Peter and Michael discuss Michael Lewis’s bestselling book about the rise and fall of Sam Bankman-Fried, a young prodigy whose only flaw was that he dreamed too big.
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Peter and Michael discuss Michael Lewis’s bestselling book about the rise and fall of Sam Bankman-Fried, a young prodigy whose only flaw was that he dreamed too big.
Where to find us:
Sources:
Thanks to Mindseye for our theme song!
Michael: Sam Bankman-Fried? Shouldn't they call him Sam Bankman-Captured?
Peter: Oh, no. [laughs]
Michael: Yeah. I don't think that's actually very good. Not good.
Peter: I hope you didn't say that to me with a distant hope that I'd be like, “No, it is good.” [laughs]
Michael: Yeah, I did say that for you. But I can't figure out how to make it in a like, “All I know is kind of phrasing.”
Peter: Yeah. [laughs]
Michael: Okay, let's try it. Let's do it. Let's do it.
Peter: Okay. Michael?
Michael: Peter.
Peter: What do you know about Going Infinite?
Michael: All I know is that I'm skeptical that this episode is going to teach me that running a year’s long financial scam is harder than administering a to person polycule.
[If Books could Kill theme]
Peter: What do you know about this book? Because this is the most recent book we've ever done. This dropped in October 2023.
Michael: I know that I, in general, like Michael Lewis and have read many of his books and found them good. What I remember from the discourse when Going Infinite came out, this was a book about the rise and fall of Sam Bankman-Fried that was weirdly sympathetic to him.
Peter: Yeah. That's a pretty good overview. I will say that I also wanted to preface this episode by saying that I'm a big Michael Lewis fan.
Michael: Yeah.
Peter: I loved Flash Boys. I loved The Big Short. I'm a straight man who follows sports, but is still fundamentally a nerd, which means that Moneyball is very important to me. This book actually kind of rules.
Michael: Oh, yeah.
Peter: The sole problem is that he is unable to see his subject, Sam Bankman-Fried, for who he actually is.
Michael: [laughs] Kind of a big problem when you put it like that, but still--
Peter: It is a big problem. It's frustrating and fascinating at the same time, because Bankman Fried is sort of a con artist and you are sort of watching Michael Lewis get conned-
Michael: Oh, yeah. [laughs]
Peter: -over the course of the book. In short, Michael Lewis wanted to chronicle Sam Bankman-Fried. He spends a year shadowing him, learning about this young prodigy, trying to understand his cool new business, all while writing one of his classic, informative, yet entertaining and accessible nonfiction books. The twist comes when, in the midst of all of this, Sam Bankman-Fried is revealed to have committed massive multibillion dollar fraud. His company, FTX collapses, the SEC alleges that he committed securities fraud, the DOJ brings a criminal case and the story of this brilliant prodigy that Michael Lewis was writing suddenly doesn't really make much sense.
Michael: Right.
Peter: But on the other hand, there's now another, arguably more interesting story to tell about this con artist who not only tricked investors and customers, but also the author himself.
Michael: Yeah. [laughs]
Peter: Michael Lewis is still out there to this day, defending the kid.
Michael: He's joined the polycule. [Peter laughs] He's in Barbados.
Peter: I hate to disappoint, but Michael Lewis doesn't actually cover the polycule situation going on.
Michael: I'm so mad.
Peter: It is outrageous. It makes you wonder, [Peter laughs] if you didn't notice the polycule, then why do you think that you were really on top of things?
Michael: His whole thing is writing about color and having these kind of human and personal details. I feel like a 10-person polycule in a tropical location should have been your opening anecdote, something along those lines.
Peter: It should have been a three-chapter arc. [Michael laughs] I don't really get it. All right, so, what do you know about FTX?
Michael: Oh, God. Dude, I've listened to, I swear to God, seven different podcasts about this. Like, “Okay, I'm going to understand. I'm going to figure out actually went on,” and every single one of them just goes in one side of my brain and goes out the other. I cannot hold on to information, something, something crypto.
Peter: What I realized very quickly is that you don't actually need to understand anything about how crypto works to understand the basics of what SBF did wrong here.
Michael: Oh, God. Thank God.
Peter: Sam Bankman-Fried, SBF, as we will occasionally call him, ran FTX, a cryptocurrency exchange platform. That just means it's a place where people can trade cryptocurrency. He also ran Alameda Research, just like a regular hedge fund invests in stocks, they invest in crypto. The fundamental fraud here was that Sam took customers money from FTX and illegally funneled it to Alameda Research and a bunch of other corporate entities, where they used it to make trades, buy things, make massive political donations, shit like that.
Michael: Okay. So, he said, “We're going to take your money, put it in a lockbox and then give it back to you.” Whereas, actually, he's using it as a slush fund for various other things that he wants to do.
Peter: Not just that, but he was making untruthful disclosures to banks, investors, etc.
Michael: Okay.
Peter: I think that the fact that this is crypto makes people assume that it's complex. There are complexities that are related to crypto. But big picture, it's fraud and embezzlement, right?
Michael: Right.
Peter: That's what's happening here.
Michael: I remember an interview that I did with a guy who wrote a book on Enron when we did a You're Wrong About episode about that. He said this whole construction of white-collar crime as like, “Ooh, it's so complex,” is kind of a thing that just serves to protect rich people.
Like, most of what Enron did, he said, was just lying and stealing.
Peter: That's exactly what happened at FTX.
Michael: Yeah.
Peter: So, I'm going to tell the story that Michael Lewis tells, which is a good story in many respects. In the opening chapter, we're looking at Sam Bankman-Fried shortly after he becomes mega rich from the perspective of Natalie Tien, his young and inexperienced head of PR. For the record, everyone around him was young and inexperienced.
Michael: Okay.
Peter: So, what Lewis wants you to take away from the early parts of the book is that Sam is like an enigmatic, wunderkind genius. He's a very odd guy. And behind every little quirk, Michael Lewis sees hints of brilliance.
Michael: Okay.
Peter: So, he talks about how Sam is hard to manage, because he doesn't keep a regular sleep schedule and wants wanders off without telling anyone. He posts on social media haphazardly. He will talk to journalists very freely for very long periods of time. He would play video games, and tweet during live TV interviews and important phone calls.
Michael: I checked Grindr when we're recording, and nobody calls me a genius.
Peter: [chuckles] There's a vignette where he's talking to Anna Wintour on Zoom while he's playing a video game. You can tell that Michael Lewis is just captivated.
Michael: It's weird that people see this as evidence of his being a wunderkind as opposed to just like he's not listening very closely.
Peter: Yeah.
Michael: Like, is there evidence he's actually good on these calls? It's like, anyone can play video games while they're pretending to do something else. That's the easiest thing in the world to do.
Peter: The thing is that he's very, very rich for most of this. And so, I don't know, people want to talk to him, and he doesn't want to talk to them. [Peter laughs] He would always flake on his commitments. With Anna Wintour, he agrees to go to the Met Gala and then backs out the night before.
Michael: Okay.
Peter: Here is how Michael Lewis explains this. Give me one moment.
Michael: It says, “When people asked Sam for his time, they assumed they’d posed a yes or no question, and the noises Sam made always sounded more like “yes” than like “no.” They didn’t know that inside Sam’s mind was a dial, with zero on one end and one hundred on the other. All he had done, when he said yes, was to assign some non-zero probability to the proposed use of his time. The dial would swing wildly as he calculated and recalculated the expected value of each commitment right up until the moment he honored it or didn't.” Okay, so he's just flaky.
Peter: Yeah.
Michael: This is like 80% of the people I knew in my 20s.
Peter: I'm not a professional psychologist, and I'm going to repeatedly say that throughout this episode. But I can say with 100% confidence that that is not what's happening in Sam Bankman-Fried's mind [Peter laughs] when he schedules an appointment.
Michael: Yeah.
Peter: What's happening in his brain is that he doesn't particularly care about this shit.
Michael: Yeah.
Peter: So, he agrees to it without thinking much, and then he blows it off without thinking much.
Michael: Yeah.
Peter: That's not the manifestation of an algorithm in his brain.
Michael: Another way to cast this is kind of selfish behavior.
Peter: Yeah.
Michael: You've made commitments to people, and then you're like, “Eh, I don't really feel like it.”
Peter: The dude is just a bit of an asshole. He's careless with other people's time, and he has accumulated enough money and influence that everyone around him, more or less, has to accommodate him anyway.
Michael: Right.
Peter: But yeah, Michael Lewis sees this and he's like, “Wow, he's doing fucking calculus in his brain.” It's like,” No, he doesn't want to go to the Met Gala.”
Michael: Yeah. Also, so much of this stuff has this weird Clever Hans thing where if somebody is rich, you project all this competence onto them and you interpret every action as if it's evidence of their genius.
Peter: You are right there with me. Let's drill down into this. So, there's this trope in some of these profiles and stories of ostensible geniuses. The genius in question is confronted with a game that normal people think is complex, but he thinks it's too simple. The first time I noticed this was a couple years ago. Elon Musk tweeted about chess.
Michael: Oh, yeah. [laughs]
Peter: He “found it to be too simple to be useful in real life: a mere 8 by 8 grid, no fog of war, no technology tree, no random map or spawn position, only 2 players, both sides exact same pieces etc."
Michael: Dude, I love that you're using this to play out your spite as a chess guy that he maligned [Peter laughs] the game of chess. [laughs]
Peter: Look, that is part of it. [Michael laughs] It is annoying to see someone would be like, “This is too simple. Why isn't it more like StarCraft or whatever the fuck?” Like, “Shut the fuck up.”
Michael: [laughs] Don't bring StarCraft into this.
Peter: Oh, look whose game is being attacked now.
Michael: [laughs] I'm playing StarCraft right now. [peter [laughs] That's how much of a genius I am.
Peter: Well, I feel like what's happening in these situations is that these guys believe in their hearts that they are unparalleled geniuses. They know that something like chess is something that geniuses are supposed to be good at, right?
Michael: Yeah.
Peter: So, when they aren't immediately good at it, they need to explain it away in order to preserve their ego.
Michael: There's no fog of war, unlike my polycule.
Peter: I really wish that you hadn't learned about the polycule situation.
Michael: I'm just good in keeping polycule jokes the whole time.
[laughter]
Peter: I'm going to send you anecdote from Michael Lewis. This is from Sam Backman-Fried's time as a youth at math camp.
Michael: It says, “By math camp standards he was only mediocre at puzzles and games. But he also suspected that the sorts of games they played at math camp were too regular for his mind. “The place I am strongest is the place where you have to do things other people would find shocking,” he said. He still had no idea where in the world, if anywhere, he might find such a place. Or if it existed.”
Peter: How badly do you have to get your ass kicked at Settlers of Catan [Peter laughs] to say some shit like this? The games that I'm good at would be too shocking for your brain to comprehend.
Michael: Look, none of us can figure out the scoring at the end of ticket to ride. Sam, it's fine.
Peter: [laughs] Right. What the fuck is going on in this fucking quote? He's not as good at games and puzzles as the other kids, and he's like, “That's because they're too regular.”
[laughter]
Michael: The thing is, I'm also bad at games, but I think it's because I'm kind of dumb. [Peter laughs] But don’t other people just have enough self-loathing to not externalize this kind of thing? [chuckles]
Peter: Lewis backs up a bit to Sam's childhood. Sam does not have strong memories of his childhood. He didn't seem to have many friends, if any friends. His parents are sort of weirdos. It's very clear they're both professors. His mom is a law professor at Stanford. There's a very clear sense in the stories about his parents that they are not particularly attuned to the lives of their children. They're very aloof. Sam could have used some early interventions, and I feel like history vindicates that take.
Michael: But then I assume that he was legitimately smart at one or two things.
Peter: Absolutely. He's in a lot of respects, a good example of the limitations of genius. You know what I mean?
Michael: Yeah.
Peter: One of themes of Sam's later childhood is that he very quickly starts to feel like he is smarter than the people around him.
Michael: Yeah.
Peter: But I do think that you can say like, the kid was a genius. For sure, is a genius. It's just that genius is this very narrow thing.
Michael: Right. And then people project genius into all these other domains where he might actually not be all that smart.
Peter: Speaking of, here's a quote.
Michael: By the way, you're going to say, speaking of, how was your week? [Peter laughs] I'm like, “Oh, it's me. It’s not me.” [Peter [chuckles] Okay. It says, “In elementary school, he’d read the Harry Potter books over and over. By the eighth grade, he had stopped reading books altogether. “You start to associate it with a negative feeling, and you stop liking it,” he said.
“I started to associate books with a thing I didn't like. He kept his thoughts about the literary industrial establishment to himself through middle school, but by high school, they began to leak out of him. I objected to the fundamental reality of the entire class,” said Sam of English. “All of a sudden, I was being told I was wrong about a thing it was impossible to be wrong about. The thing that offended me is that it wasn't honest with itself. It was subjectivity framed as objectivity. All the grading was arbitrary. I don't even know how you grade it. I disagreed with the implicit factual claims behind the thing that got good grades.” Ooh, this sounds like me. This sounds like me as like a little libertarian.
Peter: Right. This is like early onset stem brain. [Michael laughs] He goes on to explain, and this is Sam now, explaining why he thinks statistics show that Shakespeare wasn't as good as people say.
Michael: Wait, really?
Peter: I'm sending you his quote.
Michael: Okay. I was going to follow up on the thing where he says like, “Books aren't good.” [Peter laughs] He says, “I could go on and on about the failings of Shakespeare, but really I shouldn't need to. The Bayesian priors are pretty damning. About half the people born since 1600 have been born in the past hundred years, but it gets much worse than that. When Shakespeare wrote, “almost all Europeans were busy farming and very few people attended university,” few people were even literate, probably even as low as 10 million people. By contrast, there are now upwards of a billion-literate people in the Western sphere. What are the odds that the greatest writer would have been born in 1564? The Bayesian priors aren't very favorable.” What?
Peter: The Bayesian priors aren't very favorable. [Michael laughs] Oh, God. So, Bayesian priors are like the likelihood of something happening before introducing new variables. So, all he's saying is like, “Before anything else, just take into account how few literate people were on the planet during Shakespeare's time, and it's unlikely that the best writer ever would come from that era.” There's so many comprehensive misunderstandings of literature in this that it's hard to pick them apart.
Michael: Right. Because you could say there's a fraction of the scientists around back then that there are now. So, what are the chances that somebody would come up with this foundational theory of evolution? It doesn't make sense statistically. But that isn't how literature and science work.
Peter: Have you ever heard the term engineer's disease?
Michael: [laughs] No. But I know where you're going with this.
Peter: This is something that has bounced around the internet for a bit to describe how engineers and other stem types think that their technical knowledge allows them to solve various problems across different fields. I think what's happening here is that like you're very good at solving problems, and your sense of your value as a person is tied up in your ability to solve problems. When you are confronted with problems that cannot be readily solved that require some subjective input or another, your brain rebels and you try to turn it into a problem that can be solved, right?
Michael: Yeah.
Peter: Your brain is like a hammer, and so every problem must be a nail. Otherwise, you are forced to confront the limitations of your intelligence. So, Sam pretends that all of these complex, subjective elements of human existence can be reduced to a math problem, because he's good at math problems, and then he can solve it and his ego can rest easy, right?
Michael: Right.
Peter: This is late-stage stem brain.
Michael: I think these kinds of arguments are meant to appeal to a particular kind of dude, which potentially Michael Lewis is. Because he sounds like he's making this kind of objective argument. I mean, nobody who knows anything about Shakespeare would find this convincing.
Peter: Right.
Michael: I think whether Shakespeare is good or not, you can just read the works and decide that.
Peter: Well, he can't, because he doesn't know how to analyze literature, right?
Michael: Right. Yeah.
Peter: And that's what drives him nuts. Look, I don't like Shakespeare. There were two times in my schooling when I realized that I was not an all-around smart kid. One was when we hit calc.
Michael: Yeah, same, same, same.
Peter: And then two was when we read Shakespeare. I realized that I am below average at figuring out what is going on in a Shakespeare play. [Michael laughs] This actually applies to any sort of book with old timey language.
Michael: Yeah.
Peter: Any sort of old English. I am fucked.
Michael: This is why I never finished Elden Ring. I'm not trying to read item descriptions.
Peter: I'll do a separate episode if you want to debate Elden Ring, which ruled.
Michael: What? You know about Elden Ring? I thought this was going to be one of my little video game comments that you just ignore.
Peter: Are you fucking kidding me? I played the shit out of Elden Ring.
Michael: Really?
Peter: When I got fired--
[laughter]
Peter: When I got fired, I got Elden Ring. Look, if you want to talk about a bleed build, I got a [crosstalk] killer one. A killer one. [Michael laughs] So, Sam gets into MIT, majoring in physics, minoring in math. Lewis again portrays this as a situation where he is so much smarter than the people around him at MIT that it's basically a waste of time. Lewis says, “During college lectures, Sam experienced a boredom that had the intensity of physical pain. He had no ability to listen to a canned talk.”
Michael: A canned talk. A lecture?
Peter: Again, Lewis reads this as like, “This guy's brain is so powerful that even MIT professors cannot stimulate it.” Again, not to play armchair psychiatrist, but I really think Lewis would have benefited from cruising the Wikipedia for ADHD.
Michael: Yeah.
Peter: I too was bored in lectures. It wasn't because I knew all of the European history that the professor was talking about.
Michael: Right. You also think about like, what would a poor kid--? How would we respond if it was a poor black kid who couldn't pay attention to lectures and hated Shakespeare? This stuff gets processed in a completely different way.
Peter: Frankly, I think the real takeaway from these opening anecdotes is that Sam struggles to put energy into things he doesn't care about, right?
Michael: Yeah.
Peter: Sam himself seems to rationalize this away as those things being too simple or unimportant. He says that his disinterest in college came from realizing that academics weren't doing much to change the world.
Michael: Oh.
Peter: But that criticism is coming from someone who spends huge percentages of his free time playing video games.
Michael: Right.
Peter: I would have hoped that Lewis would prod at that a little bit, but he seems to take Sam's own characterizations at face value.
Michael: It's also funny looking at-- If we want to be retrospective, you could also look at it through the lens of the crime of-- This is somebody who’s like-- it seems like cut corners and had a lot of-- It seems like contempt for things that are outside of his realm of interest.
Peter: Yup.
Michael: That's a dick move. [chuckles]
Peter: Right.
Michael: Not necessarily a genius move. Like, you can say, “Oh, I'm not that into Shakespeare in a way that doesn't denigrate Shakespeare.” It just doesn't click with you for whatever reason.
Peter: So, we're now in 2014. He goes to work for Jane Street, a highly selective, prestigious trading firm. This is also about where Sam gets into the effective altruism movement. I imagine that you know something about this. This feels very Mike Hobbes.
Michael: Man, somebody in my book club has introduced me to the concept of ranch triggers. Like, things that people say that you're like, “Okay, I need three minutes to [Peter laughs] talk at you about this.” Like, if it comes up in any context, you're like, “Just to warn you. Here it comes.” That's how I am with effective altruism.
Peter: You're on the clock.
Michael: Okay. [laughs]
Peter: Three minutes.
Michael: Basically, this is a movement that came about because a lot of the things that were going on international development were extremely arbitrary. And then there was this movement to start to measure quantitative results and to focus on the most effective development interventions, which sounds great and was a huge improvement over what was going on at the time.
But then over time, it started to adopt all of the problems that it had originally been a response to. It has this weird thing where it's like, “Well, we figured out objectively what the effective development interventions are. And all we have to do is scale those up everywhere,” which, as somebody who worked in development for 11 years, that's not really something that exists. You can't say that something “works” or “doesn't work.” And people without any relevant expertise in the local context coming in and saying, “No, no, no, this is science. We've done this. We're going to impose this on everybody in this standardized way,” is a concept with a very long and very diabolical history in international development.
Peter: That's an interesting history, because I think this is like a very specific manifestation of this movement among these ultra rich guys.
Michael: Yeah.
Peter: With respect to Sam himself, I think it's likely that it interests him again, because it presents humanity as a problem that can be rationally solved. I think one of the things that charmed Michael Lewis is that he believes that Sam Bankman-Fried is, in fact, truly invested in the wellbeing of humanity and figuring out these big problems. I don't see any specific reason to believe that Sam is being dishonest about this. I just think that he's probably more interested in the effective part than the altruism part.
Michael: Yeah.
Peter: A little later in the book, Lewis talks about the mission creepy in this community. To oversimplify a bit, one way to look at this was like, what are some very cost-effective altruistic interventions?
Michael: Yeah, that's fine.
Peter: Mosquito nets, right?
Michael: Yeah.
Peter: Cheap, effective, great use of money. But a lot of people in the movement, Sam included, start to think more about what the largest threats to humanity are.
Michael: Yeah.
Peter: So, instead of focusing on cost effective ways to prevent hunger and disease, they spend their time trying to pinpoint the biggest existential threats. Like, Sam believes it's AI. You can't let these fucking nerds be in charge of anything.
Michael: Yeah. No, don’t.
Peter: It all circles back to AI at the end of the day.
Michael: That's the thing. There's no smart or dumb way to predict what is going to happen in 5,000 years. Again, it's like this over confidence in your own ability to reason through these extremely complex social problems using Excel spreadsheets.
Peter: There's actually a really good example of the limitations of what they can do. So, Sam's at Jane Street doing great, finding success with various types of trading arbitrage. In 2016, they bet billions that a Trump win would tank the markets. They figure out that the markets are moving at the speed of CNN.
Michael: Okay.
Peter: So, if you can sort of look at the data and beat CNN to the punch, they can make a bunch of money. They do that. They are able to develop this system that can beat CNN to the punch, but they lose a ton of money because the markets didn't tank when Trump won. The markets went down and then overnight popped right back up, which really highlights the point. Yes, they are in fact very good at the math side.
Michael: Right.
Peter: They can look at all this data and figure this shit out. What they couldn't figure out was the subjective, much more complex problem of whether the markets would actually like Donald Trump to win.
Michael: Right. That's such a fascinating example, because it is both sophisticated and very dumb at the same time.
Peter: Right.
Michael: Good example, Peter. Good poll. That was relevant.
Peter: Michael Lewis makes it easy with his accessible [Michael laughs] pros and nicely flowing narratives.
Michael: Use affiliate code, MIKEANDPETER at checkout for 10% off.
Peter: [chuckles] This is the only book that I've done where I would recommend it. I'm like,-
Michael: Yeah?
Peter: -“Eww, this is a fun read.”
Michael: That’s interesting.
Peter: You go in understanding what he gets wrong, but the actual experience of reading the book is cool. This is cool.
Michael: I can't believe it's not the secret.
Peter: [laughs] That's the one that's helped me the most. [Michael laughs] So, in 2017, Sam leaves Jane Street to found Alameda Research, his crypto trading firm. He had been a little bit disillusioned. Just hadn't been quite as happy as he wanted at Jane Street, and he realizes that crypto is like the next big thing. He starts recruiting his friends and acquaintances, including Caroline Ellison, who would become his on and off girlfriend and the CEO of Alameda.
Michael: Oh, I thought you were going to say of the polycule.
Peter: She plays a big role in the polycule as well.
Michael: Okay.
Peter: A lot of his recruits come from the effective altruism community right off the bat, alienates a bunch of people with his off-putting management style. I sent you an excerpt.
Michael: It says, “He was demanding and expecting everyone to work 18-hour days and give up anything like a normal life, while he would not show up for meetings, not shower for weeks, have a mess all around him with old food everywhere, and fall asleep at his desk,” said Tara Mac Aulay, a young Australian mathematician who was, in theory, running the company with Sam. “He did zero management and thought that if people had any questions, they should just ask him. Then in his one-on-ones with people, he’d play video games.”
[laughter]
Michael: But what was his build?
Peter: I'm sending you another one.
Michael: “It crossed his mind now that he was starting his own business, that he should read up on how to manage people. But every time he flipped through books or articles on management or leadership, he had roughly the same reaction he'd had to English class. One expert said X, the other said the opposite of X. It was all bullshit,” he said. This man doesn't know about one book theory. [Michael laughs] This is the real problem.
Peter: It's very funny that he's like, “Ugh, there's subjectivity. No, it's not real.” [Michael laughs] I'm sorry, but you have to-- I don't care which style it is, you got to pick one of them and just go for it because you suck.
Michael: This also just seems like he's not great at just human complexity or things that don't have a quantitative solution.
Peter: Absolutely.
Michael: Most human relationships, there's not one formula for how to be a good friend.
Peter: Yeah.
Michael: And also, the thing about not showing up for meetings and playing video games, it seems like an inability to understand how his actions will be perceived by other people.
Peter: Rationally, you should understand that 5% of my attention is very valuable.
Michael: [laughs] But it's also funny, because rationally you should know that even if you think you're good at listening to people while you're playing video games, it's going to seem off putting to other people.
Peter: No. You have to understand that rationality always leads you to whatever the most selfish thing to do in any given moment. [Michael laughs] Generally speaking, this firm is doing well. There's a lot of inefficiency in crypto markets at this time, so there's a lot of opportunity for arbitrage and that's how they make their early money. At one point, the traders cannot locate about $4 million worth of a cryptocurrency called Ripple.
Michael: Okay.
Peter: People are freaking out and many senior management folks, to the extent that they exist at Alameda Research, suggest that they should inform investors. Sam does not want to do that. I'm going to send you a little excerpt.
Michael: “Sam continued to insist that the missing Ripple was no big deal. He didn’t actually believe that it was lost, or that they should account for it as lost. He told his fellow managers that in his estimation there was an 80% chance that it would eventually turn up. Thus they should count themselves as still having 80% of it. To which one of his fellow managers replied, “After the fact, if we never get any of the Ripple back, no one is going to say it is reasonable for us to have said we have eighty percent of the Ripple. Everyone is just going to say we lied to them. We’ll be accused by our investors of fraud.”
That sort of argument just bugged the hell out of Sam. He hated the way inherently probabilistic situations would be interpreted, after the fact, as having been black-and-white, or good and bad, or right and wrong. So much of what made his approach to life different from most people’s was his willingness to assign probabilities and act on them.” Yeah, that’s deranged.
Peter: Yeah. This is similar to the scheduling stuff. It’s something that Lewis really seems to believe that SBFs decisions are all made by assigning everything a probability and acting accordingly. And that he's very frustrated by other people who don't see the world this way, because he thinks that they are irrational. But Lewis isn't seeing the pretty obvious obfuscation here, because if Sam really thought that this was no big deal, he shouldn't have a problem telling investors, right?
Michael: Right.
Peter: The argument he's having with his colleagues is not about the probabilities and calculating how much Ripple they really have. It's about transparency.
Michael: Right.
Peter: I'm not sure that Lewis knows that he's foreshadowing when he tells this story.
Michael: Yeah. Also, there's something funny about this as a “math analysis,” because the 80% chance that it would turn up is made up. Why is there an 80% chance that it'll turn up. Why not 50%? Why not 90%?
Peter: Are you a math genius? No, you don't know the probability.
Michael: [chuckles] You can't make up a number and then pretend that you're doing math.
Peter: So, between the whole missing money debacle and his general shitty behavior, Sam alienates a bunch of the effective altruist types that he brought in, and they attempt to oust him.
Michael: Oh, really from his own company?
Peter: From his own company.
Michael: Wow.
Peter: I'm going to send you an excerpt.
Michael: It says, “Like everything else about Alameda Research, this bid by the firm’s other managers to get rid of Sam proved complicated. For a start, Sam owned the entire company. He’d structured it so that no one else had equity, only promises of equity down the road. In a tense meeting, the others offered to buy him out, but at a fraction of what Sam thought the firm to be worth, and the offer came with diabolical fine print.
Sam would remain liable for all taxes on any future Alameda profits. At least some of his fellow effective altruists aimed to bankrupt Sam, almost as a service to humanity, so that he might never be allowed to trade again.” I'm behind it. I'm into it.
Peter: Yeah. I wanted to flag this to note that like, this doesn't make sense. I assume that this is what Sam relayed to Michael Lewis about what happened here, but no person on earth would agree to be liable on all future taxes for an operation like this.
Michael: Also, aiming to bankrupt him, sounds like maybe his depiction of events too.
Peter: Right. That does sound like maybe a characterization that Sam is giving to Michael Lewis. But who knows? Maybe they hated him, and also suck at negotiations.
Michael: Yeah. [chuckles]
Peter: So, at the end of it all, in early 2018, his entire management team and half of his employees leave the company.
Michael: Wait, did they ever find the Ripple?
Peter: They found the Ripple. Yeah, it was just a software glitch.
Michael: So, it did come back.
Peter: Sam was wrong. There was 100% chance [Michael laughs] that they were going to find it.
Michael: You do know math, Peter.
Peter: That's math, baby. [Michael laughs] So, before we talk about FTX, I want to pause briefly to discuss how Michael Lewis describes cryptocurrency. I'm going to send you something,
Michael: He says, “How Bitcoin worked was interesting chiefly to technologists, what it might do was interesting to a much broader audience. It might allow ordinary people to exit the existing financial system and never again rely on the integrity of their fellow human financial beings.” What?
Peter: So, this is a weird thing to say if you know anything about cryptocurrency. It's true that cryptocurrency eliminates certain gatekeeping institutions like banks.
Michael: I guess.
Peter: Not true that it allows you to never again rely on the integrity of your fellow financial human beings or whatever, right?
Michael: Yeah.
Peter: The decentralization that crypto provides creates precarity of various types. That's why the space is like rife with scams and criminals, right?
Michael: Yeah.
Peter: Lewis sort of bounces back and forth, it feels like between buying the hype that crypto can solve the problems of the financial system and also understanding that, in practice it creates a ton of new problems.
Michael: Yeah.
Peter: He never seems to resolve it in a way that made me feel like he had his arms around it.
Michael: Well, I've never understood this thing of like, it frees you from the vicissitudes of financial institutions or whatever. It's like, you're just trading one set of arbitrary institutions for another.
Peter: I agree with that. I think that the--I don't want to have to explain blockchains, Mike. Don't make me do it.
Michael: Oh, God. I know. I don't want to have to understand blockchains.
Peter: I think that what people mean when they say this is that, when there are two parties who want to do a transaction in crypto, you press the button and the blockchain records the transaction. You don't have a bank as an intermediary. You don't need Escrow. Of course, the lack of intermediaries is what creates danger in various other regards. It's what allows cryptocurrencies to be stolen so readily. It's what allows scams to be so effective, because once the transaction happens, it's done.
Michael: Yeah.
Peter: I guess you can say that it solves some problems. In my mind, it creates so many fucking more that it's not even worth considering. But whatever.
Michael: Also, I feel like so much of the stuff about crypto is irrelevant. The way that it actually functions is as like a random commodity that has grown and crashed. Like, you mentioned baseball cards one of our previous episodes, you are like, “There was a thing where video games, like old Nintendo games were going for like $500 thousand. That was like a weird bubble.”
Peter: Right.
Michael: It's just like people investing in something because they think it's going to go up.
Peter: There are smart tech people I read who seem to see some value in crypto.
Michael: Yeah.
Peter: And I don't. But I also don't know that I'm smart enough to know that they're wrong.
Michael: Did you have any crypto, Peter? Were you a crypto guy?
Peter: Not when it was worth getting, you know? [Michael laughs] Not when it was smart. Well, I had a weird experience with crypto. I used to play poker, back when I was in college. I had a couple of acquaintances who kept going in online poker and did well, and I never kept up with it. But about a decade ago, it wasn't uncommon for poker sites to utilize bitcoin.
Michael: Oh.
Peter: Because poker is illegal in many jurisdictions across the world, online poker. So, a lot of these kids just ended up sitting on a bunch of bitcoin when it rocketed up [Michael laughs] and got rich.
Michael: Okay.
Peter: So, my experience of bitcoin is just pure misery.
Michael: Yeah, FOMO.
Peter: Some part of my brain was like, “Well, what if I had kept going with poker? Would I have been good?” No. The problem was the game was too simple for me, for my incredible brain.
Michael: [laughs] The thing is, I will say that the one use case for crypto that actually makes perfect sense to me, is buying illegal shit online. [Peter chuckles] I have my bucks and I have my crime bucks.
Peter: Bitcoin is not worth $0. It's worth whatever the value of bitcoin crime is. [Michael laughs] So, after the Alameda defections, Sam is looking for new ways to expand his business and make a ton of money and he creates FTX, which is, of course, just a platform for people to trade crypto and crypto futures. He funds it through seeking investment, but also by issuing a cryptocurrency FTT token, which guarantees owners a percentage of FTX profits.
Michael: Okay.
Peter: It's basically stock and FTX. They get the ball rolling in 2019. They start doing serious numbers in 2020. In 2021, they steadily become a household name in the crypto world. By early 2021, they are raising money at a $20 billion valuation.
Michael: Oh, wow.
Peter: Sam is very talented at pitching VCs. This is for a couple of reasons. One is he just has a good pitch, because FTX has a pretty good platform. Two, the VCs aren't that interested in the business. One of themes of Lewis’ section on them is that they don't really understand the basics of crypto or FTX. They're just impressed with Sam. His disinterest in other people actually appeals to them, because it makes it look like he doesn't really need their money, and that makes them desperate.
Michael: It is one book, because this is basically the rules.
Peter: That's right.
Michael: He's waiting four days to call them back.
Peter: This is Sam accidentally being a pickup artist for investors. [Michael laughs] On top of that, his willingness to talk to the press at length and very straightforwardly, it comes across as a unconventional, forthright type of guy.
Michael: John McCain cracked this code too. If you give people access and seem like, “Ooh, we're just talking off the record and seem chill,” you will get the most hand jobical coverage from the media.
Peter: There are times when he says, “Stuff that makes you think that maybe there are scams going on here.”
Michael: Okay.
Peter: He appears very famously on the Odd Lots podcast where he is explaining a certain type of crypto operation. He basically just describes a Ponzi scheme.
Michael: Oh, really? [laughs]
Peter: People put money into a certain type of coin, which he just describes it as a box. People put money into a box and then more people put money into the box, which makes the box more valuable. He explains this at length. I'm not going to send you his explanation. What I am going to do is send you the timestamp for the host's reaction to his explanation.
Michael: Okay. Good. Okay.
Michael Lewis: I think of myself as like a fairly cynical person.
Joe: Yup.
Michael Lewis: That was [Tracy laughs] so much more cynical.
Joe: Yeah.
Michael Lewis: [Michael laughs] This is how I would have described farming. You're just like, “Well, I'm in the Ponzi business and it's pretty good.”
Joe: Did any of this require any economic case? It's just like other people put money in the box and so I'm going too. And then it's more valuable, so I got to put more money in. At no point in the cycle did it seem to like, describe any like economic purpose.
Male Speaker 1: So, on the one hand, I think that's a pretty reasonable response. But let me play around with this a little bit, because that's one framing of this. I think there's a depressing amount of validity. Okay, so you've got this box is kind of dumb, but what’s the end game? This box is worth zero, obviously. You can’t keep this market cap or something.
On the other hand, if everyone now thinks that this box token is worth about a billion-dollar market cap, that’s what people are pricing it at and has that market cap. In fact, you can even finance this. You can put x token in a borrowed lending protocol and borrow dollars with it. If you think it’s worth less than two-thirds of that, you can even just put some in there, take the dollars out, never give the dollars back just to get liquidated eventually. It is like real monetizable stuff in some senses. At some point, if the world never decides that we were wrong about this in a coordinated way, like, you're the guy calling bullshit and saying, “No, this thing's actually worthless,” but in what sense are you right?
Michael: Wait, what? He seems to be saying that, “Yes, it's a Ponzi scheme. But if everybody believes in it, including banks, then you can borrow against it and get real money out of it.” But that doesn't make it not a Ponzi scheme. That's precisely the cynicism that Donald Sutherland is pointing out. [Peter laughs] Like, it's not producing any real value. It's more just like financial groupthink.
Peter: Right. That is basically the answer he ultimately gives, except you can already see that he doesn't answer questions very directly. He's very good at these question dodging responses, where he nonetheless appears to be giving a somewhat sophisticated response.
Michael: Dude, that's such a skill.
Peter: It really is.
Michael: To make people think that you're being forthright, but actually you're obfuscating.
Peter: By the end of 2021, 10% of all crypto trading happens on FTX.
Michael: Oh, wow.
Peter: There are still a fraction of the size of Binance, the largest exchange. So, they're still looking to grow. Lewis says Sam's goal is to “Establish FTX as the world's most regulated, most law abiding, most rule following crypto exchange.”
Michael: What?
Peter: To acquire as many licenses to allow him to operate legally and openly in as many countries as he could to make a bet on the rule of law shaping the lawless crypto markets.
Michael: Why would you believe him when he says that?
Peter: I think that he was telling the truth in a sense that that was what his PR strategy for FTX was. In other words, he's betting on crypto becoming absorbed into the financial regulatory apparatus rather than remaining somewhat outside of it.
Michael: But also, it's funny that Lewis categorizes this as he's wanting to be the rule of law guy when it seems like for most of his life, he's someone who thinks the rules don't apply to him.
Peter: I think that Sam Bankman-Fried understood that this was a smart strategy, but had no actual interest in abiding by the law.
Michael: Yeah.
Peter: They combine this with a huge PR effort targeting the US. They buy the naming rights to the Miami Heat arena for 20 years for $155 million. They run that fucking Super Bowl ad with Larry David.
Michael: Oh, that was an FTX ad?
Peter: Yup.
Michael: The ironic thing is that I can't think about that ad now without the curb your enthusiasm music playing in my head.
Peter: He made a sponsorship deal with Tom Brady for $55 million.
Michael: I don't know who that is.
Peter: [sighs]
Michael: I'm kidding. I'm kidding. I'm kidding. That's the one person I do know who that is.
Peter: Don't. [Michael laughs] All right, I'm going to send you a rundown of some of their other marketing expenditures.
Michael: It says, “Three-year deals each with the Coachella music festival, Steph Curry, another person I know, by the way, and Mercedes’s Formula 1 team for, respectively, $25 million, $31.5 million, and $79 million. The five-year deal with Major League Baseball for $162.5 million. A seven-year deal with the video game developer Riot Games for $105 million. $17.5 million to Shark Tank’s. Kevin O'Leary for twenty service hours, twenty social posts, one virtual lunch and fifty autographs.”
Peter: This business is pulling in a ton of revenue at this point, something in the realm of $400 and change million dollars a year.
Michael: Mm-hmm.
Peter: But these expenditures [chuckles] are wild, right?
Michael: Yeah.
Peter: It's almost as if they have a source of funds that is not strictly their revenue.
Michael: What the fuck is a virtual lunch?
Peter: Like, a fucking Zoom lunch with Shark Tank’s, Kevin O’Leary, [Michael laughs] the third most famous guy on Shark Tank.
Michael: [laughs] For $16 million?
Peter: Although, that might have been worth it because Kevin O'Leary was on TV defending Sam Bankman-Fried when [chuckles] this all went down. [Michael laughs] So, maybe not the worst investment of the bunch.
Michael: Look, you say this guy did crimes, but his checks cleared. [Peter chuckles] So, who can say?
Peter: Now worth noting that Sam was putting a ton of money into politics. He was very anti-Trump. He was publicly a big supporter of democrats. Behind the scenes, he was funding republicans as well. He was planning to hand tens of millions to Mitch McConnell to support establishment conservatives against like the MAGA wing. One of the funniest adventures in the story is his attempt to pour millions into a race for a congressional district in Oregon, because some effective altruist weirdo he liked was running. This backfires because the massive amount of money immediately draws tons of attention, and people look into it and are like, “Why is this guy being bankrolled by a crypto billionaire?”
Michael: Why is he promising to give him a mosquito nets to everybody in bend? He so weird.
Peter: At some point, in late 2021, they also moved from Hong Kong to the Bahamas. There's a very good, very Michael Lewis chapter that covers the building of the new compound in the Bahamas, which is a total circus because Sam hires these architects but gives them almost no guidance.
Michael: Nice.
Peter: The only specific thing he says is that he wants three badminton courts.
Michael: They should have called it the polytechnic campus.
Peter: Now, before we talk about how this all falls apart, I want to take a detour further into the psychology of Sam Bankman-Fried, as described by Michael Lewis, “Bankman-Fried essentially self-diagnoses as something like a psychopath-
Michael: Oh.
Peter: -and a lot of Lewis's characterizations back that up. At one point, Sam and Caroline Ellison are on the rocks. She's basically in love with him. He very obviously does not feel the same way. They hash it out by exchanging bullet pointed memos.”-
Michael: Oh.
Peter: This is an excerpt from one of his memos to Caroline Ellison.
Michael: Oh, my God. Okay. Imagine somebody reading your breakup texts.
Peter: Imagine someone reading your relationship memos.
Michael: [chuckles] It says, “In a lot of ways I don’t really have a soul. This is a lot more obvious in some contexts than others. But in the end there’s a pretty decent argument that my empathy is fake, my feelings are fake, my facial reactions are fake. I don’t feel happiness. What’s the point in dating someone who you physically can’t make happy?” Oh, he's telling her, “What's the point of dating me?”
Peter: Yeah. He's doing the nerdiest, “It's not you, it's me in history.” [Michael laughs] This is echoed by others. Constance Wang, his COO says, “He has absolutely zero empathy.” In a journal entry, he wrote, “I don't feel anything, or at least anything good. I don't feel pleasure or love or pride or devotion. I feel the awkwardness of the moment enclosing on me, the pressure to react appropriately to show that I love them back. I don't because I can't.” He has a therapist he likes George Lerner, and he brings him to be an in-house coach at FTX, essentially meaning that he functions as a therapist for the whole company.
Michael: Oh.
Peter: Here's a passage about when Sam found this guy.
Michael: It says, “Sam had been in the market for a new therapist.” “The previous therapists were incredulous about various parts of me,” he said. He’d explained, for example, what he thought of as his perfectly rational decision, made at a surprisingly young age, to never have children. Or he’d tell them of his absence of feeling or how he had never felt pleasure. They had a term for it, anhedonia.” Amazing drag name. “They’d nod for a bit, but then mistrust his self-diagnosis.” It was like, “What about me are you disputing?” Said Sam. “There was not any clear way to break through with them. I know that there are things that are unusual about me. They wouldn't just accept them and move on.” So, therapists couldn't accept the fact that he was detached or didn't have any emotions.
Peter: Yeah. Therapists might not generally be willing to move on from someone who is talking about symptoms of severe psychological dysfunction.
Michael: Yeah.
Peter: He's like, “They mistrust his self-diagnosis.” Yeah, that's a good thing for a therapist to do. When someone's just like, “Hey, here's my psychological problem,” the therapist isn't there to be like, “Oh, okay. Cool. Now I know that. Let's move on,” right?
Michael: Right.
Peter: The therapist is there to peel that apart for you.
Michael: Or, if you're just like, “Oh, I don't care about anybody. I don't feel pleasure.” That's also something that therapists would presumably be working on.
Peter: Right.
Michael: Anhedonia is like a symptom of depression.
Peter: Right. So, Lewis writes that, “What Sam liked about George was that George simply took him as he was and actually didn't seem all that interested in engaging in pointless conversations about his feelings.”
Michael: Therapy? Isn't that what therapy is?
Peter: I do. Again, I have concerns about a therapist that does not talk about feelings.
Michael: [laughs] We don't just sit around and he asks, “How do you feel about that?” We don't waste time with that shit. He’s my therapist.”
Peter: George Lerner is another guy who seems a little bit shady. But Lewis is not particularly skeptical of.
Michael: Okay.
Peter: Vice did some reporting where it was revealed that Lerner was trying to find potential dating options for FTX employees,-
Michael: Okay.
Peter: -which he claims was, to keep them in the Bahamas, to give them things to do in the Bahamas. That's something that reads a little different when you know that there was a bizarre executive level polycule. [Michael laughs] There were also reports from former employees that he was over prescribing Adderall.
Michael: Ooh.
Peter: I'm a little torn on all this, because a writer in Lewis' position probably shouldn't be doing too much armchair psychology, right?
Michael: Yeah. Yeah.
Peter: But it is like emblematic of Lewis blind spots that throughout the book, SBF is like, “I'm a literal psychopath.” And Lewis is not catching it.
Michael: Because there's a neurodivergence story that could be told here. But it also sounds like there wasn't a formal diagnosis and also, that should be handled with some amount of care, talking to experts.
Peter: I really think that Lewis is like, “Yeah, his brain only does math. It doesn't do feelings.” It's like uh.
Michael: That doesn't-- I don't know.
Peter: Again, I am not here, Mike, to do armchair psychology about these people. But I do have thoughts. [Michael laughs] All right, we are now at the part of the story where FTX starts to collapse.
Michael: Oop.
Peter: In the middle of 2022, crypto prices start to tank. Until this point, a lot of FTX's success was the result of not just Sam's strategy and marketing, but also the fact that the crypto boom was happening at the same time, right?
Michael: Right.
Peter: They had gotten a ton of customers, because there was a ton of money flowing into the crypto market, and therefore to FTX. When the prices collapse, money starts to flow back out.
Michael: Right. At the beginning of a bubble, it's really easy to run a successful financial firm.
Peter: Right. I think that there were aspects of FTX's design that appeared to be top of the industry, but they also came in at the perfect time.
Michael: Yeah.
Peter: Lewis says that as late as October 2022, you could not tell that anything was amiss at FTX. We now know from Caroline Ellison's testimony that in summer 2022, when crypto prices declined, FTX's lenders started calling in their loans, and FTX began to pay them back with what they knew was customer money.
Michael: Oh, wow.
Peter: In early November, Lewis takes a week-long break from hanging out at the Bahamas headquarters. When he left, FTX appeared to be fully functional. When he returned a week later, the company had filed for bankruptcy.
Michael: No way.
Peter: Remember earlier I mentioned the FTT token, which was like the in-house cryptocurrency that basically functioned like a stock in the company? CoinDesk, a cryptocurrency news site, had been sent what appeared to be a leaked FTX balance sheet that showed a lot of FTX's assets were held in the form of that token.
Michael: Ooh.
Peter: Binance, FTX's chief rival, was a major holder of that token. Shortly after the leak, they announced that they will be unwinding their position, hinting that they had concerns about it. This leads investors to unload their positions, which functions like a run on the bank for FTX.
Michael: Right. So, everybody comes looking for their money, but there is no money because they've already given it away to people who've already tried to pull their money out.
Peter: That's right. It quickly becomes apparent that they do not have the liquidity to cover the withdrawals. There is a shortfall of some $8 billion and change. The money had been commingled with Alameda Research and other entities where it was presumably traded, invested, used to buy shit, etc., etc.
Michael: But the thing is, there's an 80% chance that they'll get it back. [Peter chuckles] So, it's actually okay to say.
Peter: That is the story of the collapse of FTX in short, right?
Michael: Mm.
Peter: There's a run on customer funds, which leaves Sam and his buddies exposed with their hands in the cookie jar and no more cookies left. The story that Sam Bankman-Fried tells about all of this and that Michael Lewis appears to at least buy is that he was not aware of any of this.
Michael: Yeah.
Peter: He claims that he only became aware that Alameda had used the customer money in October 2022 right before everything falls apart. Sam claims to have never moved the money, and Lewis says that this is, “Irritatingly difficult to disprove.” This is the story that Sam advances at his trial. He claims that he was a terrible manager who was so hands off that he did not realize that $8 billion was missing.
The most obviously shady part of this story that he's telling is that, in his words, in his story, Sam found out about all of this right before everyone else did. He's saying, “Oh, I only learned about this in October 2022.” The CoinDesk piece drops on November 2nd. If his story involved any other timeline, he would have had to explain why he didn't do anything to locate or replace the money, right?
Michael: Right.
Peter: He tells a story like, “Oh, I found out, and then everyone else found out right after. I had no time to do anything.” Multiple people testified that senior players at FTX, Sam included, were aware of the missing money at least several months earlier.
Michael: Wouldn't they simply have to be, unless people are doing this behind his back?
Peter: I believe that this is a story that you don't need to think about that hard when [Michael laughs] someone is like, “Oh, I didn't know.” Can you very easily prove that they knew? Maybe not. Do you need to kid yourself?
Michael: Yeah. [laughs]
Peter: Definitely not. Definitely not. Of course, he fucking knew.
Michael: That the literal CEO would not have any idea that this was happening is really implausible.
Peter: This is where Lewis starts to go off the rails. He says, “I had a question. It preoccupied me from the moment of the collapse. Where had the money gone? It was not obvious what had happened to it.” He does some very admittedly crude back of the napkin math and figures that FTX and Alameda had $23 billion go in and $14 billion go out, plus it had $3 billion on hand. That left $6 billion unaccounted for. I'm going to send you something.
Michael: It says, “The most hand-wavy story just then being bandied about was that the collapse in crypto prices somehow sucked all the money out of Sam’s World. And it was true that Sam’s massive holdings of Solana and FTT and other tokens of even more dubious value had crashed. They’d gone from being theoretically worth $100 billion at the end of 2021 to being worth practically zero in November 2022.
But Sam had paid next to nothing for these tokens, they had always been more like found money than an investment he’d forked over actual dollars to acquire. He’d minted FTT himself, for free. For his entire haul of Solana tokens, he’d paid no more than $100 million. His fleece cloud fortune had evaporated, but that didn’t explain where all those dollars had gone.” I didn't understand any of this paragraph.
Peter: What he is saying is like, “Well, sure, they might have lost a ton in crypto, but they didn't pay much for the crypto.” So, it's sort of a wash. They're not taking a loss. My response to that is like, “What do you think was happening inside Alameda, a crypto hedge fund that we all know had almost no risk controls?” right?
Michael: Mm.
Peter: He assumes that they were just trading with the crypto that they had already received. They were not. They were borrowing capital and making highly leveraged bets on crypto going up.
Michael: Right.
Peter: They were losing those bets, because crypto went down. Michael Lewis should understand this also.
Michael: Also, it's not like some big mystery. Bankman-Fried actually seems like the kind of guy who's throughout his entire life has been overconfident in his own intellectual abilities.
Peter: Yeah.
Michael: It actually makes sense that a guy like that would look at these extremely risky assets and be like, “Ah, I got to figure it out. They're not risky at all.”
Peter: Right.
Michael: And maybe would borrow against a bunch of money that he doesn't have. The nature of the criminality actually seems totally in keeping with everything else we know about Bankman-Fried.
Peter: Absolutely. We also know that he had a massive appetite for risk. That's something that, Lewis talks about in the early chapters. He doesn't feel the stress of risk in the same way that most people do.
Michael: Right.
Peter: So, Lewis is trying to solve the mystery of where this money went. He repeatedly asks Sam the question. One explanation Sam gives is hackers.
Michael: Okay. [laughs]
Peter: I'm sending you another excerpt.
Michael: It says, “The biggest hacks occurred in March and April 2021. A lone trader had opened an account on FTX and cornered the market in two thinly traded tokens, BitMax and MobileCoin.
His purchases drove up the prices of the two tokens wildly, the price of MobileCoin went from $2.50 to $54 in just a few weeks. He’d found a flaw in FTX’s risk management software. FTX allowed traders to borrow bitcoin and other easily sellable crypto against the value of their MobileCoin and BitMax holdings.
The trader had inflated the value of MobileCoin and BitMax so that he might borrow actually valuable crypto against them from FTX. Once he had it he vanished, leaving FTX with a collapsing pile of tokens and a loss of $600 million worth of crypto.” Props to this guy.
Peter: This dude rules. So, to be clear, this guy artificially inflated the prices of some random crypto that was actually worthless.
Michael: [chuckles] Yeah.
Peter: Then he borrowed bitcoin, which is not worthless against that. Then he just walked off with the bitcoin leaving FTX with the worthless collateral. This is not a hack.
Michael: Yeah. No, this is just like a loophole in your business model.
Peter: This is a failure in FTX's risk management system that lost them $600 million. FTX gave him $600 million. It's not like he stole it. He wasn't doing fucking back-channel hacker shit.
Michael: This is like those people that figured out the game shows and just went on and just cleaned up. That's not a hack. They just figured out the system.
Peter: It's not until the final chapter that Michael Lewis claims to solve the mystery of where the money went. The last chapter of the book centers around John Ray, who is the expert brought in to oversee FTX in bankruptcy. We're at the very end of the story. You get the very distinct vibe that John Ray is the first actual adult to enter the room, Michael Lewis included. He is immediately suspicious of Sam. He calls Caroline Ellison, “An obvious, complete fucking weirdo.”
[laughter]
Peter: Lewis seems like skeptical of Ray. He says that it, “Felt like an amateur archaeologist had stumbled upon a previously unknown civilization.” But to put this in perspective, Ray is the guy who oversaw the recovery of Enron's assets, right?
Michael: Yeah.
Peter: This is what he does. He might actually be the best in the world at it. The idea that this is too much for him to comprehend, that is bullshit.
Michael: I love the idea of a basically Tommy Lee Jones from The Fugitive coming in and just being like, “Fuck you. Fuck you. You're cool. Fuck you.” Just immediately within 10 minutes being like, “Everyone here is a fucking clown.” [laughs]
Peter: That's absolutely what happened. He talks to every single one of them and he's like, “These are all a bunch of psychopathic nerds,” [ Michael laughs] and he gets to work. I think what bothers Lewis is that to Ray, FTX was not some brilliant pioneering company. It was just a poorly run company doing a lot of embezzlement. And the people leading it, we're weirdos and freaks.
Michael: It's riding a trend too. It's not like it's this super advanced business model. It's like they're selling Tamagotchis or something.
Peter: Who says Tamagotchi?
Michael: Tamagotchi.
Peter: Tamagotchi.
Michael: Oh.
Peter: Tamagotchi. What the fuck?
Michael: [laughs] God, you're like half of our fucking inbox. Like, “Ooh, the way that Mike pronounced this.”
Peter: Look, I could have let it slide and then everyone would have been like, “Why didn't Peter say anything?” [Michael laughs] How are you getting both vowels wrong there?
Michael: Dude, our last bonus episode, you said yeets instead of Yates, and I stood strong. [Peter laughs] I didn't say anything even though I wanted to say this bitch empty.
Peter: Okay. And to give you a sense of how off base Lewis is in his read of John Ray, John Ray was ultimately able to trace a massive amount of money located across something like 100 corporate entities, which he was able to successfully map out. That's how good John Ray was-
Michael: Yeah.
Peter: -at this fucking job. And Michael Lewis is like, “I don't know. He thinks SBF is weird.” [Michael laughs] So, again, what happens as the bankruptcy proceeds is that Ray is able to recover a large percentage of the money owed to investors, to the point where now many people believe that investors will be repaid in full. This leads Lewis to his ultimate conclusion about what happened here, which I am going to send to you.
Michael: It says, “Ray was inching toward answer to the question I'd been asking from the day of the collapse. Where did all that money go? The answer was, nowhere. It was still there.”
Peter: So, no, no.
[chuckles]
Peter: That is an extremely dishonest way to put it. A better way to understand this is that the money was gone and John Ray found other money to replace it. That's what actually happened. John Ray had to scrape together money from various entities, assets, employees, debtors, investors, etc. Money was eventually pulled together. But to say it didn't go anywhere, it was still there. Not to state the obvious, but if it was still there, FTX would not have had to declare bankruptcy.
Michael: Right.
Peter: This is like if I defrauded you out of 100 Grand, and then I spent it on cocaine and then you had the court seize my house and sell it to pay you back. And then I was like, “See, the money was still there.” [Michael laughs] No, it was not still there. They had to go find other money. They had to sue people who were on the FTX payroll to get the money from them.
Michael: And also, the reason it got hidden in the first place also wasn't some oversight. It doesn't get spread across 100 accounts by accident.
Peter: That's the reason that Lewis is wrong about all of this. The basic fact that enough money was eventually tracked down to pay back customers, that seems to drive Lewis’ belief that SBF is less guilty than he's made out to be. His general position seems to be that the money was sloshed around recklessly, but that it had not been lost, per se. So, this is mismanagement, but it's not fraudulent conduct. He gives an interview with Time Magazine, where he says, “I thought how curious it was the speed FTX went from being this pretty widely admired and reputable operation to being viewed as this vast criminal enterprise without there being a whole lot of new data, except for the fact that the money was in the wrong place.”
Michael: Well, -
Peter: Yeah, except for that fact.
Michael:-I find it a little suspicious that everyone's view of Jared from Subway changed so quickly [Peter laughs] when the only thing we learned.
Peter: The only new information.
Michael: One small fact.
Peter: He is making it seem like the crime that Sam Bankman-Fried is accused of is like insolvency. He's saying, “Look, FTX wasn't really insolvent. The money was somewhere, so it's all good. That means nothing was stolen.” But that's not the crime that Sam Bankman- Fried was accused of. He was accused of fraud. It doesn't matter where the money is. It matters that at various points, Sam knowingly lied to various parties, from banks to customers in order to defraud them, right?
Michael: Right.
Peter: In mid-2022, he directed Caroline Ellison to create multiple falsified balance sheets-
Michael: Ooh.
Peter: -to send to lenders to hide Alameda's liabilities. He submitted fraudulent documents to banks in order to skirt around regulations and open up accounts that otherwise would not have been approved. At one point, he fraudulently backdated a document two years in order to trick auditors into thinking that an agreement had been in place for longer than it had been. And he signed it by hand instead of using DocuSign, which he always used otherwise to avoid having metadata which would reveal the actual date.
Michael: Oh, wow.
Peter: In March 2022, FTX published a document, FTX's key principles for ensuring investor protections on digital asset platforms, which said, “FTX regularly reconciles customers trading balances against cash and digital assets held by FTX. Additionally, as a general principle, FTX segregates customer assets from its own assets across our platforms. Not only is it not true that FTX regularly reconciled customer funds against its own assets, there's no evidence that they ever once reconciled customer funds against their assets. And not only did FTX not segregate customer assets, many customer assets were being deposited directly into Alameda Research bank accounts.”
Michael: Oh, wow.
Peter: This is like a little sampling. SBF was caught in a host of lies about FTX's risk management and plenty of other shit. At one point during the trial, he's being cross examined and he's asked whether he actually cared about regulators or if it was just PR. He goes, “No, I actually cared.” Then the prosecution produced a text message he sent where he said, “It's just PR. Fuck regulators.”
[laughter]
Peter: Smoked, dude. Absolutely smoked.
Michael: You got to know when they're asking you something like that, they got some text messages in their back pocket. That's fucking brutal.
Peter: They are never going to ask you a question like that if they are not teeing you up to get your fucking skull knocked out of the park. Oh, God, I'm going to send you a couple of clips from Michael Lewis appearance on 60 minutes.
Interviewer: What's your response to someone who hears this and says, “It's a fun story and it's crypto in the Bahamas, but this is the oldest architecture of a financial collapse that's been going on for centuries.”
Michael Lewis: This isn't a Ponzi scheme like when you think of a Ponzi scheme. I don't know, Bernie Madoff. The problem is there's no real business there. The dollar coming in is being used to pay the dollar going out. And in this case, they actually had a great real business. If no one had ever cast aspersions on the business, if there hadn't been a run-on customer deposits, they'd still be sitting there making tons of money.
Michael: Ooh. Well, first of all, the question was never whether or not it was a Ponzi scheme. Because that's like a specific kind of fraud.
Peter: Notice how the guy's like, “Well, this is a fraud, right?” And he's like, “It's not a Ponzi scheme.”
Michael: Also, if it wasn't for the run, they would have been fine. But the whole point of these regulations is to prevent this outcome when there is a run.
Peter: Also, another way for them to be fine would be to have had the customer assets rather than having misappropriated them-
Michael: And lie, yeah.
Peter: -to say that this was a great real business.
Michael: They're Tamagotchis, Michael.
Peter: It's true that there was massive revenue, but that's not a great business if there is a world historic misappropriation of funds happening to that revenue. I don't fucking like, “What do you think a business?” [Michael laughs] If I'm like, “Hey, I have a business. It generates $300 million in revenue and then I shoot that out of a cannon into a furnace to be like, “Damn, there's a good business here.”
Michael: Yeah.
Peter: Like, “No, no, the cannon is crucial. You have to focus on the cannon.”
Michael: Right.
Peter: All right, I'm going to send you another clip. For some reason, my phone is not copying this one, so I'm just going to put in the chat.
Interviewer: I could see people watching this saying like, “Come on, guys, this is Elizabeth Holmes in cargo shorts. This is all a ruse. Don't fall for the schtick. This was a bad actor.”
Michael Lewis: It is a little different supplying phony medical information to people that might kill them. And in this case, what you're doing is possibly losing some money that belonged to crypto speculators in the Bahamas. On the other hand, this is not to excuse. He shouldn't have done that.
Peter: [Michael laughs] Now, the idea that it's like crypto speculators in the Bahamas, what are you talking about? Just because the headquarters is in the Bahamas, it doesn't mean that all of the customers are in the Bahamas. There were many normal people who lost a shitload of money when this all happened. Now, I'm not one to drum up tons of sympathy for people who lose their shirt in the crypto space, but to just be like, “Ah, who gives a shit?” Like, [laughs] it's just crypto speculators.
Michael: The thing is, I actually have the least amount of sympathy for all victims of crime for fucking crypto speculators. But also, if the whole thing was just some low rent bullshit that was scamming a bunch of rubes on the internet, it means Sam Bankman-Fried isn't some math genius with a fundamentally sound business model.
Peter: Right.
Michael: He's basically a used car salesman or one of those grifters selling gold bars to people half watching Fox News at 02:00 in the afternoon.
Peter: Right.
Michael: That's a totally different story than the one Michael Lewis has been telling. And he's like, he's trying to have it both ways.
Peter: It's so fucking weird. Michael Lewis built his fucking career-
Michael: It's weird, dude.
Peter: -talking about these financial scams. Here he is like defending one.
Michael: So, what do you think happened with Lewis? What happened here?
Peter: I do have working theories.
Michael: Okay.
Peter: My first is that Lewis’ work, as good as it often is fundamentally a little bit sycophantic. The Big Short, Moneyball, Flash Boys, they all have villainous characters, but they are at their core, books about the heroes. They're about these brilliant underdogs who everyone wants to be dismissive of but are ultimately proven right.
Michael: Right.
Peter: That's the book Michael Lewis thought he was going to write. And more importantly, maybe it's the kind of book he writes generally speaking.
Michael: Yeah.
Peter: He had painted SBF as a bit of a heroic figure in his mind. When the bad news drops, he couldn't really shake it, right?
Michael: Yeah.
Peter: I think that's my first level theory. My second level theory is that Michael Lewis has built a lot of his career on his skepticism of the existing financial system to the point where I think he had some blind faith in cryptocurrencies as an alternative. Not because he had reason to believe that they could be a viable alternative, but because he wanted them to be.
Michael: Also, SBF was good at casting himself as an outsider to all of these structures.
Peter: Yeah.
Michael: When slightly similarly to effective altruism, he's actually replicated a lot of the problems with it.
Peter: If you remember, he describes crypto as something that could free you from having to rely on the integrity of others in the financial system. That's obviously not true. It can't be true. There is no financial system that frees you from the need to trust other human beings. That's not how it can ever work. But I think Lewis wants it to be true, because he believes that the existing system is hopelessly corrupt.
Michael: Yeah.
Peter: Zeke Faux, an author who has his own much better, at the end of the day book about crypto and FTX called Number Go Up, he said that Lewis told him, “You look at the existing financial system and the crypto version is better.”
Michael: What?
Peter: I don't want to get into why I think that's wrong.
Michael: That's wrong.
Peter: What I want to point out about that statement is that it's a very weird thing to say, because Lewis in this book basically admits that he doesn't understand bitcoin at all.
Michael: Yeah.
Peter: He says, “Bitcoin often gets explained, but somehow never stays explained. You nod along and think you're getting it, but then wake up the next morning needing to hear the explanation all over again.”
Michael: Oh, my God, that's so true and so wise. This is my experience. Absolutely. [laughs]
Peter: It's absolutely true. But how do you write that and then say that this is better than the existing financial system?
Michael: Yeah.
Peter: My answer to that is that this is someone who has so little faith in the existing financial system that he's ready to believe anything.
Michael: What this actually reminds me of is a lot of the health grifting that me and Aubrey talk about in Maintenance Phase, where it always casts itself as an alternative to like, “Western medicine doesn't want you to know.”
Peter: Right.
Michael: This is the way that it's often frame. But then what they're doing is they're shunting you to vitamin supplement companies, which is also big business. They're operating on the principle that there's only one actor can be bad, and everything outside of it must because it's an alternative be better.
Peter: This is Donald Trump too, right?
Michael: Yeah.
Peter: Like, the appeal of Donald Trump is like, “Well, I hate these existing political institutions and actors.” Donald Trump is outside the establishment. Therefore, Donald Trump is good.
Michael: Yeah.
Peter: It's the same basic thought process that is very clearly lacking a step.
Michael: And you have to have a more sophisticated analysis of just, is this part of an existing institution or not? Yes or no?
Peter: Right. Lewis hosted a podcast called Judging Sam where he covered the trial. I listened to some of it to just confirm that like, “Yes, he still seems to buy the hype.”
Michael: Yeah?
Peter: In the very first episode, he questioned the nature of the charges. He called Sam very persuasive on the stand, which is his opinion, but also probably objectively incorrect, because it took a jury about four hours to find him guilty on seven fraud charges, and then he got 25 years in prison. So, persuasive to Michael Lewis, perhaps.
Michael: It seems like the main mistake Lewis made is that he seems to have never really entertained the possibility that the subject of his biography was a fraud. Just as a person who writes about American business, you should absolutely be entertaining that possibility and thinking about it at every stage of your book. But then it also seems like he didn't really consider the possibility, even after the subject of his biography was convicted of fraud.
Peter: It's one of those things where just all those anecdotes, if you are looking at it on the surface, you might think, “Wow, this guy is just a straight up genius. He doesn't think like normal people.” But if you're just willing to peel back that one layer, this guy is obviously selfish, admits that he doesn't give a shit about other people. He has a very narrowly defined set of skills, and used those skills to run up a massive fortune and then lost it, because those were the only skills he had.
Michael: Yeah.
Peter: You need to be in a mindset where you want to believe that this guy is a savior, in order to watch him playing video games [Michael laughs] during meetings with employees and be like, “His brain is just too good.”
Michael: The thing is that part of that I actually agree with, because I know a guy that got fired as a lawyer and then spent months playing Elden Ring. [Peter laughs] Now there's nothing he can't do.
Peter: Look, I give Sam Bankman-Fried credit, because I've tried to play video games while on work calls, and everyone's like, “Peter, are you there?” [Michael laughs] And I'm like, “No, I'm sorry. I can't do both. I can't do both.”
Michael: I've beaten Malenia twice since we started, Peter. [Peter laughs] It's fucking false.
Peter: Absolute bullshit. Absolute bullshit.
Michael: Yeah, melee. Melee, Peter. No summons.
Peter: No summon-- Don't even fuck with-- You can't do Malenia on summons, and I'm not going to talk about it. [Michael laughs]
[music]
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