Hacker News Reader

Comment by throwthere | Hacker News Reader

Having followed a lot of the SBF discussion since he keeps giving interviews, here's the FAQ--

1) How did you lose $5ish billion of customer deposits?

- They were deposited to Alameda, a totally independent hedge fund run by an unrelated party (my ex-girlfriend who lives with me). We credited Alameda without properly debiting Alameda on FTX.

2) Why didn't you track them?

- There was a bug in the dashboard. I made a boneheaded mistake. Oopsies.

3) What happened in the days leading up to the collapse?

- It was an attack from Binance, they're the bad guys. They cashed out and broke FTX.

4) Wait but they cashed out their assets, how would that effect people who had cash and other assets at FTX?

- Well we didn't comingle margin and non-margin customer accounts/assets if that's what you mean. It's more that we had this terms of service that was really complicated. Yes there's a part of the terms of service that says we won't lend out your assets, but there's this other part somewhere that says we will that applies to everyone even though it says it only applies to margin accounts. It's because of complex accounting. This is all actually just really complex and I don't remember all of it.

View on HN

Having also followed this unfolding drama, I can say this is sadly a reasonably accurate take.

I'll add my own opinion which is that he seems to—at least on some level—legitimately believe that all of this is extremely complicated and impossible to understand unless you're someone of his intellectual caliber. It's so complicated, in fact, that even he struggles to keep it all in his head at once. I say this because I otherwise can't come up with any reason why he would continue to give multiple interviews except that the man actually thinks that his ideas were brilliant and sound, but he just made some understandable mistakes and that if people could understand where he's coming from they'd see that he's a sympathetic victim here and not some idiot that was very obviously going to lose everyone's money from the get-go.

Of course the reality is that he's some idiot that was very obviously going to lose everyone's money from the get-go. None of this is very complicated to anyone who's ever worked in finance (admittedly not me). And absolutely fundamental basic controls were never put into place. These controls were skipped because SBF was convinced he was doing something extremely novel and complicated and such old-school concepts would only hinder his ability to execute on his brilliant ideas. Except these ideas weren't all that brilliant, they just involved doing things the likes of which you wouldn't even imagine attempting in traditional finance because… gestures wildly at the ongoing FTX debacle.

> These controls were skipped because SBF was convinced he was doing something extremely novel and complicated and such old-school concepts would only hinder his ability to execute on his brilliant ideas.

Don't let him sell the story that it was all very complex and he made a bunch of mistakes and he should have done better. They used Snapchat for company messaging so there wound't be records. This wasn't a mistake due to complexity. He knew he was risking customer funds with an extreme Alameda margin position. He just hoped the market would go up and he'd get away with it and come out with tens of billions in profit. His bet, that he illegally made with customer funds, did not pan out, and he ended up without the money to pay everyone back. His terms of service said he would not make such a bet, yet he did it anyway. He took extreme, fraudulent risk with other people's money. He knows that, but he's playing dumb and trying to sell the narrative that it was all a big mistake.

I agree. It wasn't very complex, he made a bunch of basic mistakes that nobody with even a passing familiarity with finance should have made, and to say that he should have done better is an understatement of almost comical proportions.

I just also think that these things were (at least initially) due to absurd levels of hubris and incompetence rather than outright malicious intent. The guy thought his shit didn't stink but anyone even vaguely paying attention could smell what was up from miles away. He still doesn't think he did anything wrong other than making some justifiable mistakes in his rush to build something great and surely anyone can see that if he just explains himself for the thousandth time.

It is complex, but that doesn't mean it's not malicious. Let's use a simpler example.

Sam runs a horse racing operation and allows you to place bets on horses. Before the race begins, Sam collects $1,000,000 from various people placing bets on the race. During the race, Sam runs across the street to the casino and puts the $1,000,000 he's holding on black at the roulette table. If he wins the bet, Sam plans to take the $2,000,000 back, pay off customers at his race track, and then walk away with an extra $1,000,000 in his pocket.

Unfortunately, it comes up red, and Sam walks out of the casino with nothing. Realizing he won't have money to pay his customers back, he tries to find someone who can buy his race track and take on the debt, but nobody wants to inherit a $1,000,000 debt.

This is malicious. Sam willfully defrauded customers. Yeah, it could have worked out, but it didn't, and nobody consented to risking their money on the roulette table.

Now change $1,000,000 to $10 billion and replace "race track" and "casino" with complex finance mumbo jumbo.

Sure. This is a reasonable analogy.

I simply think that he started from an a priori belief that a) he is brilliant, and therefore b) ideas he comes up with are similarly brilliant, thus c) this idea is brilliant.

It wasn't.

That said, I don't think it should matter whether or not he came into this plan with an intent to defraud or if he mistakenly thought this was a foolproof investment strategy. The man is guilty as all hell and ought to face consequences for the outcome regardless of intent. I just think it's amazing to watch him continually try and explain how brilliant and complicated this idea was and how a few small mistakes brought him down while it's actually pretty simple to understand at a high level what happened and this outcome was virtually guaranteed from the start.

You see the same thing with most con-men (and women) when someone finally pulls back the curtain. Most won’t admit they were doing anything wrong even once they are in prison.

Near as I can tell, it’s the rationalizing part of the mind trying to protect them by trying to convince themselves and everyone else they are actually not bad.

It’s why it is so important to ignore what people say, and look at what they are doing and the results of their actions over time.

I have to add a preface of this is my opinion, but -

I think it's impossible he didn't know he was committing fraud. Now he's playing dumb, but I've know at least two people in situations like this. One was doing super risky real estate stuff which blew up in a surprisingly similar way - maniacal plans for world domination, mansions, lots of cocaine and adderall, sex with the co-workers, tons of leveraging, the whole thing. He was absolutely thrilled by the schemes and knew they were illegal. Ways to increase and manipulate the leverage was the daily conversation!

I know it's just an example, but this is all SBF would be doing all day besides press - talking about the funds and what they're doing with them. People imagine CEO's as being insanely busy and it's true, but there wouldn't be a day that passed that he wouldn't be making decisions with the finances - where they're going, what to do, etc. He's lying about dashboards and not knowing.

Smart sociopaths will convince even themselves it didn't happen when caught. Don't buy it.

I just also think that these things were (at least initially) due to absurd levels of hubris and incompetence rather than outright malicious intent.

Is there really that much of a difference between these two in this financial context?

I don't think it matters from a justice perspective.

From the perspective of someone watching the crypto world discover failure by failure why the modern banking system is the way it is this particular situation is amazing to witness. Everyone believes they're a genius when line goes up. Line goes down and everything falls apart.

As has been said before, once you reach a certain level, the two often become empirically indistinguishable.

Woah source needed on the Snapchat for company messaging. I gotta see this.

> Ray said that “one of the most pervasive failures” at FTX’s main international exchange was the lack of records about decision-making. He said that Bankman-Fried often used messaging platforms with an auto-delete function “and encouraged employees to do the same.”

https://arstechnica.com/tech-policy/2022/11/new-ftx-chief-sl...

("Snapchat" - the specific brand - may be inaccurate. I've seen it reported as messages that "auto-delete" without a specific platform mentioned.)

prob Signal

I heard they used Signal, which can have disappearing messages

I think both interpretations are true. I think he did think they were so brilliant and novel that they could ignore the rules. I think it's reasonable and probably legally correct to interpret that as fraud (with self destructing messages being strong evidence of mens rea). I think he really didn't intend for things to go wrong. I think he probably thought "we're all gunnuh make it," or "(3,3)" as Levine describes it in today's Money Stuff. I think now that everything has collapsed, he's trying to weaponize his rationalizations to maneuver himself into a better position (nonspecifically, there's no plan he's just trying to see what kind of better position is possible. I provide some admittedly sparse evidence for that here [1]).

In order to lie convincingly, you must first lie to yourself. His method is a sort of "sincere bullshit." That excuses nothing but is necessary for a complete understanding of the story.

SBF wasn't an exit scammer, or he would left with the money much earlier. He wasn't a Madoff character, or he wouldn't have attracted so much attention. A better comparison is Holmes. They were both looking to build an empire and probably believed they would eventually make good on all or most of their promises. This is a really dangerous form of con artist, because they can take in everyone - the greedy who want to ride the hype, the optimists who want to implement the vision, the desperate who need to believe in something, we can all fall for this sort of thing.

IANAL

[1] https://news.ycombinator.com/item?id=33910390

> he seems to—at least on some level—legitimately believe that all of this is extremely complicated and impossible to understand unless you're someone of his intellectual caliber. It's so complicated, in fact, that even he struggles to keep it all in his head at once

Yeah, I strongly disagree here.

He's just a pathological liar and he's currently on an interview spree where he's lying out of his mouth to try and avoid jail time.

If you want evidence that he a liar, look at the DMs he sent to his friend (apparently he forgot she was a reporter?) that got published to Vox.

He clearly explained his strategy of lying about his left-leaning political views to get brownie points with the media.

He intentionally wanted to defraud people from the start. When he started FTX, they went through multiple jurisdictions (first Hong Kong, then Singapore and finally the Bahamas) to find the country that would give him the least regulatory oversight so he could run his ponzi.

He intentionally had staff message him using Signal with disappearing messages to minimize the paper trail. Same thing with hiring the Ultimate Bet guy.

He had a clear backdoor that allowed him to send customer funds over to Alameda and he put some some BS "FTX collateral" to serve as a veneer. He bought companies like BlockFi to get more customer funds so he could keep the ponzi going. Spent fucktons on advertising in arenas, F1, superbowl, etc. because your customer LTV calculation changes when you can just steal the user's deposits and use them to lever up your hedge fund.

I'm guessing his plan was that he would use the FTX user deposits to take a huge long position on crypto, ride the bull wave and become the richest person in the world. He thought he'd be able to time it right and get out before the bear market with his profits but he timed it incorrectly and Alameda blew up.

Now, he just wants to make it seem like it was an accident and due to poor management by him. No, it was 100% intentional and he knew exactly what he was doing.

You could be right. But if this interview spree is a calculated move to avoid jail time, he's doing a truly awful job of it. But this wouldn't be the first time he did an awful job of something due to misjudging his own competence.

> But if this interview spree is a calculated move to avoid jail time, he's doing a truly awful job of it. But this wouldn't be the first time he did an awful job of something due to misjudging his own competence.

Yep, I think that's exactly it.

In his mind, it's either

- do not do any interviews. The outcome is a 90% probability of life in prision

- do the interviews and try to shift public opinion to it being an accident. He knows he still has some influence over the media because of his past donations. Maybe 50% probability of life in prison if he can shift public opinion?

He seems like an addicted gambler who thinks he just needs one more bet to dig himself out of the hole.

> "Disgraced crypto boss Sam Bankman-Fried says he hopes to start a new business to make enough money to pay back victims of the FTX collapse."

https://www.bbc.com/news/technology-63911363

If all this was done maliciously from the get-go, I don't understand why he would take this approach as opposed to simply cashing out when things started to turn and disappearing. If you've got enough money, it's not hard to make yourself scarce.

So why stay visible and continue to do these interviews and testify before the US House when all he's managed to do so far is convince everyone that he's guilty as hell?

That's what I can't put together about this strategy. It only makes sense to me if he genuinely, truly doesn't believe he did anything wrong. Which is frankly amazing if true given everything we know.

> why he would take this approach as opposed to simply cashing out when things started to turn and disappearing

Because he wasn't expected their balance sheet to get leaked.

He had enough liquidity from FTX customer deposits to cover any Alameda margin calls from losses and Alameda wouldn't get margin called from FTX for any losses (due to their god mode).

So, he could keep just keep holding levered losses and wait for the tide to turn.

However, the FTX balance sheet got leaked and that caused CZ to want to liquidate his FTT stake.

This caused a huge wave of customers wanted to withdraw their money from FTX just in case (a very smart decision in retrospect) and he didn't expect that many customer withdrawals to come at once.

Or, maybe he thought he'd be fine if 10-20% of customers withdrew (in a worst case scenario) because he could sell the FTT "collateral".

But, the price of FTT also collapsed simultaneously and that caused the ponzi to fall apart.

Edit:

Or sorry, do you mean he should've cashed out and disappeared last month (after it was revealed that FTX lost all the customer deposits)?

Yeah, I don't think that's possible.

He would've been on the FBI most-wanted list and multiple intelligence agencies would be looking for him.

Having a billion dollars is pretty pointless if you're a top 10 most wanted criminal. Unless you have a country that's explicitly willing to shelter you, then you can't really spend the money otherwise you'll give yourself away.

Also, I don't think he's a complete psychopath. Him just disappearing would force his parents/siblings to also have to become fugitives and I don't think he wanted that. (if he disappeared, he would not be able to talk to his family again as aiding a fugitive from justice is illegal. Also, it would be completely impossible for his parents to live normal-ish lives if their son was on the FBI top 10 most wanted list. It's slightly more possible if their son is in prison.)

> Him just disappearing would force his parents/siblings to also have to become fugitives

How is that? Are they involved somehow? I’ve been following this somewhat closely and the only time I’ve seen his family mentioned is that he should have known better given his parents’ expertise, but that doesn’t imply they were involved.

Not sure why they would become fugitives or what exactly parent is referring to, but FYI: FTX bought a $16 million house in the Bahamas and put it in SBF's parent's names https://www.businessinsider.com/sam-bankman-fried-ftx-bahama...

No, I'm saying if he took the route of cashing out and going into hiding. He would never talk to his parents/siblings again. Or, they will be in serious legal trouble if he does.

Helping a fugitive evade governments is illegal everywhere.

And even if he goes with the "never talk to his parents/siblings again" route.

It's basically impossible for you to show your face in public anywhere if your son is on the FBI top 10 most wanted list.

It's slightly more palatable if your son is in prison lol.

The counterpoint is people have disappeared and not been caught yet who ran smaller crypto exchanges:

- Ruja Ignatova - disappeared in 2017, $3-4 billion missing - https://en.wikipedia.org/wiki/Ruja_Ignatova

- Gerald Cotten - declared dead in India under mysterious circumstances in 2018, $850 million missing - https://en.wikipedia.org/wiki/Quadriga_Fintech_Solutions

- Paul Vernon - disappeared in 2016, rumored to be hiding in China, ~$8 million missing - https://news.bitcoin.com/vanished-cryptsy-ceo-big-vern-order...

Interesting. Yeah idk maybe it is more possible than I thought then.

Maybe I'll try and hop on the next Twitter spaces Sam does and ask him why he decided not to go the international fugitive route.

Or yeah idk. I guess he has strong belief that he can spin the story into an "accident" and get away with 5-10 years of jailtime? That's probably better than spending the rest of your life in hiding.

This is exactly it. He thinks he's the smartest, most persuasive guy in the room. And, given that he was able to raise $420 million while pocketing $300 million in the last funding round, he's probably right. But I doubt even he can talk his way out of this one. I hope not.

Past donations only give you influence when they serve as evidence you will make future donations. SBF won't be making any big donations anytime soon so they will buy him absolutely nothing now.

"Everything Sam Bankman-Fried is doing is in singular pursuit of not going to jail" -- https://newsletter.mollywhite.net/p/everything-sam-bankman-f...

But the media has been surprisingly lenient so far.

<< He's just a pathological liar and he's currently on an interview spree where he's lying out of his mouth to try and avoid jail time.

That is likely true, but it does not disprove parent's point of:

<< he seems to—at least on some level—legitimately believe that all of this is extremely complicated and impossible to understand

Interview with various fraudsters over the years seem to suggest it is not that uncommon for the individual to create a story around the event that got them in hot water and it is also not uncommon to have them repeat it ( and seemingly even believe it ). It is a basic psychological defense. And, as a bonus, unless the individual is an actual psychopath, in which case it likely does not matter, you get to sell your story without seeming like you are lying ( and most people suck at lying, while they know they are lying ).

Still, it is just an opinion and it is not mutually exclusive with what you wrote.

>"I'll add my own opinion which is that he seems to—at least on some level—legitimately believe that all of this is extremely complicated and impossible to understand unless you're someone of his intellectual caliber."

Yes and I think that was an image he actively sought to cultivate. This is the whole "cult of the genius" trope that the VC's want us to believe in. This is where you hear people regurgitating things like "he's playing 3D chess", whatever that is means.

Perhaps a telling bit of this chicanery is this incident:

>"In this context, the most telling detail in the FTX saga doesn’t have to do with dubious tokens or suspicious accounting. Rather, it involves League of Legends, the massive multiplayer online game that is a favorite of FTX founder Sam Bankman-Fried. In September, the tech venture-capital firm Sequoia Capital published a profile of “SBF” on its website, explaining how the crypto prodigy convinced the firm to invest some $200 million during a Zoom meeting—while playing League of Legends the whole time."[1]

Further from this same source:

>"What’s significant isn’t just that the now 30-year-old entrepreneur didn’t think it necessary to give the deal his full attention. It’s that Sequoia published this detail in an article meant to advertise its FTX investment. (The article was taken down after the firm began to collapse in early November.) Far from seeing Mr. Bankman-Fried’s gaming as a worrisome example of distraction and disrespect, Sequoia was impressed by it and expected readers to have the same reaction."[1]

[1] https://archive.vn/AiEEO#selection-243.48-247.34

> the crypto prodigy convinced the firm to invest some $200 million during a Zoom meeting—while playing League of Legends the whole time

VC's deserve to be crushed for acts such as this. imagine giving $200 million to a 30 yr old who is playing games on critical investment calls!!!

inconceivable -- from all angles.

> This is all actually just really complex and I don't remember all of it.

Saving that one for future use.

It'll be interesting to see if anything blows back on binance here. If politicians see CZ as having blown up the business of one of their big donors, they may be unhappy enough to do something really dumb.

Yea, like destroying 100s of thousands of small account owners on Binance. Because the guy looks “Chinese” (but he multiple times publicly stated he is not Chinese).

To be fair, CZ was born in China and may have some ties to the Chinese government. He really is Canadian, though.

He wasn’t raised in China nor does he currently live there, but he was literally born in China and is ethnically Chinese. He doesn’t “look” Chinese, he “is” Chinese.

I could see this maybe happening if SBF hadn't already done a media circuit where it was painfully clear he didn't know what he was doing. It would be hard to pin significant blame on Binance at this point. Whatever CZ did or didn't do the perception is that FTX was already doomed.

On #4, Coffeezilla got past the smokescreen and got SBF to admit there was "fungibility created during those withdrawals between assets" and that it had always operated this way.

[1] https://www.youtube.com/watch?v=4o_jPzBZSIo (~15:30 in)

> Having followed a lot of the SBF discussion since he keeps giving interviews,

The better question is, why is anyone still interviewing him? You're far better off interviewing a terrorist than a conman - as dangerous as the former may be, they aren't going to talk you to death... Whereas the raison d'etre for a confidence man talking to you is so he can sell you a self-serving line of bullshit.

There's literally nothing that SBF says that isn't aimed at the singular purpose of keeping him out of prison. Until he's testifying under oath in a court of law, there's nothing he could say that's worth listening to.

We are generally smart enough to not hand a killer a loaded gun, but can't seem to resist handing a fraud and liar a loudspeaker.

A key thing seems to be that Alameda couldn't have been a totally independent hedge fund because my understanding is that SBF owned 90% of Alameda.

> - There was a bug in the dashboard. I made a boneheaded mistake. Oopsies.

Will this hold up in court? Can you go to jail for bugs in dashboards?

The difference is negligence and intentional fraud. SBF is obviously arguing for the former. The law is more lenient to oopsies than Enron.

I don't really know if there's precedence here.

Normally, to burn billions of dollars, you need to be an executive in a big, established corporation that has controls in place to avoid that sort of thing from happening. It's much harder to claim negligence if you conveniently found a way to sidestep all of that in some sophisticated manner.

FTX is kinda different. With crypto in general, you have relatively new, private companies operating in a space with almost no regulation, getting millions/billions of dollars thrown at them by VCs and customers in a short period of time. It would be possible for a software bug to burn money at an unprecedented rate in a crypto company when compared to a big established bank or something.

Even though that is possible, I can't imagine that argument holding up for SBF. I think it'll be tough to buy SBF claim he's a simple startup founder who got in over his head when lawyers present stuff like FTX's corporate structure. But IANAL and all that, so it'll be interesting to see how this plays out.

In a nutshell, he ran FTX like Mt. Gox. He did't know what he was doing but just on a bigger scale than ever.

If you truly believe that he didn’t know what he was doing then he managed to successfully paint the narrative of a naive young entrepreneur. He knew what he was doing.

Mark Karpeles got in over his head, criminally. He lied some, he defrauded some, but most of it seemed to be to try to cover up for previous mistakes, and I think he legitimately just had some bad things happen to him, got in over his head, and made a bunch of mistakes in an early time for Bitcoin. He deserved prison time, and he's paid his debt to society.

That's not what SBF did, not even close. All of the FTX executives are from top schools and have top credentials. They knew exactly what they were doing was fraudulent. They just thought they could get away with it.

Reply on news.ycombinator.com