SBF Arrested

Do not pass go... Do not collect $200... Go directly to jail...

(Source: Getty Images)

Bill Bonner, reckoning today from Baltimore, Maryland...

Front page at the Wall Street Journal yesterday:

FTX Founder Can’t Explain Lost Billions.

And here’s the front page follow up today:

FTX Founder Arrested in the Bahamas

Losing a $10 bill happens from time to time. Even hundreds of dollars can be misplaced, mislaid, or simply forgotten.

But losing billions takes a special kind of nonchalance. Like losing your virginity, losing billions is the kind of thing you tend to remember; because, you can’t get it back.

And now, poor Sam Bankman-Fried has lost it all – his innocence….his fortune….and his reputation. And perhaps soon, his liberty.

Losing your virginity is your own business. Many people remember the occasion with fondness. But losing billions of dollars that belong to others is a whole different phenomenon. The depositors won’t want to blame themselves; they’ll want to blame you. And put you in jail.

Mere Mortals

The more we learn about the FTX story, the more amusing it is. It is like the Odyssey, full of mortal weakness and the caprice of the gods. It doesn’t seem to matter how much you have, or how clever you are about it, your wealth… status…and power can still go ‘poof’ in a matter of hours—along with your reputation for being a world-improving genius.  

Yes, the FTX affair provides us with an opportunity for philosophical introspection – on the nature of wealth, stupidity, greed, arrogance, fame and incompetence. It also shows us how easily the great and the good become entangled in things they don’t really understand and later regret. Bill Clinton, Tom Brady, Katy Perry, Orlando Bloom, Sequoia, 3AC, Voyager Digital, Larry David, the Miami Heat – all trucked with Sam Bankman-Fried…and all added the weight of their fame to his fortune, such as it was.

We were suspicious when we first heard of SBF. At the height of his glory, he told the world that he didn’t read books. The Washington Post:

“I’m addicted to reading,” a journalist said to the erstwhile multibillionaire in a recently resurfaced interview. “Oh, yeah?” SBF replied. “I would never read a book.” 

That was surely the mark of a moron. Wouldn’t the experience of others in similar situations have been of use to him?

A Modest Recommendation

Had we been asked, we could have recommended some titles. Reminiscences of a Stock Operator, Against the Gods, When Genius Failed, The Price of Time. These books can be found at used book stores on the internet. For the price of a cup of coffee, SBF could have learned something.

If he’d asked, we would even have sent him one of our own books – Hormegeddon, Mobs & Messiahs, Empire of Debt, or Win, Win or Lose. After all, we are connoisseurs of financial disaster. Any one of those books would have warned him against the fads and fancies of a bubble market.  

But who’s to blame? 

SBF admits the failure of FTX is his fault…but a fault of omission, not commission. That is, it wasn’t wrongdoing on his party, but merely inattention. “I got really distracted,” says he.

That works for us. After all, crypto was just fake money; it was a giant distraction. Instead of creating real goods and services, bright young people were fooling around with cryptocurrencies. But let’s look at it more closely. To do so we will return to those wonderful twins, locked forever in a gravitational embrace. We are referring, of course, to Terra and Luna. Now, there was a pair!  One solid and immoveable…the other moody and inconstant. But because the one could be traded for the other at a fixed rate, and one was ‘backed’ by dollars, the twins were thought to be ‘stable’ or ‘safe.’

We’ve already commented on how preposterous this is. In practice, neither coin was worth anything…other than what people were willing to pay for it. And while a ‘market rate’ price applies to everything, some things are more likely to retain value than other things. That’s what the record of financial disasters tells us. An ounce of gold is still worth about what it was 2,000 years ago. A crypto coin, on the other hand, may have lost 90% of its value in the last 2 weeks.  

Vernacular Value

What determines the value of money is the vernacular...it’s how much people are willing to pay for it. So, when speculators began to have doubts about Terra and Luna, in the spring of this year, the price began to fall.  

That is when, according to The New York Times, SBF may have begun manipulating the two cryptos:  

Federal prosecutors are investigating whether FTX’s founder, Sam Bankman-Fried, manipulated the market for two cryptocurrencies this past spring, leading to their collapse and creating a domino effect that eventually caused the implosion of his own cryptocurrency exchange last month, according to two people with knowledge of the matter.

U.S. prosecutors in Manhattan are examining the possibility that Mr. Bankman-Fried steered the prices of two interlinked currencies, TerraUSD and Luna, to benefit the entities he controlled, including FTX and Alameda Research, a hedge fund he co-founded and owned, the people said.

Widely believed at the time was that SBF was acting as a JP Morgan of the crypto space – as an angel of mercy. He was said to be intervening to support the two.  Actually, he may have been doing something much more devilish. Here’s the NYT:

The exact causes of the collapse of the two cryptocurrencies remain unclear. However, the bulk of the sell orders for TerraUSD appeared to be coming from one place: Sam Bankman-Fried’s cryptocurrency trading firm, which also placed a big bet on the price of Luna falling, according to the person with knowledge of the market activity.

Had the trade gone as expected, the price declines in Luna could have yielded a fat profit. Instead, the bottom fell out of the entire TerraUSD-Luna ecosystem.

If this is true, it is another marvelous piece of a marvelous story. SBF might have set off the avalanche of selling that eventually buried him. So far this year, the $1 Terra coin has fallen to a price of $0.000171. FTX is in bankruptcy. And SBF is in jail.

“I ask myself a lot,” Sam Bankman-Fried told the WSJ, “how I made a series of mistakes that seem – they don’t just seem dumb; they seem like the type of mistakes I could see myself having ridiculed someone else for having made.”

Don’t worry about it, Sam. Everybody does.

Regards,

Bill Bonner