Michael Lewis Definitely Does Not Understand How to Play the Probabilities—or Even Read the Evidence
Stockholm Syndrome for SBF to the max!
From:
The $8 billion that Alameda borrowed from FTX without providing any real collateral is gone. Alameda traded that many real dollars away to other people in return for FTT and other SBF crypto tokens that had value only as long as people believed in SBF. And nobody does—except for Michael Lewis, who thinks that lending all your money to someone who then uses it to buy s***coins is a “great real business”:
Michael Lewis: ‘[Sam Bankman-Fried and FTX] isn’t a Ponzi scheme: ‘Like, when you think of a Ponzi scheme, I don’t know, Bernie Madoff, the problem is—there’s no real business there. The dollar coming in is being used to pay the dollar going out. And in this case, they actually had—a great real business. If no one had ever cast aspersions on the business, if there hadn't been a run on customer deposits, they'd still be sitting there making tons of money…
And yet people are still tiptoeing around ML’s Stockholm Syndrome here:
Gideon Lewis-Kraus: Michael Lewis’s Big Contrarian Bet: ‘Almost everyone in the world believes that Sam Bankman-Fried is guilty. In “Going Infinite,” the writer takes the kind of risk that his characters often do, and asks us to question that assumption…. Lewis very gently insinuates that Ellison, in over her head, might have made some very bad decisions… reserves an unusual contempt for John Ray… oversee[ing] the bankruptcy, for a variety of purported forensic errors… concludes the book with the suspicion that the mystery of the missing funds might not be a mystery at all—it seems possible, he writes, that the bankruptcy proceedings thus far have in fact accounted for all of it. Bankman-Fried’s insistence that the whole thing was a series of accounting and management errors seems, to most people who have been following this for the last year, ridiculous on its face…. The trial will make him look like a fool or it will make him look like a genius…
Let’s remember what the state of affairs really was: highly illiquid—which a properly run exchange can never be—and presumptively insolvent, unless a miracle were to occur:
Arash Massoudi & al.: Wall Street grabs its popcorn for the FTX trial: ‘Readers may remember that the FT obtained documents FTX sent to investors last year, which revealed that the exchange—remember this isn’t a bank—held just $900mn in easily sellable assets against $9bn of liabilities the day before it collapsed into bankruptcy…. [That] didn’t strike us as a “great” business. It’s also debatable whether SBF’s trading operations were more legitimate than Madoff’s market-making operation, which was large and separate to his infamous Ponzi scheme…
And what the state of affairs really is: SBF engaging in witness tampering:
Molly White: A preview of the Sam Bankman-Fried trial: ‘Caroline Ellison… is likely to be the government’s star witness, as she was Bankman-Fried’s top lieutenant. However, she is also likely to face the fiercest cross-examination over her role in the collapse, and she has already been the target of Bankman-Fried’s attempts to shift blame…. His decision to leak some of her personal diary entries to the New York Times in July was described by Judge Kaplan as an attempt to tamper with a witness (the second such incident), and was what finally landed him back in jail in August….
Blaming his subordinates in the Alameda-FTX polycule:
Molly White: A preview of the Sam Bankman-Fried trial: ‘In a draft of a long Twitter thread that he never ultimately published… he blamed “Alameda’s failure to hedge” on Ellison and described her as unsuited for her role [I39]. He also claimed that their strained personal relationship influenced her actions, in what seems to be an ongoing attempt on his part to portray her as a jilted ex who singlehandedly tanked his empire. The extent to which this strategy has been endorsed by his legal team, versus being a scheme Bankman-Fried came up with on his own, is not quite clear….
With his co-conspirators in the embezzlement scheme having already pled guilty:
Molly White: A preview of the Sam Bankman-Fried trial: ‘Gary Wang… coded the secret “backdoor” that allowed Alameda Research to borrow billions in FTX customer funds. He pleaded guilty to four fraud charges filed in December…. Nishad Singh… falsified records at Bankman-Fried’s instruction to inflate FTX’s supposed revenue, then lied to auditors about it [I21]. He was also a recipient of at least $543 million in “loans” from FTX…. Ryan Salame… served as a straw donor for Bankman-Fried… in charge of funneling FTX money to Republican candidates…
And now the trial begins: From Wired:
Jody Godoy & Luc Cohen: Sam Bankman-Fried's reassurances about FTX were false, ex-lieutenant testifies: ‘Gary Wang… FTX's former chief technology officer… when he told Bankman-Fried that Alameda owed the exchange $8 billion, Bankman-Fried responded with what Wang described as a “neutral” demeanor, “That sounds about right”…. Earlier on Friday, he testified about several changes Bankman-Fried asked him to make to FTX's software code to allow Alameda to withdraw unlimited funds from the exchange. He said no other FTX users had those special privileges, which the exchange did not disclose to its investors or customers…
And more:
Angela Chen: ‘Wang’s testimony made clear that Alameda was treated differently in many ways: other companies with a line of credit couldn’t withdraw off the platform and the credit had to be used for collateral but this was not true for FTX. Over time, the line of credit extended to Alameda grew from $1 million to $1 billion to, finally, $65 billion. Other companies who received a line of credit were allowed amounts in the double-digit millions only…
With bonus recognition as of September 2022 by Gary Wang at least that FTX-Alameda was insolvent, and gambling for resurrection:
Angela Chen: ‘September 2022… had SBF sending him and Singh (but not Ellison) a Google Doc with arguments for shutting down Alameda. Wang claimed he pointed out that Alameda actually could not shut down because there was no way of repaying its debt…
It is not clear to what extent SBF recognized and grasped that the $8 billion was gone.
OK, but this is nothing new for Michael Lewis. Don't get me wrong, he is a brilliant writer and I've enjoyed every one of his books that I have read, even "Trail Fever: Spin Doctors, Rented Strangers, Thumb Wrestlers, Toe Suckers, Grizzly Bears, and Other Creatures on the Road to the White House". He is also a very entertaining speaker, if you get the chance to hear him.
But he writes fiction. It is very very very important to understand this. Consider The Big Short, in which he imagined Michael Burry as a contrarian lone genius, fighting Wall Street madness single-handed against impossible odds. The reality is very different. About 2/3 of the mortgage-backed CDOs contributing to the crisis were synthetic, meaning that the assets they were built on weren't actual mortgages, they were "side bets" as protrayed in the movie version. And what was deeply stupid about the movie version was that Michael Burry was the guy making the side bet! For every dollar of credit risk sold to an investor, there was a dollar of credit insurance purchased by a Michael Burry via CDS. Far from being a lone genius, Burry was a boson, one of a horde of indistinguishable particles of identical characteristics, without whom the crisis would have been impossible. That is to say, Lewis presents the underlying facts of the matter just about completely backwards.
We have recently seen that his good friend Sean Tuohy was maybe not everything that Lewis cracked him up to be, and perhaps that even represented a conflict of interest. I personally think he also got the good guys and bad guys wrong in Flash Boys, but let's not get too deep into the weeds. You get the point. Read Lewis for pleasure, not for information.
I'm 2/3 the way through Lewis's book on SBF and find all the sturm and drang about his approach to the subject laughable. Lewis had unprecedented access to SBF and others working for both Alameda and FTX that nobody else writing on the topic had. Lewis fairly discusses the problematic issues which now are well known. Crypto has always been a fantasy investment where a small number of people make money at the expense of a great many others. Alameda and FTX operated without suitable institutional controls and certainly a lack of accounting. Ultimately the legal system will decide the fate of SBF and there will be other books, podcasts, essays, and a movie or two on the subject (along with a lot of psychological analyses of the leading characters :-) ).
As with Mr. Koop, I've also read all of Lewis's books and enjoyed all of them. Some of them cover matters that I know quite a bit about and I found those well thought out and factual. The bottom line for me is any single book on a topic is insufficient and one needs to read a variety of perspectives.