The MacGuffin, Part 2: The Story Arc of SBF and FTX

The MacGuffin, as Alfred Hitchcock famously put it, is the object of desire.

It is Prince Charming. It is the Princess Bride. It is the Way Out. It is the Way In. It is the Secret. It is the Answer to the Question. It is the Ring of Power. It is the Alien Technology. It is the Map. It is the Treasure. It is Whodunit.

It is the thing or emotion or idea or state of being around which the plot of a story revolves, and every movie you have ever seen, every scripted TV show you have ever watched, they all have a MacGuffin.

So does your life. Your life has MacGuffins, too.

One of the oldest and most powerful MacGuffins is the Magical Money Machine.

The Magical Money Machine is Draupnir of Norse mythology, the golden ring of Odin that would make eight perfect copies of itself every nine days. The Magical Money Machine is the straw-into-gold spinning wheel of Rumpelstiltskin, an evil protagonist in a story that dates back 4,000 years. The Magical Money Machine is the genie of the lamp, the purse that has a few gold coins in it every morning, the goose that lays golden eggs. The Magical Money Machine is a reasonably common MacGuffin in today's movies, like the supercomputer of Westworld and the superintelligence drug of Limitless. But the best place to find this MacGuffin today isn't in Hollywood but on Wall Street. Because once you start looking for the Magical Money Machine in financial media and financial advertising and, most prominently, in the stories that we financial professionals tell ourselves, you will find it EVERYWHERE.

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Comments

  1. 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.

  2. 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.

  3. Avatar for bhunt bhunt says:

    100%. I hope they get there, too!

  4. 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.

  5. Avatar for robh robh says:

    Fantastic note Ben. Really well done. Please make a PDF available for easier sharing.

  6. 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.

  7. 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!

  8. 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?

  9. Avatar for Bangi Bangi says:

    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 when wrong when he borrowed from the mob who were, indeed, loan sharks. Years later he ran another scheme involving gold.

  10. Avatar for bhunt bhunt says:

    What a story! Had not heard of Weinberg before.

  11. Another first-rate post, Ben - and an excellent account of another extraordinary, and yet depressingly familiar, episode in finance.

    For those that are interested (and hat-tip to the FT for this link), here is a breathless paean to SBF and FTX (and, of course, by reflection, those clever partners at Sequoia) published on the Sequoia website in September (yes, 2022). No longer available on the site but the interwebs still oblige:

  12. I’ve seen the Magic Money Machine before, too.

    It was the “The Circle Of Gold” in my hometown of Pelham, NH. In the summer of 1978, I was 13 years old, and for a few months, I watched this thing spiral out of control until it nearly consumed our whole town and eventually imploded.

    Some of you might remember around that time there were these chain letters that went around where you paid $100 to make $100,000. The gist was that you’d buy the letter with a list of names for $100 - $50 going to whoever sold you the letter, and $50 would get mailed to the name on the top of the list. You’d cross the top name off and add your name to the bottom. Then make 10 copies and sell those to other people.

    The Circle of Gold was different. But it was close.

    Our Magic Money Machine was started by a local police detective named Arthur Heneault.

    Arthur short-circuited the process of mailing the money and recruiting new people. He handled all the backend himself. People would buy one of these Circle of Gold certificates for $100. In 7 days, you could cash it in for $1,000. Or, you could let it ride and roll that over to the “Circle of Platinum” for $1,000 and then get $10,000 in a week.

    My parents heard about it through our neighbors, the Fishers. They were friends with Arthur and had been in for a few rounds. They made enough to get an inground pool and take a family vacation to Florida. Rumor has it the Fishers pulled $34,000 out of The Circle of Gold. And they weren’t the only ones.

    The story spread through the area like wildfire.

    With “The Circle of Gold,” there was no need to recruit. People were literally begging to get in. People were showing up at the police station asking for Arthur and trying to hand him cash. That didn’t last very long before the chief put the kybosh on doing it while on duty.

    Arthur, was a respectable police officer. So he set up shop in the barn at a local farm with open hours a few days a week. Our little one-stoplight town was flooded with people from all over New England. The police had to set up special traffic control to deal with it.

    I saw all of this first-hand. My mother was one of about a dozen people he hired to type the certificates. A couple of times, I would go hang out with my mother after football practice and watch the insanity.

    This thing got so big that Arthur had to hire six bodyguards. I remember his sleeves rolled up, hair matted with sweat, surrounded by burly off-duty cops with guns at their hips, counting stacks and stacks of cash.

    Reporters from the local papers and TV were there reporting the whole thing. I remember my mom was in a photo on the front page of the local paper. (An honor that turned out to be ignominious, when the shit eventually hit the fan.)

    The scene was like a revial. Hundreds of people jammed into this rustic New England barn on top of Kimball Hill Rd to throw their cash at Arthur. I remember Arthur answering questions from the crowd. “How does this work? Is it a pyramid scheme?” And Arthur tells the crowd, “No, I’m investing this money and making it grow for you. You’re guaranteed to get your money back. But if you leave it with me, it will grow. Do you want your money back now?” HELL NO!

    The atmosphere was like a casino when the table is hot or a racetrack when your horse comes it. I still remember the poorly lite barn, filled with cigarette smoke and sweat on humid New England evening. The energy was palpable.

    Of course, my parents were investors in the Circle of Gold. They were not early investors like our neighbors, the Fishers. But they were in early enough that they got a payout. And what do you think they did? LET IT ROLL! They re-upped and put it right back in.

    It went on like this getting bigger and bigger for about a month. The barn with folding tables and string lights exceeded capacity. I remember Arthur telling my mother he was going buy a bigger building to run the business. It was exciting. We were gonna be rich!

    Then, suddenly everything came to an stretching halt.

    Later, we heard that Arthur got the tap on the shoulder from the Attorney General and was found guilty of securities fraud. Anyone who was waiting to get their money back, never saw a dime. There were a few people got in and out early. But a lot of them rolled that money right back in.

    Arthur lost his job at the police department but somehow as able to buy a sucessful grocery store, a couple of towns away. He did pretty well for himself.

    In hindsight, it was obviously a pyramid scheme that was doomed to fail. But in real-time, watching that all unfold, it was hard not to get wrapped up in it.

    People want to believe in that Magical Money Machine.

  13. How can someone so smart, as you say, as SBF spend so much time thinking of so many ways to take people’s money? Corruption of the “system” (society, government, business, ?) has spread so far that there is not enough honest endeavors to physically (financially) support the corruption and it seems as if it will all come crashing down. Soon everyone will just be stealing everyone else’s fake magic money.

  14. Hi Ben,
    It is truly amazing the technical expertise you have about capital markets. The thourough analysis that you offer, and explain in terms I can understand, would be impossible for someone like me (who did not earn a living as part of the financial world, I was a digital engineer), to dig out of articles and books.

  15. Avatar for palmer palmer says:

    Lovely article, Ben. Even if not entirely new information, a wonderful pulling of it all together with wonderful thinking about the disparate parts.

    I want to also thank you for two points you made in earlier articles specifically on Bitcoin:

    1. Bitcoin itself is art. Truly an elegant design. In my mind this gives it a little intrinsic value.
    2. Bitcoin ™ is what we are watching blow up (as most Magic Money Machines do).

    I will gladly give credit to you whenever I mention the two concepts. Wonderful thoughts.

    A couple of thoughts though to add on top:

    1. It won’t die like other fads. As long as we have networks and computers, someone will be mining it. It’s not going to ever fully fade away.
    2. Its elegant design does a very good job of mimicking the properties of gold that made gold a choice of a store of value. Scarcity and permanence.
    3. Gold’s advantage is 6000 years of agreement that it has value.
    4. Bitcoin is a lot cheaper to hold. It has a much cheaper cost of carry. No need for men with guns to guard it.

    Bitcoin really only does one thing. It mimics the properties of gold. Agreed, no revolution here. It’s just an interesting digital form of the properties of gold. As such, I think it’s more likely than not at some point in the future it will share the store of value market with gold. Not any time soon given current Bitcoin™ wreckage, though. But, it’s a better choice in my mind than paying fees to hold a very dense metal. And it’s permanence means there will be many chances for a critical mass of rich people on the planet to all agree it has value like gold and split gold’s market cap with it. However guessing when that happens, that’s the rub… will be listening to the narratives.

  16. Welcome to the Pack, Palmer!

    You left an important aspect of gold off your list of differences. Gold is physical and is used in manufacturing. That inherently establishes a minimum value. That doesn’t exist for Bitcoin. There is no minimum limit to the value.

    Buffett made the comment that he wouldn’t take all the Bitcoin in the world for a dollar. His point is that Bitcoin has value because other people believe that it has value. If you owned it all, there would be no value to other people.

    It is similar to how prisoners establish fiat currency with cigarettes, matchsticks, or postage stamps. They are just tokens, and everyone agrees that they have some value that’s above their minimum intrinsic value. For a fiat system to work, it requires faith and trust.

    It’s the same as Beanie Babies or trading cards. The value comes from what other people put on it. (BTW, there was a good piece in Barron’s this weekend by Jack Hough on Hasbro and Magic: The Gathering trading cards:
    Hasbro Won Big With a Role-Playing Game. Is It Now Diluting the Magic?.

    Is there a reason why Bitcoin couldn’t go to zero?

    It is the same with the USD, for that matter. It’s a matter of faith and trust.

  17. Avatar for palmer palmer says:

    I think less “couldn’t,” more highly unlikely. There will always (ok, maybe 99.99999% chance) be someone in a tinfoil hat mining it somewhere. And it is something that is hard to kill. That hard to kill part means many more opportunities for resurgence, “Hey, remember bitcoin? Oh wow, it’s still around!”. I think the physical is less important than you think. It’s a bit of a virus now that some form of it (if not the original) will be part of our networked eco-system as long as we have networks.

    Though agreed… Beanie Babies and baseball cards keep coming to mind for me, too. It solely is about trust and agreed upon value… have always thought that about gold. But, BTC is something I would want to collect, simply as a collectible because of it’s elegance. If it drops to near nothing, would love to own a bit more. :slight_smile:

  18. Agreed!

    By the way, I “collected” three bitcoins in 2015 when it was sub $300. Yup! Put about $1,000 into Mt.Gox and bought three coins. This was before I understood that you could buy fractions of coins or that you could have an external wallet. Or the need for saving recovery phrases in place so you could find them again.

    Hillarious, right?

    So funny I could cry.

  19. Avatar for naiguy naiguy says:

    Interesting point. I wonder if this trait alone gives BTC some minimal intrinsic value?

  20. Avatar for palmer palmer says:

    Beanie Babies cannot be killed by conventional weapons.

  21. Avatar for 010101 010101 says:

    Where do the different types of people view themselves and others in relation to the MagicMTree?

    Is there a type of person who thinks they can own it, or borrow it?
    Do some believe they can shake it to make it?
    It must be very well hidden. The slightest glimpse of it, gazed on by a multitude could only beset an outcry, a clamour, a surge to grasp its elusive mass.
    Does this tale of SBF and his voyage of self-indulgence reveal any secrets?
    Any deeply hidden, guarded powers, written spell-like on archaic, fossilized wood flotsam, wearing surf-shorts into the public domain?
    It reminds me that real magicians can’t reveal their tricks.

  22. Can anyone think of a magic money machine in the 1980’s?

    I know the whole of society was a magic money machine lol

  23. Avatar for jewing jewing says:

    Multi-Level Marketing Organizations?

  24. Avatar for bhunt bhunt says:

    What a great post, Eric! This could be an ET note on its own.

  25. Perfect - Thanks My Dad was caught up that for a minute.

  26. Avatar for 010101 010101 says:

    Tokyo commercial land 85-87.

    Polly Peck 82-90.

  27. Funny how the defenses just continued to ring hollow. Barry Silber of DCG group, as the market hits new highs for the day.

  28. i’ve got money sitting in USDC and DAI at the moment. Are we at the stage where we should be paying more in tax and just moving out into USD, or is USDC looking strong enough with US bond backing?

  29. Me too! It was long distance phone cards as a pyramid scheme through churches in my area. LOL

    A few years before that there was a nearby called Studebaker also made a Magic Money Machine, and used the employee pension fund. I still run into people from families that were permanently decimated from that fraud. But no worries now because the PBGC was invented to make sure it could never happen again.

  30. While I agree with the consensus of praise Ben, I disagree with you letting the Biden Administration so easily off the hook. Granted there’s countless rocks to kick over but the continuous money laundering pay to play tactics since the Clintons should not be dismissed as ridiculous. This Ukraine war is so beloved by the Left that, that alone, should raise questions.

    Romanticizing FTX as the “Wild West” seems simplistic without even having to cite Hobbes. The racoons always run havoc in unregulated environments, not that you haven’t written brilliantly about it already. In CA , law-abiding taxpayers are watching in dismay as authorities pay lip service to daily smash & grab organized crime when it is “common knowledge” Dem politicians opened the floodgates to it.

    I don’t think it’s an accident the Biden Administration has hamstrung the oil industry while ignoring rampant crypto corruption. I don’t think it’s an accident Dems have demanded vaccine mandates & avoided passing national abortion rights laws.

    Follow the money Ben.

    Please turn your incredible intelligence on how the country if not world is being run.

    Yes, like you, I thrive on ‘the home on the range (farm)’ mentality, but like an episode of Yellowstone, our personal freedoms have never been more threatened by government.

    Can you see the paradox of no “my body my choice” when it comes to experimental vaccines & shutting down the economy for almost 3 years WHILE letting the Ponzi cryptoverse racoons rape & pillage unfettered as long as politicians, investment bankers, media outlets & yes all the Stadium owners and other PLACEMENT targets benefit.

    How can you give it a pass like it’s a run of the mill scandal? When, in fact, in light of the “cancel culture” & unprecedented government censorship, it is an epic attack against people like us—free thinkers aspiring for individual rights.

    Where’s your incredible wit exposing how wokeness has evolved into fascism & totalitarianism.?

  31. Avatar for 010101 010101 says:

    There has been a fair amount of defence of the ideology of totalitarian democracy that is incompatible with dialogue. Perhaps, sometimes, discretion is the better part of valour.

  32. I’m a bit confused that you make this issue about the Biden administration when the reality of crypto and monetary policy we see right now pre-dates him.

    What do you think has Biden done or I guess not done?

    The SEC under Biden fined blockfi a record 100 million I think, the most that has been issued against a crypto related business. What measures was taken under Trump that Biden didn’t push on with?

    I remember Trump pushed ripple for some reason. But was he doing something else?

    Or is this critique of the system in general? In which case the regulatory capture of government agency seems to have been going on for years. Think of the post office being eviscerated by DeJoy as having a more damaging impact than Tom Brady losing his gambling money imo.

    Because at the heart of it, money is only worth anything for it’s ability to exchange productivity, and any money that was speculatively destroyed in a bubble is money that was unproductive. But destroying the post office and making it less efficient is directly unproductive in a way that money being destroyed isn’t.

  33. Kaiser—I’m not too interested in arguing which party is the lesser evil as both are beyond the pale. My point—in real time—there are layers of corruption that should be exposed & not whitewashed. I always find it amusing when appropriate criticism is met with reflex tribalism. I was raised in a particular religion & was somewhat devout for many years. But self-education & thorough examination provided more than enough reasons to terminate any affiliation. It seems any reasonable reflection towards either political party ought to lead to a similar outcome. Yet tribalism and the attraction of affiliation almost always triumphs even in the face of atrocities. It seems only the most advanced philosophers can transcend such herd psychology.

  34. Maybe if Blockfi had been funding politicians and other agents they wouldn’t have been fined.

  35. I misread the situation then. :slightly_smiling_face:

    I just found it odd you mentioned Biden and democrats specifically as if the problem started and ended with them.

  36. Great post! You have a knack for cutting to the heart of a matter.

    I was caught off guard and pleasantly surprised by your upbeat ending.

    For the past ten years, not coincidentally as long as I’ve been writing Epsilon Theory, I’ve been catching glimpses of a new MacGuffin to pursue, a MacGuffin of belonging in the present and difference-making in the (very) long-term future.

    This is why I keep coming back to Epsilon Theory, and why I lurk on the forum from time to time.

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