The collapse of FTX and Sam Bankman-Fraud is looking quite spicy for journalism

Some social movements develop and the person which is perceived as the leader of that social movement becomes popular. And with popularity come free passes.

Now a smart person will make sure not to use free passes because they know that the populace is fickle, their infatuation too shall pass and as soon as it does pass then the backlash is going to be 100 times worse.

So if they do any media they'll do their best to put a stop to the ass-licking in order to make sure that they'll not be using a free pass.

Then you have those who don't care and instead try to accumulate as many free passes as they can, say because they are old and are projected not live to see the crowd turn against them, or for whatever reason.

Luck is also important. Take Nixon and JFK. One conspired against his opponents and the other stole Illinois. Both are very serious crimes, only one got to live to see the truth uncovered and crowd turn against him, the other is hailed as one of the best Presidents.

1) You do a bad job at the due diligence and do not review anything beyond the income statement and top-level balance sheet accounts.

2) You turn a blind eye to it because it is favourable to you. Favourable can also be just the outcome of assessing the risk of 'cost of reversing fund diversion practices' vs. 'letting it slide because those diversions yield returns'.

I'm guessing algebra is difficult for journalists.

> Major investors, with lots of money on the line, also didn't catch this.

Major investors had all the incentives to keep the scam going as they stood to make big money from the scam.

Journalists should have the incentives to expose the scams, except they were not in this ( and probably some other ) case because they were either getting money from the scam or were trying to be the best cheerleaders possible in hope of getting money from the scam.

in the case of FTX its probably easy to. shave customer liabilities without it showing up. probably, this is because they didn't have proper segmentation of client funds. if you have an external entity holding the assets in trust then you need to be doing very dodgy stuff in the company to be hiding customer liabilities. for example even in with a trust account setup you could have part of customer funds being diverted into secret accounts and they don't show up in the liabilities. as an external auditor you can ask to see systems and a paper trail but you are just seeing what people want you to see and if there is a conspiracy to lie then you are fucked. the best you can do is try to get some industry estimates and see if they match or compare to external statistics (like revenue, etc) and hope they have been reported truthfully.

my guess in the case of FTX there probably were red flags like lack of proper segregation and these weren't reported by the external auditor.

You don't want companies to be able to buy other companies? You don't want multinationals? Good luck. Maybe you want a limit on the depth of an ownership tree instead - no more than 3 levels of ownership.

There are multiple libel and defamation cases in play in almost every competent jurisdiction at any given time.

Activist funds do this every day.

Obviously those gifts don't excuse SBF's massive fraud! But it's not as if SBF was only donating to political candidates and nothing else.

So I don't think the journalists did anything particularly wrong here. (Unless you think crypto is so sketchy that they should have treated _anyone_ connected to crypto as presumably fraudulent -- in which case, fair, I guess.)

Issuing bonds to pay off old debt is not a ponzi because the premise that you will lose your money if the company defaults is known and evaluated up front. And the yield on the bond is commensurate with the risk.

There is no reasonable expectation that an exchange will gamble and possibly lose the money you deposit

People sometimes assume that I am a sort of antagonist to Bankman-Fried, in part because he has sometimes said things in our talks that are … let’s say surprisingly candid. Most notably, people keep bringing up an Odd Lots podcast from last August in which I asked him to explain yield farming. His explanation starts:

>You start with a company that builds a box and in practice this box, they probably dress it up to look like a life-changing, you know, world-altering protocol that's gonna replace all the big banks in 38 days or whatever. Maybe for now actually ignore what it does or pretend it does literally nothing. It's just a box. So what this protocol is, it's called ‘Protocol X,’ it's a box, and you take a token. You can take ethereum, you can put it in the box and you take it out of the box. Alright so, you put it into the box and you get like, you know, an IOU for having put it in the box and then you can redeem that IOU back out for the token.

And at some point I interject:

>I think of myself as like a fairly cynical person. And that was so much more cynical than how I would've described farming. You're just like, well, I'm in the Ponzi business and it's pretty good.

And he replies:

>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. And I think there's like a sort of depressing amount of validity. …

>So you've got this box and it’s kind of dumb, but like what's the end game, right? This box is worth zero obviously. … But on the other hand, if everyone kind of now thinks that this box token is worth about a billion dollar market cap, that's what people are pricing it at and sort of has that market cap. Everyone's gonna mark to market. In fact, you can even finance this, right? You put X token in a borrow lending protocol and borrow dollars with it. If you think it's worth like [not] less than two thirds of that, you could even just like put some in there, take the dollars out. Never, you know, give the dollars back. You just get liquidated eventually. And it is sort of like real monetizable stuff in some senses. And you know, at some point if the world never decides that we are wrong about this in like a coordinated way, right? Like you're kind of the guy calling and saying, no, this thing's actually worthless, but in what sense are you right?

People on Twitter now are like “he admitted that FTX is a Ponzi!” but of course that’s not true. He conceded a certain validity to my claim that some crypto businesses — not his — are Ponzis. He is just in the business of trading their tokens.

In fact, I came away from that conversation bullish on FTX and Bankman-Fried. My view was, and is, that if you talk to a crypto exchange operator and he is like “crypto is changing the world, your old-fashioned economics are just FUD, HODL,” then that’s bad. A wild-eyed crypto true believer is not the person to operate an exchange. The person you want operating an exchange is a clear-eyed trader. You want someone whose basic attitude to financial assets is, like, “if someone wants to buy and someone wants to sell, I will put them together and collect a fee.” You want someone whose perspective is driven by markets, not ideology, who cares about risk, not futurism. A certain cynicism about the products he is trading is probably healthy.

That said, knowing what we know now, this seems prophetic:

>But on the other hand, if everyone kind of now thinks that this box token is worth about a billion dollar market cap, that's what people are pricing it at and sort of has that market cap. Everyone's gonna mark to market. In fact, you can even finance this, right? You put X token in a borrow lending protocol and borrow dollars with it. If you think it's worth like [not] less than two thirds of that, you could even just like put some in there, take the dollars out. Never, you know, give the dollars back.

A popular theory about what happened to FTX — the one I wrote about above, and yesterday — is that FTX issued its FTT token, and it had a market price, and Alameda got a lot of it, and FTX loaned Alameda money against it, and then Zhao was “the guy calling and saying, no, this thing’s actually worthless,” and Alameda could “never, you know, give the dollars back,” and that was the end of FTX.