I wonder what the world would be like if we assumed best intent and genuinely asked what we could do to prevent things like this in the future. I'm not talking about toxic optimism, but also maybe not using hindsight to call people out. Sure there's an important message here, but is this really about better journalism, or about improving the reputation of the person doing the calling out.
Maybe we'd just provide more space the scammers and charlatans, I don't know. But lots of people messed up in this thing.
No prominent political pundit is going to see one bit of long-term skepticism after the "Red Wave" stuff of the last couple of weeks. They'll just happily keep going on all the news programs to offer their "expert opinion".
This is all we do and it doesn't really seem to be working. I think the more power someone has, and the more divided our society, the more calling them out elevates them (Trump, Musk, etc)
We need to ban offshores and ban any contact with them. Create some legal framework and set defined thresholds of what is offshore and what is not and punish with short prison terms any schemes involving them. Unfortunately all world politicians are beneficiaries of this scam, and so financial crime will continue as before.
Ban shell companies while we're at it. This is not sarcasm or exaggeration. Companies should not be allowed to own majority stakes in other companies or obfuscate their operations under sub-brands of sub-brands.
> Companies should not be allowed to own majority stakes in other companies
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.
By what logic would one need to be a socialist in order to oppose opaque corporate structures that obscure the market and thereby make it harder for consumers to make more informed judgments? Companies don't need to own other companies to make markets work. Is it "socialist" to be pro-transparency?
I could agree with the need for corporate transparency, but the initial proposal seemed excessively strict. Unfortunately, people managed to arrange complicated empires of corporations even back in the days when it took an act of the legislature to create a corporation (and therefore shell companies as we know them were impossible to create)[1].
You'd need to look at libel laws. SBF might not have been a real billionaire but he had access to enough money to sue the average journalist into oblivion (or at least make their life miserable for many years). Second look at how news is funded now it's not being subsidised by ads in the back of a newspaper.
Even if a journalist is too scared to criticize an apparent billionaire, that's no excuse for getting onto that billionaires gravy train and writing articles about how great the billionaire is. If they were too scared to do their job properly, they should at least have kept their mouths shut and said nothing. They didn't have to take the money of the guy they feared, and they didn't have to write nice things about him.
What's he going to do, sue you for libel for saying nothing at all?
Journalists, government officials, enforcement agencies are not separate from society, they are embedded within it.
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.
So the defense is no longer "the journalists were afraid of getting sued" but rather "the journalists like access." Access which affords them money and power.
That is as I already assumed. How is that any different from a bank robber excusing himself by citing the utility of money?
I suspect this has always been the case, but we apparently had enough journalists on various teams that someone would smell a scoop and dive in.
But I think that was mostly just a myth even in the "bad old days" of yellow journalism and newspapers making it big by exposing scandals. Maybe the increase of advertising revenues compared to subscriptions is involved, but deep down people are people and people are manipulatable.
You don't get it. It's not about journalists vs. non-journalists.
It's about skeptics vs. easily indoctrinated.
Thankfully the proportions are about the same, there are about the same quantity of skeptics as well as easily indoctrinated people among every profession. including journalists. Skeptics however are a reationary bunch they show up with some delay compared to those who are easily indoctrinated.
Also skeptics tend to criticize from 30,000ft whereas easily indoctrinated people have a deep need to elevate a guy and blindly follow him. Journalists who are skeptics were criticizing the whole crypto movement, whereas journalists who are easily indoctrinated were busy elevating SBF, CZ, Musk and every other cult figures in the space.
That's the reason why you can't find skeptical articles on FTX and SBF, the skeptics did not write pieces on that, they were writing pieces critical of the whole movement, whereas easily indoctrinated journalists were low-key intersted in the movement but what they really wanted was to blow SBF, Musk and CZ.
If you're a journalist and you're scared of being sued unless you write glowing articles about shady billionaires, then quit your job and find another. Work as a gas station clerk or something. How many gas station clerks get sued by billionaires for the offense of not being a journalist at all?
Not sure why you're being downvoted, I think this is a fair question to ask.
Crypto was founded on the notion that central banks were inherently corrupt and that we needed to establish an alternate financial system free from the power of banks. Well, here we are and look at how it's going. Fraud is everywhere and huge institutions are collapsing. This wasn't supposed to happen, but it does because it turns out that people with incredible amounts of money and power, whether backed by a government or not, are not very good at keeping the system in stasis.
They're both obviously scams intended to make a small group rich at the expense of everyone else and the newspapers would say so, if they weren't on the payroll and getting a cut via advertising, donations and other less visible transfers of cash.
What sort of due diligence would you have liked to see, and what do you expect it would have turned up? It was public that FTX money came from running a crypto exchange, but that FTX's CEO (SBF) secretly diverted customer funds to his hedge fund (Alameda) doesn't seem like something people would have discovered in due diligence. Major investors, with lots of money on the line, also didn't catch this.
this kind of thing is not completely straight forward to catch. if they are able to lie about their liabilities then they can be truthful about their assets and it is difficult to catch the lie about the liabilities. if I'm an external auditor and you tell me you have some assets then that is something I can try to verify myself or ask you for more evidence. if you tell me you only have a liabilities of $X but the value is actually $X+Y then this is much harder to find.
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.
I agree this is tricky, and also that it seems like something auditors should have been able to catch. But "an experienced auditor would have caught this" is very different from "someone receiving funds from a foundation funded by this company should have caught this".
There are two major ways in which you would not identify this flow of money:
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'.
Can you say more about the level of diligence you think journalists should generally be doing when they receive funds from an organization? I think you're proposing a much deeper level than anyone currently does and which would be maybe hundreds of hours of research, but I'm not sure?
Discovering a fraud when most people at the organization don't know about it and the people who do would like to your face is not a light task!
> ? It was public that FTX money came from running a crypto exchange, but that FTX's CEO (SBF) secretly diverted customer funds to his hedge fund (Alameda) doesn't seem like something people would have discovered in due diligence.
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.
> Journalists should have the incentives to expose the scams
I agree. But the incentives are gone. A huge portion of the investigative journalism industry died when hard copy newspapers died. A lot of those journalists now work for private industry doing competitive intelligence. They need to pay their mortgage just like software developers do. Very few people pay for hard core journalism now (ads by their nature mainly pay for clickbait, and even then the 'journalist' sees very little of the income)
> Not sure what you're saying here? The amount of money the FTX Foundation was plausible given FTX's fees and volume.
Only if FTX and its founder found a way to create print money out of the thin air.
> That ignores new investors buying in, who I don't think had those incentives?
New investors are definitely not major investors and even those investors simply want to find an even greater fool.
Two weeks ago I overheard a bartender in a dive bar where beer and a shot goes for $6 telling the regular drunk about all the mad money he is making at FTX. Here's a thing: there's not a single non-scam that would allow a bartender in a dive bar that sells $6 beer and a shot to make gobs of money "investing" or "trading"
> Only if FTX and its founder found a way to create print money out of the thin air.
It looks like FTX volume was something like $7B/day in July [1].
FTX fee structure [2] was complex, but assuming they got at least 0.04% seems reasonable? In which case they were making ~$3M/day ($7B * 0.04%) or ~$1B/year in fees.
Yes, compare the earnings of NASDAQ with the "earnings" of FTX. Google the "founder". Watch the shit he talks about. Ask yourself - if he has that much time to be a clown what are the odds of him actually running a company that is worth that much money without a team?
> compare the earnings of NASDAQ with the "earnings" of FTX
Yes? Everyone knew that volume in crypto was too high and likely irrational. But that wasn't much indication that FTX was behaving fraudulently: they seemed to be just doing the straightforward work of helping match buyers and sellers and taking a cut.
> if he has that much time to be a clown what are the odds of him actually running a company
Lots of CEOs seem to do things like this; again that's not a strong signal. Also doesn't have anything to do with algebra.
> Yes? Everyone knew that volume in crypto was too high and likely irrationa
No, everyone knows that the exchange volume in crypto is high and fraudulent. Irrational behavior is not acknowledging it.
> Lots of CEOs seem to do things like this; again that's not a strong signal. Also doesn't have anything to do with algebra.
They do not. There's 24 hours in a day. Excluding 5 hours the CEO "slept", two hours that CEO spent eating and waking up that leaves 17 hours total. Every single activity one engages in subtracts available time for running the company.
> FTX had several hundred employees
FTX "leadership" lived in a single Penthouse in Bahamas, having sex with each other. Fish rots from the head. In this case anyone who did not want to ignore it saw that the head of the fish was rotten.
I'm saying is calling people out the best way to solve the problem? Maybe Tar and feathering them _Elevates_ them and makes them more powerful or likely to stay in their tracks. Maybe this person is also complicit and just pointing the finger to take the focus off of themselves. Maybe we just keep circling around making the same mistakes because instead of educating eachother we just call each outer out, leading to people taking a side rather than trying to improve. I don't know.
Maybe instead of blaming journalists for not exposing FTC we should wonder why multiple hedge funds invested millions into the venture without seeming to have caught on either.
I think all these failures point to why regulation exists in the traditional financial system. The information imbalance in a free market is sufficiently large that even large actors that "should know better" can be fooled for years.
These failures point to why trustless public ledgers (blockchains) were invented.
Exchanges that run on them (DEXes like Uniswap, Bisq, ShapeShift, etc.) are completely transparent, providing no room for the kind of information asymmetry which is required for frauds like FTX.
The internet and the rise of free, low-quality advertising driven outlets killed most of it by ~2010-2012. My entire family worked in the industry, most of the damage was already done by then. Just look at the number of working journalists over time.
We are just in the aftermath, where only behemoths like NYT or outlets willing to be domesticated by billionaires can survive.
If you want good financial journalism, you need to look at what short sellers are saying. That was how WireCard came to light. That is what did for FTX: Binance found the truth, not the NYT or Twitter.
Sure seems like Coindesk benefited from someone leaking FTX financial information. Probably an insider, could be a whistleblower but more likely a disgruntled employee with an axe to grind given the depravity of the industry.
Yes, huge props to Marc Cohodes: he was totally correct.
But twitter user @Bitfinex'ed (someone who's on a crusade against Tether/Bitfinex since years) described the very scam Alameda and FTX were running before FTX even launched, years ago.
@Bitfinex'ed noticed that SBF had ties with tether from day one. He warned about hundreds of millions of frozen funds (by authorities) on FTX right before FTX raised a billion dollar.
He was warning people not months but years ago.
Anybody who believe this whole Alameda/FTX scam wasn't planned from day one is an useful idiot. The very type of idiot the media is needing right now to sell the "leverage gone wrong for SBF" angle.
There are records of SBF describing the very mechanism he was running with Alameda and FTX before he launched FTX.
The problem with that approach is that short sellers are explicitly trying to manipulate the market because they have a vested interest. It is not uncommon for short sellers to oversell a weakness due to this.
Sorting out the “good” short sellers from the “bad” is a tough job. One that good financial journalists do as a matter of course.
Notice I specifically said “oversell a weakness”. If what a short seller says is true and then they add their analysis, which presents a dire case, that is largely not seen as illegal market manipulation.
Defamation and libel cases against journalists regularly pay out. (They pay out infrequently against public figures, in part because the threshold is higher and in part because journalists are more careful with them.)
Binance saw the real game that SBF was planning: regulatory capture of the crypto exchanges market to get rid of Binance. When evidence impossible to deny came up to light, Binance decided to strike Alameda/FTX to death.
Funnily enough the regulation the ex-CFTC commissioner working for SBF was working on alongside officials may still pass and so Binance may still be totally screwed. But CZ was not going to go down alone and let SBF pull his incredible feat.
CZ wrote stuff like: "Sam isn't a team player", "He's working behind our back to pass legislation that'd prevent us from operate".
In other words: SBF wasn't just a scammer like tether/bitfinex/binance/justin sun etc. SBF was also working, not even in the shadows, to get rid of all of these guys.
I don't think Binance "found" the truth, they heard things and acted on what they heard, but they weren't the ones that did the initial investigation from my understanding
So if I've got this right, these journalists took "charitable grants" of money to toot their horns for the giver, who's ostensibly charitable acts amounted to giving money to journalists to say how charitable they were?
I guess none of them stopped to think "if you guys are so charitable, then why are you giving this money to journalists like me, rather than to charitable causes?"
Sam Bankman-Fried donated money to a wide variety of causes, the vast majority of which weren't journalists. If you want to read more about where he donated, here's the article where the quote comes from: https://www.vox.com/future-perfect/2022/8/8/23150496/effecti...
SBF wasn't just giving money to political candidates and journalists, he was giving it to a wide range of causes. The FTX Foundation was spending a lot of money on global health and welfare, for example: https://ftxfoundation.org/global-health-welfare/
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.
Right, but this was before the fraud was exposed; at the time the recipients had no way of knowing it was fraud. Obviously nobody would accept money from SBF now that the fraud has been exposed.
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.)
Lots of journalists literally think they're a charitable cause. And much of "charity spending" is for puff pieces to increase funding for the charity, after all.
FTX was never doing a ponzi. All the threads are about how everyone was ok with SBF ponzi’ing because the money went to a good cause but that’s just not the case. EA proponents thought SBF was just running a normal exchange, if that was true I don’t see what’s morally wrong with supporting him.
But was that the reason it collapsed? Matt Levine thinks it's something else[1] (tl;dr: bad loans given to alameda research backed by FTT tokens). 8% pretty close to the rates that decentralized lending protocols provided[2]. There might be other issues with the product (eg. inadequate disclosures), but if it does what it's promised (eg. invest your money into decentralized lending protocols and/or yield farming) and the underlying product collapsed that's not really a ponzi any more a ETF composed of junk bonds going under is a ponzi.
Most of the well known historical Ponzis started out as legitimate investment funds. Then the fund manager started commingling funds and taking risks with customer money in an attempt to boost returns. Inevitably, there was a loss, and at that point the Ponzi component (paying existing investors with new investor's funds) got started, with the intent being to only do it until they could catch up on the losses and then return to being legitimate. The "catch up" never happens and eventually all new inflows are going to pay out existing investors. It blows up when outflows exceed inflows. In the case of FTX/Alameda it seems the blowup just happened earlier than usual, before they could reach "Full Ponzi".
[2] is referring to 1inch offering 8.05% APY on the 1inch token _only_, which is easy when only 621m out of 1.5b tokens are circulating (i.e. more 1inch tokens are printed to pay the fake interest).
Using new user deposits to pay off old users is a ponzi.
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
The kind of person that risks billions of depositor funds to get obscenely rich might be the same kind that walks back their pledge to do good after getting obscenely rich.
But no one knew ftx had written the shitty loans until last week. You can speculate that he was risking billions in depositor funds but there wasn’t really any evidence.
I found this exchange between Sam Bankman-Fried and Matt Levine to be pretty revealing:
> SBF: (26:43) And they’re like ‘10X’ that's insane. 1X is the norm.’ And so then, you know, X token price goes way up. And now it's $130 million market cap token because of, you know, the bullishness of people's usage of the box. And now all of a sudden of course, the smart money's like, oh, wow, this thing's now yielding like 60% a year in X tokens. Of course I'll take my 60% yield, right? So they go and pour another $300 million in the box and you get a psych and then it goes to infinity. And then everyone makes money.
> Matt: (27:13) 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.
This is a little weird, but I do feel like I ought to disclose a bias here, which is that I like Sam Bankman-Fried. I have done a few podcast interviews and events with him, and I have always found him likable, smart, thoughtful, well-intentioned and candid. That is not in any sense investing advice or whatever; it’s just how I feel. I am rooting for this all to work out for him and FTX.
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.
If you split your business into two (or more) parts, segregating legal activities into one entity and illegal stuff into a different entity, that doesn't make strictly the legal company good, or not a scam. FTX+Alameda is a Ponzi and always has been, and the mechanism why they failed (printing clown bucks, then selling them to hype the price, then print more and more) is exactly a Ponzi.
IMHO, the moral failing is simply being too credulous of SBF's claims and not digging deeper. A lot of the stuff getting posted in the aftermath was content already available before FTX collapsed. In particular, the conversation with Matt Levine where SBF basically describes a Ponzi scheme comes to mind.
Ponzi has a very technical meaning and people instead use it to mean "Every Scam" and it gives an effective defense for scammers.
Many scams end up operating as a Ponzi scheme in their final days as it keeps them afloat a bit longer, but the actual scammy loss is often not a Ponzi.
Maybe we'd just provide more space the scammers and charlatans, I don't know. But lots of people messed up in this thing.