The MacGuffin, Part 2: The Story Arc of SBF and FTX
November 18, 2022·51 comments
Alameda Research made real money for two years. Then it didn't. But no one knew because no outside investors were watching. What happened next wasn't some elaborate crime. It was a series of small decisions to hide a declining hedge fund inside an exchange, then inside customer companies, each layer designed to replace the last one before anyone could ask why the money machine stopped working.
• A hedge fund with promising returns suddenly became ordinary. Alameda killed it in 2018-2019 exploiting gaps in early crypto markets. By 2020, it was just another fund competing in a harder market. But Alameda had no outside investors demanding performance reports, only client loans promising 15% returns guaranteed.
• An exchange gave the hedge fund access to unlimited customer money. FTX the brokerage could extend margin to Alameda the client. Alameda could sit on both sides of trades. FTX could issue fake tokens and pump them through its own market. Everything flowed back to the hedge fund through collateral and loans that never had to be repaid.
• SBF asked regulators for one thing that would have made him invisible. Permission to clear and settle trades in-house. This was how Bernie Madoff hid his Ponzi for decades. The CFTC and SEC said no. That rejection may have been the only thing stopping him.
• When crypto companies started collapsing, SBF bought them. BlockFi and Voyager had billions in customer assets and were desperate. FTX positioned itself as a white knight. Within weeks, customer accounts moved to FTX custody, collateral was rehypothecated, loans went to Alameda. Then BlockFi told customers concerns about a mysterious Bahamian hedge fund were false.
• Institutional investors and media believed a story so completely it overrode what they could actually see. Everyone knew Sam Bankman-Fried was a genius with a magic money machine who wanted to give it away. Related-party transfers, fake tokens used as assets, customer deposits funneled through shell companies. None of it mattered. How did smart people with advisors miss this?
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Comments
Pulling all of that together in a few days! If you need another side hustle, Forensic Accountant would suit you. Thanks for adding meat to the bones we had all started piecing together from Twitter, Bloomberg, and other sources.
And, for including the link to Part 4 of Things Fall Apart. Can’t read these foundational thoughts enough.
I hope all your readers get to the last handful of paragraphs, which for me are 100x more important than the fraud story. I find that the narratives which can be summed up by Number Go Up have commandeered the living metaverses of detractors of crypto/btc in an equal but opposite way of how it corrupted many of the supporters. “Forget all that” is 100% right, too bad it is so difficult! The slope of enlightenment for distributed trust systems will be applications that marry the digital and real world in communities where trust >>> money. After the last few weeks many people will think that a future which embraces and benefits from this kind of thinking has gotten more nebulous and further away, but as you hint in those concluding paragraphs it is truly the opposite.
100%. I hope they get there, too!
Great note Ben!
I think I’ve quoted your “too clever by half” note a few too many times to my friends and colleagues at this point.
In tech, I think Crypto (the legal Casino) was seen by a few too many engineers as sort of the “easy way out” to working for yourself.
For anyone looking for some of the OG blockchain coyotes, they went off to think about things like improved public goods funding or making voting mathematically optimal for the public good.
Reminds me of The Bezzle
Fantastic note Ben. Really well done. Please make a PDF available for easier sharing.
Ben,
I have been following your tweets on the topic and although you have pounded into me the importance of narrative and narrative control, looking at the tweets that are coming out I am constantly thinking back to the novel 1984 vs. the law of identity in philosophy. In philosophy the basic law of identity is A = A. In 1984 we are told not to believe what our eyes tell us and that 2 + 2 = 5…Big Brother told us…it’s common knowledge. The audacity of some of these guys that AFTER the fact are still trying to spin a controlled narrative of hey I’m the good guy amazes me.
Thank you for bringing some clarity to this muddy puddle of crypto for me.
HIGH RISK WITH NO RETURNS.
I am blessed with dyslexia, and as God is my witness, this is how my brain actually read that sentence.
Another great post, Ben!
Soooo blockchain voting by 2024 to stop the widening gyre and trustless elections from turning into Civil War 2.0? Or is that mere apophenia?
I’ve been around long enough to have personally witnessed this very similar scam.
Mark Ross Weinberg would borrow money from investors at usuries rates and speculate in commodities. His claim to fame was that he got advance notice of Jimmy Carters grain embargo on Russia from a relative (who I seem to remember worked at the White House, may have been his father) and made a small fortune. When the “rube” who invested would want his money back, Mark would claim that the investor was a “loan shark” and that Mark would sue for treble damages. It all went wrong when he borrowed from the mob who were, indeed, loan sharks. Years later he ran another scheme involving gold.
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