one person to pay off another, in the Lewis construct.  “But Sam Bankman Fried had two businesses.  He had this hedge fund he called Alameda Research, but he had this crypto exchange.  And the exchange was a gold mine.  It generated a billion dollars in revenue in 2021.”

But what was SBF’s “exchange” trading?  Well, that’s where the Ponzi comes in.  Crypto is supposed to be this outside-the-normal-way of investing your money.  In the conventional way, which we might call the Wall Street way, you take money – real cash money you have earned from your labor – and you invest it by buying stock in a business…let’s say, McDonald’s.  That company makes and sells fast food, so there is a real thing going on, with stores in mall parking lots and along streets, glass and steel and employees and ground beef and buns and French fries, and when all those people sell a lot of burgers and fries and Cokes, they make a lot of money and the value of your stock goes up, and if you sell it, you make a profit on your investment.  Or maybe you just hang onto your stock, and the profits of McDonald’s accrue to you in the form of dividends paid to shareholders.

We should note that all of this, from the way the company sells its stock, to your investment, to the way the company accounts for its profits and losses, and the payment to you if you want to sell your shares and get your money back, is regulated by the Federal Trade Commission and Securities and Exchange Commission and lots and lots of federal laws that establish the groundwork for the way the whole thing works.

And then along came crypto, advertising itself, in the words of Michael Lewis, “in a series of sort of narratives,” as a way of moving money and investing money and paying for things outside of the normal way of doing business, which is to say, outside of the regulated way of doing business.  It caught the attention of federal prosecutors that one of the ways that SBF spent his investors’ funds was on lobbyists in Washington D.C. who worked assiduously to ensure that crypto exchanges like FTX were not regulated the way the New York Stock Exchange or the Over The Counter market are regulated.

Why is that, you might ask?  Well, it turns out, it was because if SBF and his crypto exchange were unregulated, then he could do whatever the hell he wanted with all that money, all those billions or trillions – take your pick – that were “sloshing around.”

So, what did he do with all that money?  Well, one of the lies of the crypto business is that it is outside of the “normal” financial system.  If you were really outside of the normal financial system, what would you do when people began writing you checks or handing you cash?  Why, you’d put it in a safe or under a mattress, because you would not want it to be handled by big, bad, normal mechanisms of the financial systems like, say, banks.

But that’s exactly what SBF did.  He put his investors’ funds in a bank, or banks, most of them, or all of them, off shore, as it happens.  And then he came up with what Lewis called his other business, “this hedge fund called Alameda Research.”  Now, I don’t know about you, but a hedge fund doesn’t really sound to me like an alternative to the regular financial system way of handling money.  But SBF had to do something with all that money, and he invented way of sloshing it around and called it a hedge fund, so when he was dealing with people like Patriots owner Robert Kraft, and billionaire hedge fund manager and philanthropist Paul Tudor Jones, and venture capital fund Sequoia Capital, they would feel comfortable that their money was going to a financial institution that at least had the kind of descriptive title they would recognize.  Instead of putting the billionaire investors’ money under a mattress in the Bahamas, Bankman-Fried actually put their money in millions of dollars’ worth of real estate, like a $16.4 million house he bought for his parents, and a $35 million penthouse apartment prosecutors described as a “frat house,” shown below.  And he spent their money on private jets, and naming rights on football stadiums, and other stuff billionaires could understand.

SBF’s Bahamas frat house. Note court exhibit mark at lower right.

Bernie Madoff collected money from people by playing the role of “Uncle Bernie” who pretended he was doing you a favor by taking care of your money, and because his fund was such a sure thing, it was available only to special people like you, because you’re an insider.  Bankman-Fried got his investors’ money because he played the role of nerd-genius who understood this complex thing called crypto.  Because so many big guys had given him their money – and they wouldn’t throw their money at him unless he was a sure thing, would they? – the next investor and the one after that and the one after that felt safe, because…

Because what?  Well, that was the magic thing about crypto that Bankman-Fried identified right off the bat.  It was like one of those over the counter derivatives or credit default swaps during the housing bubble that nobody understood but everybody was making billions from.  Nobody understood the whole deal of how toxic mortgages were being packaged and sold and then repackaged again as something else and sold again until the whole house of cards came crashing down in 2008.

That’s crypto:  a house of cards.  FTX was a house of cards in the Bahamas with a curtain behind which a fuzzy-headed little man was pulling levers to obscure the fact that behind it all, it was just a regular old Ponzi scheme of smoke and mirrors. 

Sam Bankman-Fried got caught, but crypto lives on, confounding even such media-bros as Michael Lewis, who told Chris Hayes, after spending two years being allowed behind the curtain with the fuzzy headed little man.  Speaking of the FTX crypto exchange, Lewis assured everyone, “It was real! Without the hedge fund over there to screw it up, he'd still be there!  It was a casino!  It was like they took little slices of every transaction in crypto!  Most money in crypto was made by people who created these exchanges,” Lewis patiently explained.

So was most of the money made by the people who created Ponzi schemes. Being at the top, they got paid, while everyone below them in the pyramid didn’t. 

The magic of crypto, we learn from the example of Michael Lewis, is believing.  Except when you’re confronted with 12 ordinary citizens on a jury who don’t believe.  Then you’re in a jumpsuit on your way to jail.