Hacker News Reader

Comment by shorthistory | Hacker News Reader

Can anyone speculate what Bankman-Fried's exit plan was?

Was this a fraud that got out of control, or premeditated? If it was premeditated, what was the exit plan?

Did he expect to be able to gamble with customer funds indefinitely?

Were the Effective Altruism intimations genuine?

Why, if Alameda was a market maker, and they therefore presumably have some form of insight into the markets, did they then decide to take a huge directional bet on Crypto [source?]? This is contrary to market making principles.

What was the purpose of encouraging employees to invest? Was it to buy their silence/cooperation ('you have to stay employed and invested if you ever want your money back') if they found out about the fraud, or did Bankman-Fried genuinely believe it was to their benefit?

Why were there so many puff pieces in the media, without any journalist questioning the narrative?

View on HN

My thoughts are that FTX was maybe a legitimate business, but then Alameda was his trading baby that just happened to be run by kids, including himself, that have no idea what they're doing and was losing money left and right. Then using FTX customer funds was viewed as just a "let's move these funds over to get our trading back on track and when we do, we'll move them back". That's my honest guess if I'm being generous as to their intentions and thought process. Not saying it isn't criminal though, because I think it is. It's also a complete guess as an outsider to all this.

That’s my guess too but the size of the hole (8bn+) makes it hard to imagine it could all be lost in trading, either in a big bang, or gradually for years.

As I understand it, their primary "trade" was to buy and hold FTT. Suddenly FTT's value went "poof" and the rest is is history.

I think that would only explain $4B or so, they said their hole was $10B. Or do we think the FTT leverage multiplied the exposure?

I don’t even understand why FTT existed?

I also don’t understand why there are competing cryptocurrencies? Without governments and borders, shouldn’t one standard currency be enough? (Technical challenges aside)

Why are there multiple racecar teams? If there is a standard set of rules, why can't there be a standard car that hits the maximum ideal speed around a track, and a standard racer to do it? Or even just automate it?

>I also don’t understand why there are competing cryptocurrencies?

A lot of these "competing cryptocurrencies" are just financial instruments, kind of like you could have stock in a company, but you can also trade options and futures of the same underlying stock.

> A lot of these "competing cryptocurrencies" are just financial instruments, kind of like you could have stock in a company, but you can also trade options and futures of the same underlying stock.

No they weren't. This comparison has no relation to reality.

Crypto-currencies have no underlying. A crypto-currency is like a bunch of imaginary confetti. Why is every crypto organisation is issuing its own brand of confetti? It's a legitimate question. It's exactly the same confetti.

It’s not even real confetti, it’s digital copies.

Of course they do it because they can manufacture something that people will pay for out of nothing, and then can use that for other things that get them real value.

One third of FTX fees were used to buy and burn FTT tokens. This is nearly the same as stock buybacks, and makes it a security, i.e. an instrument that derives its value from the success of a business.

Buying your own imaginary confetti doesn't magically turn your confetti into a stock or into a financial derivative. A stock confers ownership of the firm that issued the stock. These tokens don't confer ownership of anything, and therefore are not like stocks.

Stocks and derivatives are not the only types of securities. I don't really see what you're getting at here.

For most people, the only important part of what you call "ownership" are the cash benefits (buybacks, dividends, and acquisitions). You can see this from the small price difference between GOOG and GOOGL.

Sorry, I don't understand what you're trying to say.

Some people think it's good to trade some of bitcoin's security for extra features, or at least, think that enough people will feel that way in the future to make these tokens good investments today.

Those people look particularly silly on days like this.

My understanding is that Alameda was a market maker, which should have less exposure to down / upswings.

What kind of bets was Alameda making? Why would it need so much leverage?

I understand why loaning money to Alameda could be rationalized a risky, but not sketchy move (if Alameda posted collateral, paid reasonable terms like anyone else would, etc.).

They have been taking directional bets since 2020 at least: https://twitter.com/AlamedaTrabucco/status/13851809411867893...

I think they thought they were honest and doing things properly, and didn't realize that their holding of FTT was making them as bad as the other frauds before. I think these ouroboros are complex enough that even main players don't necessarily understand the position they've put themselves in.

If by 'they thought they were honest and doing things properly' you think the same for Madoff, then oof.

Actions and results matter. Intentions can easily be bullshit and delusion.

If someone is committing multi-billion dollar fraud, there is a line that was crossed a LONG time ago.

I read him as saying they thought they were doing honest things.

I was referring to the same miscreants as the poster was.

It’s only plausible to a certain point that they were unknowingly bad actors. They’d have to willingly be deluding themselves.

No one commits multi-billion dollar fraud accidentally.

They’d have to turn a blind eye to something any reasonable person would consider a ‘are we the baddies’ moment. Or two. Or dozens.

As to if it’s documented? One can hope, but I’m not holding my breath. I’m sure there have been many shredder parties (or digital equivalents) happening in many places since the news broke.

Oh you’d be surprised. I think most people are capable of this kind of fraud. It’s human nature to judge others by their actions, but judge yourself by your intentions.

Capable, yeah. Capable without knowing they’re doing something wrong? Yeah, no.

Most people cross that threshold well before a million bucks.

You can tell by the shape of the lies that are inevitably told. Someone who actually thinks they’re doing something ok won’t go to such lengths to hide important details, or omit specific things that are inevitably omitted.

And in this case, why not just update the TOS to be clear what they’re doing?

Because they know it’s wrong.

What you’re talking about is willful delusion.

Denial ain’t just a river in Egypt, etc.

Yeah and the point is no one sane would seriously say Madoff thought he was being honest. They’re making an analogy between Madoff and SBF being similar/the same.

Let’s not treat senior management and owners of a company that has gambled away billions of dollars of customers (and investors) money as kids. They should get jail time from what I’ve read so far.

They were either criminally stupid or did this on purpose. It really wasn’t that complex. This isn’t even close to 2008 complexity since this was all happening within one organization With the same owner SBF.

"Never attribute to incompetence that which can be adequately explained by greed."

“Never assume malice by that which could be explained by incompetence.”

As a caveat, however, SBF did work at Jane Street and graduated Summa Cum Laude from MIT with a Physics degree, so maybe this quote does not apply.

Right, which is exactly why I took that quote--which is overused by HN crowd--and changed it to fit the context. But you went and added it anyway.

I won't assume any malice on your part.

Nitpick: There is no such thing as Summa Cum Laude at MIT. Rankings and GPAs are not published, so he just graduated with a physics degree, period.

Always gives me pause when I hear people say that someone graduated with honors at MIT, even when it's Tony Stark:

https://getyarn.io/yarn-clip/87387a75-dde7-44ec-bc87-66f4e20...

Or this guy from Why Him:

https://getyarn.io/yarn-clip/bbc047f6-7417-4eb3-b4fe-064f75d...

1: “Never attribute to incompetence that which can be adequately explained by greed."

2: “Never assume malice by that which could be explained by incompetence.”

1+2 = 3: “Never attribute malice to that which can be adequately by greed”

Greed can be a form of incompetence - the inability to set goals that are reachable without recklessness or imprudence.

Yup, "accidentally criminal" is still criminal.

I don't really care whether they're kids of not. I do think it's possible that they step by step ended up in a situation they didn't realize they were getting into. Doesn't mean I think they shouldn't be punished if such a treatment is required.

But again and again, supposedly smart finance folks end up blindsided by retrospectively obvious stuff. There's just too many complicated fabrications on top of one another.

I'm not particularly sanctimonious, I think the average vilain of the day is most of the time just an average person making dumb mistake.

You’re right, and I see where you’re coming from, but the reality is that this can end with a 50 year prison sentence for SBF. That’s what Wasendorf got for swiping a mere $200M (the largest fraud in history prior to this, according to Animats): https://news.ycombinator.com/item?id=33564752

I think that reality hasn’t set in for most people yet. Especially SBF.

[2022-11-13] If I may follow up on myself: I didn't know anything about this situation and just commented randomly. It seems obvious a few days later that it was straight up fraud.

Seeing these kids talk puts it even more into perspective. Just watch this video of Caroline Ellison, CEO of Alameda.

https://www.youtube.com/watch?v=aW6SqLXw944

I made a comment on that video elsewhere. It’s pretty clear they were way out of their league in more ways than one.

They’re the type of people that are too smart for their own good where they can’t even see how idiotic they’re being. Or maybe they’re just spoiled. Or maybe they just think they’re smart. It’s interesting to me that Jane Street prides themselves on their hiring process, but they apparently hire folks like this.

Other than people losing money, I am super glad these reality checks are happening. But I wish they’d happen to more as well, e.g., Musk and Trump.

I agree, it reflects VERY poorly on Jane Street.

They like to give the impression they hire Ultra Mega Geniuses who have done the IMO (who cares if you did the IMO at age 17...?)

What is the imo? There are many imo things. International mathematical olympiad?

Most probably. Web searching for that Caroline Ellison young lady I found some articles describing her as a young math prodigy when she was in highschool (or something like that).

How does it reflect poorly on Jane Street? These are people who left, after not very long.

If your thesis is "they were inexperienced and operating without sufficient supervision" then that's a big part of what the structure of a place like Jane Street gets you.

I think it means Jane Street likely hires with a lot of bias for elites and “twitchy” smart people. The CEO of Alameda was an intern there and invited back for a full time position. Hearing her speak in interviews makes it seem like she has no idea what she’s doing and not all that intelligent or thoughtful. So it’s weird that she, seemingly easily given she states in interviews that she had no trading experience prior to Jane Street, made it through their supposedly rigorous hiring process. It seems their hiring process may not be as rigorous or effective as they hoped, which seems obvious even looking at the process in a vacuum.

>IMO

Anecdata,

I've studied along guys/gals who've done IMO, also had them as co-workers at other times, they have never performed well.

I really like Linus' saying "talk is cheap, show me the code". These people can make a thousand arguments about why something should/shouldn't work (but never write code), then you show up with working code and they don't have much else to say.

-- having watched a series of in depth interviews with Do Kwon - the interview with Sam Bankman-Fried on Odd Lots - and now this - I wonder if these children had any mentors? - where were the adults? --

I think the adults are the investors who are just older versions of these people that made billions selling some random website to Yahoo in the dot com bubble days.

Interestingly the lack of finance graybeard mentors was listed was a factor for why a short seller (Marc Cohodes) suspected ftx was going to go down, over a month ago.

My impression is that Alameda was also a legitimate business that also made a lot of money with a lot of leverage for a while, but eventually the tide turned or it had one bad leveraged trade and poof.

That sounds like some of the thinking that went into these historic arbitrage disasters.

Some young kid thought he knew better than his elders, and was doing arbitrage, which is moving around vast amounts of money, for very small gains (but safe ones).

They had all this money at their disposal, and just knew that these stuffy old farts were "missing the boat," so they figured that they'd just use a bit, to make a small bet, and put it back...

https://en.wikipedia.org/wiki/Nick_Leeson

https://www.youtube.com/watch?v=NkQ58I53mjk

Whenever I see this kind of fervor and people getting rich off of it I liken it to pro wrestling. Everybody puts on the same show and lots of people cheer because they love the act and lots of people cheer because they think it's real. It's possible Alameda thought that wrestling was real.

There’s this incredulous passage from Sequoia article that’s been taken down since. Make of it what you will

At this point, mid-2019, SBF decided to double down again—and scratch his own itch. He would bet Alameda’s multimillion-dollar trading profits on a new venture: a trading exchange called FTX. It would combine Coinbase’s stolid, regulation-loving approach with the kinds of derivatives being offered by Binance and others. He only gave himself a 20 percent chance of success, but, in his mind, SBF needed extreme risk to maximize the expected value of his lifetime earnings—and, therefore, the good his earn-to-give strategy could do. The fact that he was, by his own lights, overwhelmingly likely to fail was beside the point.

The point was this: When SBF multiplied out the billions of dollars a year a successful crypto-trading exchange could throw off by his self-assessed 20 percent chance of successfully building one, the number was still huge. That’s the expected value. And if you live your life according to the same principles by which you’d trade an asset, there’s only one way forward: You calculate the expected values, then aim for the largest one—because, in one (but just one) alternate future universe, everything works out fabulously. To maximize your expected value, you must aim for it and then march blindly forth, acting as if the fabulously lucky SBF of the future can reach into the other, parallel, universes and compensate the failson SBFs for their losses. It sounds crazy, or perhaps even selfish—but it’s not. It’s math. It follows from the principle of risk-neutrality.

Sounds like he forgot about the principle of diminishing returns.

If you have $1B to your name, it's stupid to put it all on red, even if your expected return is positive.

Diminishing returns don't apply for SBF - his life's goal is to fund effective altruist charities, so each billion is as valuable as the last as long as there are good projects to fund.

I don't think people are comprehending how tragic this whole situation is (acknowledging that it's SBF's fault). This collapse put the brakes on a powerful force for good, and lives that would have been saved won't anymore.

Well he failed miserably at that. If he had stuck with his original supposed $1 billion, he could have given almost all of it away and still lived a very comfortable life. As it stands now, his charitable foundation has pledged far less than $1 billion (at it remains to be seen just how much it pledged actually gets paid out).

Perhaps if he had spent more time donating money (his stated aim) rather than inventing convoluted financial structures (FTX has over 100 related companies!), he would have achieved more, and cost people a lot less.

There are lots of reasons to be mad and lots of red flags, but having over a hundred companies is pretty normal in this space. To operate a financial business legally across many jurisdictions you generally need to have subsidiaries in each jurisdiction. Ex: https://wise.com/help/articles/2974131/what-are-the-wise-gro...

Not true - the FT took a look at the org chart of FTX, it's way more complicated than even Lehman Brothers - https://www.ft.com/content/c28e0570-d4c4-433c-b0a0-c99fba613...

Lehman Brothers didn't allow individuals in many countries around the world to make trades on their platform, so I don't think they're a good comparison here.

(Sorry for saying "financial" earlier when the reference class is really something more specific like "international retail finance")

It’s only ”good” if you believe the ends justify any means. What about FTX customers? People aren’t pawns you can play with for your “greater cause”

No one in effective altruism is going to defend secretly gambling customer funds, and that isn't what I read your parent as saying?

> Diminishing returns don't apply for SBF - his life's goal is to fund effective altruist charities, so each billion is as valuable as the last as long as there are good projects to fund.

Let's be honest: we don't know what his life goals are. He said that his goal is to fund charities, but that's a pretty common thing for wealthy people in the U.S. to say because saying so gives you a lot of social status at no cost. Very few people actually proceed with any plans of significant charitable donations.

We don't know what his life goals were, but we do know that he was sending a huge amount of money via the FTX Future Fund, granting it to a wide range of projects. That whole team resigned yesterday: https://forum.effectivealtruism.org/posts/xafpj3on76uRDoBja/...

5 days later and now we know: https://cdn.vox-cdn.com/thumbor/3FuCAM_X4mREv2FJTnDv_QMmD6M=...

from: https://www.vox.com/future-perfect/23462333/sam-bankman-frie...

No, Bankman-Fried is a scheming fraudster hiding under the cloak of so-called “effective altruism”. He’d have done much better for the world if he didn’t found a crypto exchange promoting scams and being reckless enough to trade with user deposits and losing it all.

Most obscenely rich people in history attempt to redeem their reputation at some point through philanthropy, from Nobel to Gates. It’s an old story and the guilt which leads to philanthropy doesn’t justify the means.

Jho Low gave a few hundred million to charity too after stealing a few billion from the Malaysian government. It's easy to be charitable if it's not your money you're giving! But I guess you're right that this is a different than that. No one is really saying that he got rich from this massive fraud (although a clear accounting of what actually happened is not available yet and probably won't be for years), in fact he lost most of his net worth because of it.

The super stupidity of using math to dazzle people around you is my greatest lesson from this. In my highly technical field, I can use math without treating it like some precious scripture. But it’s good to know it is so unfamiliar to a normal person in the VC world, I can use it to justify even a startup doing genocide as a platform or something.

It's almost like people who don't actually know anything about math, statistics, or probability shouldn't be believed when they make poor arguments using the same.

Maybe there's a reason it takes 4 years of extremely tough classes to understand the basics of "hard" math.

Four years?

Most books, yt videos, jobs and academic press releases tell me all it takes is `import tensorflow` or `git clone github://lolcoin.git`

It’s not just that. But like if I made up bullshit like “the emerging market populations are growing hard and will strain earth’s resources. Our startup needs to kill them to save the planet, here’s a log Utility function to explain it”, some VC out there is an idiot enough to give me money. Maybe if I’m playing league of legends while saying it, I’ll get more cash than I even want to raise.

> Maybe there's a reason it takes 4 years of extremely tough classes to understand the basics of "hard" math.

On top of that, any decent tech school also has an "ethics of engineering" course somewhere along the way, or at least I did about 20 years ago when I was a student (we had quite a stupid professor, but the intention was there).

I thought it was convenient how people's response to that class immediately showed me who shouldn't be allowed to run, start or control anything. "This class is bullshit and stupid" no, you are a selfish asshole who refuses to spend even half an hour a week understanding the history of the industry and the mistakes we made and how your work will have an impact on people so refuse to let that be a negative impact.

> He "calculated the odds he'd fail at 20%"....

What calculation? What's the formula that gives you the odds that your Ponzi scheme will be discovered? What can possibly "model" that, aside from a scifi-level reality simulation? It's not even math, it's math LARPing.

Yes, I feel so cheated that all I needed to do to get money for my ideas was to just talk like an ayn rand novel protagonist. At least Zuckerberg did all this but was legitimately a genius. Made sense that bankers put up with that shit cos they could tell he was smart af. But when you’re larping to be a banker like most VCs are, you’ll just copy what they did like a monkey without understanding why they did it. And I wasn’t there to part their money from them. Fml.

Quick detour: expected value alone does not optimally maximize your long term outcome. Bet sizing (a la Kelly Criterion) is just as critical.

E.g. if you had a weighted coin that was 50-50 odds with 3-to-1 payout, you wouldn't bet your whole bankroll on just one flip.

SBF said he disagrees with kelly bet sizing because his utility function is closer to linear: https://twitter.com/SBF_FTX/status/1337250702104485893

I'm not sure I follow... SBF seems to be talking about the marginal utility of a dollar. True, most people think of this value as logarithmic. However, Kelly Criterion makes no such assumption: It's simply the optimal bet size (as a fraction of your bankroll) that optimally maximizes your returns over successive game plays. If you over-bet, it's much more likely that you'll blow-out -- as SBF mentions in your link (and ironically, occurred to SBF & FTX!).

Why would a weighted coin have 50-50 odds? That sounds like a fair coin, and miscalculated odds.

I this is exactly it. When you let utilitarianism run your life, you try and maximize your ability to do good, even if you have to bend a few rules on the way.

But outcomes aren't certain and high EV plays can still carry a substantial amount of risk, which is exactly why we have finance regulations.

Every serial gambler in the world thinks that they are just temporarily in the red and one big break away from winning big. They just need to invest a little bit more.

Gotta double up to catch up.

This is literally the plot of Uncut Gems.

To be fair Howard ends up winning it all back and more in the end. Only problem is that he's killed shortly after.

"Theranos just needed a little more time to get the tech working."

Regarding his exit plan: not sure if you will find a good answer right now. One way to get some insight into this type of mental game is to read about other major scammers who just couldn't help themselves and got too deep to pull out. Bernie Madoff comes to mind, and there are many books written about him and his business.

I think he just though that he will never get caught, it was working for a long time, why would it fail?

Also why are there no lawsuits yet? Since FTX clearly broke its own T&S?

I guess the lawsuits are being prepared by affected parties as we speak.

U.S. Department of Justice lawyers are already closing in.[1]

Using customer funds held in custody is theft. Period. People go to jail for this.

This may be the biggest embezzlement of customer funds held in custody in history. Most scams involve misuse of funds invested, not just held in custody. The biggest outright theft of this type seems to have been Peregrine Financial.[2] That was $200 million, far smaller than this one.

What happened to the CEO of Peregrine? Here he is, 10 years after conviction:

    Bureau of Prisons Inmate Locator
    RUSSELL R WASENDORF
    Register Number: 12191-029
    Age:   74
    Race:  White
    Sex:  Male
    Located at: Jesup FCI
    Release Date: 02/19/2054

[1] https://fortune.com/crypto/2022/11/10/ftx-sam-bankman-fried-...

[2] https://archives.fbi.gov/archives/omaha/press-releases/2013/...

I just want to say, you have some of the most fantastic coverage of events like this.

It feels like having an investigative journalist on payroll. The delay between an Animats comment and this showing up in the news is significant. Thank you!

(I remember your comments about the CEO that forged pay stubs being similarly excellent. Someday it might be worth collating them. In the meantime, whenever Animats says CEO Foobar is going to prison, Foobar had better start mentally preparing themselves for the journey.)

By the way, that Wasendorf story (Animats’ second link) is quite interesting. He skimmed $200M by forging bank statements and was eventually caught only when the world switched to electronic auditing. Previously he was able to fool everyone by intercepting the snail mail: https://www.forbes.com/sites/walterpavlo/2012/07/13/pfgbests...

It's just knowing some basic financial history. Crypto scams are not new kinds of scams. They're mostly scams from the 18th and 19th centuries, with a new paint job. "Extraordinary Popular Delusions and the Madness of Crowds" (1841), has the first time around for most of these bad ideas. Mass market scams first got going when newspapers appeared. At last, you could reach large numbers suckers at low cost. Before newspapers, scamming was a one-on-one in person thing.

We still have both mass-market and one-on-one scams, but now they can both be done remotely. There's not much originality. It's mostly the same old scams of a few standard types, sometimes in new packaging.

I find all of it so fascinating. I wrote up Wasendorf’s story just now, mostly out of curiosity: https://news.ycombinator.com/item?id=33565992

Stories like that are really interesting to dig into. They all seem to get caught because the world changes (audits happening via internet in Wasendorf’s case, the economy imploding and sinking Alameda’s risky investments, etc) rather than from any particular mistake. The mistake always seems to be that they started cheating in the first place, and then it was just a matter of time.

Of course, we only hear about the ones who were caught. It makes you wonder how many stories like this were swept under the rug — if Alameda had made money instead of losing it, FTX would probably still be online, even though they’d still be committing the same large scale fraud.

Anyway, thanks again for all this, and especially for all the detail you put in. (Your comment pointing out that SBF is firmly under the SEC’s jurisdiction was wonderful.)

I may have missed it-but where is the source/evidence that some(all) this fraud is under SEC's jurisdiction?

Right this way! https://news.ycombinator.com/item?id=33550020

Any delay is related to the window size, MSS, and the amount of un-ACKed data ;)

> This may be the biggest embezzlement of customer funds held in custody in history.

I wouldn't be surprised to learn that the amount of actual customer funds that went in were much smaller than claimed.

Keep in mind FTX was mostly 'perpetuals' -- fake assets. It might be that a lot of the customer funds were just fictional gains, also may be that a lot of them were paper value owned by SBF entities.

I've been trying to find anyone I personally know that had FTX exposure and so far I'm coming up dry.

How about everyone with assets stuck in FTX that can’t withdraw them? When your accounting is fictional it might be hard to pinpoint who’s money went where but everyone got screwed in the end

There's someone on Reddit who says they had their entire net worth in USDC on FTX.[1]

At least they're at the head of the line in bankruptcy. Custodial funds come ahead of debts.

[1] https://www.reddit.com/r/wallstreetbets/comments/yq6y5d/all_...

> It might be that a lot of the customer funds were just fictional gains, also may be that a lot of them were paper value owned by SBF entities.

That's true for the numbers used when reporting on Bernie Madoff's Ponzi scheme. Much of the $50B was fictional gains.

There were even clawbacks on the gains of those who withdrew before the collapse.

Interestingly, many madoff victims had paid tons of federal gains taxes on the fictional gains and were unable to get the money back from the government.

Ultimately the US government is the party that gained the most financially from Madoff's scheme!

Yeah I think it’s why SBF immediately went on about not knowing everything that was going on, that he messed up by misunderstanding things, etc. He’s trying to lay the groundwork for plausible deniability here.

He will either go to prison or kill himself I would bet.

Betting someone will kill themselves or go to prison is far from constructive, and is triggering to many. Go to prison is one thing. Suicide is another. It's not a joke.

EDIT: Suicide is something that's hit personally lately - my response was likely something based on that. To the person who responded - I didn't think you considered suicide a joke - and plenty do consider it. It's never a solution though. You even got an upvote.

I’m not joking. And I agree it’s a serious matter. But staring down at 40+ years, a significant number of people would kill themselves in his position.

“I’d bet” is a figure of speech. Not the stated desire to gamble.

He won't get forty years. If he ever is indicted in America, he has to be extradited from the Bahamas first. Anyone with money can delay extradition proceedings for a couple years. Maybe he'll agree to extradition on the condition that he is granted bail in America (where he'll have $200,000 a month security guards from Guidepost Solutions enforce the conditions of his bail). Then he'll have Ben Brafman or a bigger $2000/hour firm, assisted by the world class investigators from Kobre & Kim and other high priced co-counsel negotiate the best deal possible and he'll plea guilty to some counts of wire fraud. Then at sentencing we'll hear about all his great charitable deeds, there'll be 100 letters from high level businessmen, politicians attesting to his great character, how he thought he was doing the right thing but "takes responsbility" for his actions, etc. Then maybe due to the massive losses and large number of victims he gets 10-15 years which of course after the 15% time good credit becomes 8 and a half. Then maybe we'll also find out he had a substance abuse disorder which makes him eligibile for the RDAP program and accordingly a 12 month sentence reduction. He'll also be eligible through the First Step Act to earn sentence reduction through "evidence-based recidivism reduction" classes in prison. And even if there is court ordered restitution almost no one ever pays that or if they do it is only a small fraction (there are major white collar fraudsters on $200/month payment plans for $10 million restitution orders). This is assuming he even faces justice in America because there are reports of several hundred million dollars of crypto being moved out of FTX wallets which to me looks like the internet money version of a "go bag" and someone intending to flee.

Wasn't MF Global several times bigger ($875M) in terms of customer funds used for other purposes, yet no one went to jail?

I think it likely started with a small mistake, not necessarily an innocent one but maybe one that was assumed to be low-risk. And like in the Fargo movie/show, Sam just kept digging the hole deeper trying to get out of it.

This explanation seems pretty plausible from a game theory angle. The selfish cost of losing 1 billion dollars and losing 10 billion dollars for fraud is the same. Either way he is ruined and probably goes to prison, so he keeps gambling even if the odds aren't in his favor, and problem grows exponentially.

Altruism is a lot easier when it's not your neck on the line.

denial is a powerful drug,

you are surrounded by people celebrating your genius, everything you touch turns to billions and billions

it is easy to see how someone gets disconnected from reality and ends up living in the metaverse of their own genius

And with Meta you can live your wildest illegal dreams without risks!

See? The metaverse isn't useless after all.

That's an interesting take. Probably wouldn't happen though, the argument being that illegal dreams taking place in the metaverse would contagiously spread to the unmetaverse.

This is satite., if it wasn't clear enough

The part where he was lending out deposits to make big bets looks very problematic, and hopefully illegal.

The CEO described how a feasible 'pyramid' could work with Levine on Bloomberg and it looks like he was doing just that.

This is basically a smart kid breaking all the rules, doing mostly what he was allowed to do legally with all of the misrepresentation and hyper - plus a little bit of illegal stuff which is all you need along with the massive leverage that comes along with it.

But I would say aside from his shenanigans - this is a crypto problem. At the base of the pyramid was an 'asset worth nothing' well ... of of crypto is essentially that.

The critics who follow this space rather closely seem to suspect that Alameda was especially exposed and damaged by the Luna collapse. This should have been Alameda's end, but because FTX can create FTT tokens out of thin air and it is so easy to manipulate the price, it can create the illusion of solvency ("flywheel").

Presumably, SBF was hoping that the crypto winter would end soon, which would bring everything else massively profitable for them again, and then plug the holes he had.

> Were the Effective Altruism intimations genuine?

SBF was just following the EA maxim: "take advantage of strategies other people are biased against using"

I think he probably thought the value of the coins would keep rising. Hell everyone who bought in at sky high prices thought that.

But how, if you had spent time being a market maker, that is to say you understand market neutral strategies, would you convince yourself to take this bet? It seems contrary to his presumed understanding of the markets.

My personal hypothesis is that people keep attributing the successes of SBF to his intellect rather than a mix of intellect and luck, like the rest of us mere mortal. That list could as well include SBF himself. One can be lucky often but not forever, and sooner or later the "prodigies" see the fault in their impeccable algorithms.

this is it. Luck can look a lot like genius. We see it everywhere. And when you have credentials behind you, you really start to attribute luck to your genius.

People who understand that betting on red over and over again isn't a long-term winning strategy usually don't make the news for fraudulently pissing away 8 billion dollars of customer funds.

It's survivorship bias.

Re: EA, you can see the general consensus of what’s happened in a multitude of FTX posts here https://forum.effectivealtruism.org/

My particular views are: https://forum.effectivealtruism.org/posts/EKN9Nn89ixriwSXpP/...

EA is a load of cabbage.

"Can anyone speculate what Bankman-Fried's exit plan was?"

SBF contributed millions to democrat candidates in the recent elections. Perhaps his exit plan was legislation to bail him out.

He didn't have an exit plan because, like every gambler, he was sure his "system" was better than anything that came before and couldn't possibly go tits up.

Like every gambler, he was wrong of course, and eventually lost it all because gambling is stupid.

They expected the gambles to pay off, and faster than customers started withdrawing en masse. Reminds me a lot of AIG's sketchy Securities Lending back before 2008.

> Can anyone speculate what Bankman-Fried's exit plan was?

I can speculate based on recently revealed facts.

SBF did grease politicians to the tune of 40 million USD in political donations. Several have described these donations as: "bribes" (I'll let you judge). (as a sidenote I wonder if these politicians are going to give these donations back to the people SBF scammed).

A US congressman, as reported here several times, wrote: "GaryGensler runs to the media while reports to my office allege he was helping SBF and FTX work on legal loopholes to obtain a regulatory monopoly. We're looking into this".

It's "allegedly" but it's a fact that a US congressman posted that.

It's also established that a colleague of the SEC's Garry Gensler happens to be the father of... Drumroll... The 28 years old woman CEO of Alameda.

So I'll speculate a TL;DR:

SBF was working hand in hand with corrupt politicians and corrupt officials to kick Binance out of the US through regulatory capture in order to grab Binance's insane market share (easily 10x the size of FTX).

SBF would then have continued the established FTX/Alameda scam through FTT. So he'd have then used FTX to pump the price of FTT (and, because why not, other manipulated shitcoins too) in order to keep pretending traders at Alameda were geniuses.

Alameda would have been fully legit and would have take shitloads of money from various pension funds and investment funds (knowing he already got some: why not think he would have gone for more?).

That's my speculation: why stop at 1/10th the size of Binance when you can donate tens of millions to politicians (which is pocket change when you're making billions) and work with the SEC to get a monopoly on crypto exchanges in the US, all the while pumping the value of your Alameda fund and all the while having covers of magazines and people everywhere (Bloomberg, Sequoia, JP Morgan, etc.) saying how big of a genius you are and how geniuses all people around you are.

The guy is a megalomaniac: no longer than a few weeks ago he was saying that companies worth tens of billions were "potential acquisition targets".

And I think that, had the overall markets not have been crashing hard, he may have succeeded at all that, creating a scam 10x or 100x bigger than the one he actually ran.

But the market crashed and CZ took the opportunity to reveal the FTT scam to get rid of a very dangerous competitor. No matter if Binance is legit or not: SBF was after Binance but Binance was too big for SBF too chew. Binance may be going down too (no clue about that) but Binance was never going to go down alone while letting SBF free to run his SEC-endorsed scam.

This is all very interesting. I am also starting to wonder whether CZ had a good idea this would happen because maybe Binance is structured similarly.

Basically - is Binance solvent? I don’t know.

Binance leads the industry in proof of 1:1 reserves of custom holdings.

CZ knew about FTX's finances because he was the original investor in FTX. The reason he had FTT to dump in the first place is because of that initial investment in FTX.

No, you're thinking of Kraken, which has been doing this for years (not an endorsement!). Binance just did it, by revealing their wallet addresses, and promised more in future.

Two important points: 1. Generally Proof of Reserves is a term where all holders can validate cryptographically that their funds are accounted for. This is harder because it's natural and efficient for an exchange to co-mingle multiple customers. 2. Doesn't mean they're solvent! They might owe customers $100bn for all anyone knows.

It's still far better than nothing, but FWIW their history of lying about their home jurisdiction, and massive "out of nowhere" growth is a huge red flag that you should be aware of (FTX did the latter even faster, of course, being founded in 2019!).

Im 9-to-1 that Binance is shady asf but I don’t have much evidence - outside of the fact that they used to list tokens in exchange for a share of the pie, which in my eyes is super dodgy.

CZ is much smarter than SBF [1].

I'm actually confident that he's running a real business there, because that's the smart thing to do.

1: CZ literally destroyed FTX with a tweet.

They were caught off guard by the risk asset sell off. They thought the bull run would go for longer

10 Billion dollar question: Who were the counter parties to these trades where customer funds were "lost".

It's called value destruction. The coins value dropped very quickly, the counter parties then where either 1) Most likely nobody, (as in nobody cashed out, as the myriad altcoins approached the limit of worthless) and 2) traders on FTX who cashed out other ,"more valuable" coins they were lent after depositing altcoins as collateral.

They were the counterparty with themself?

They accept FTT as collateral, give out a leveraged loan to the other company. The company spends that money on things like stadium rights and bailing out other failed crypto companies. Collateral falls to a value of 0, and the money is spent.

The thing is that there was never any funds stored in these accounts. If you store a bitcoin then there isn't any value to it until you sell it.

The money that you spent to pay for the bitcoins exit the system during the purchase. Most likely paying the Ferrari of the seller.

My understanding is that there were bitcoins (and other crypto tokens) stored in the accounts that are not getting returned, valuable or not.

From his flirtations with politics and regulations: get too big to fail.

Reply on news.ycombinator.com