Daily Bread for 12.26.22: After the Confidence Game Collapses

Good morning.

Monday in Whitewater will be mostly cloudy with a high of 18. Sunrise is 7:24 AM and sunset 4:27 PM for 9h 02m 49s of daytime. The moon is a waxing crescent with 14.4% of its visible disk illuminated.

 On this day in 1944, George S. Patton’s Third Army breaks the encirclement of surrounded U.S. forces at Bastogne, Belgium.

The collapse of FTX (cryptocurrency exchange and crypto hedge fund) is a financial loss for many. (I have no investments in crypto, and so the story is, for me, merely an instructive ethical tale.) No one is writing more usefully about FTX (or other financial topics) than Matt Levine. 

See about FTX: Hey, Whitewater Here’s How to Bringing Order to Chattering Chaos (SBF Missed FTX’s Risks) and Crypto Is about More than Crypto (Crypto Debt Can Be Trouble).

See also about Twitter: Levine About Musk About Twitter (‘Elon Checks His Pockets) and Quite the Mess, Isn’t it? (‘Elon Wants Some Twitter Help). 

Levine writes now about how, since FTX’s collapse, some of CEO Sam Bankman-Fried’s partners in alleged crime have become plea-entering witnesses against him. (For background see from the New York Times Two Executives in Sam Bankman-Fried’s Crypto Empire Plead Guilty to Fraud.) Levine assesses the dynamic between Bankman-Fried and his former colleagues in FTX Friends Flip on SBF

Of course there will be several FTX movies, and maybe the most cinematic scene in the whole story is the meeting that Caroline Ellison, the chief executive officer of Alameda Research, FTX’s affiliated trading firm, held to tell her employees that they’d been stealing FTX customer money. Imagine! Imagine coming into the company all-hands meeting at the lucrative trading firm you work at, in the Bahamas, far away from your friends and family and competitors, in a slightly cult-like environment where your every need is catered to out of the firm’s enormous profits. And then your 28-year-old boss is like “so guys, a little bad news, actually we’re a Ponzi? Sorry if I didn’t mention that earlier.” Everyone quit immediately, but much too late. 


Ellison and Gary Wang, the former chief technology officer of FTX, have agreed to plead guilty to federal fraud charges for their role in the FTX implosion. (The plea agreements say that Ellison and Wang face maximum sentences of 110 and 50 years in prison, respectively, though presumably they will end up with substantial discounts for cooperating.) Last night, Sam Bankman-Fried, the founder of FTX and Alameda, landed in New York to face similar charges. There is something of a prisoner’s-dilemma situation here, in that there was in theory the possibility that everyone at FTX and Alameda could have stuck together and said “what, we never did anything wrong,” and that they might have persuaded a jury of that. The odds were always low, but it is the approach that Bankman-Fried has taken in public interviews.


The question I always have in situations like this is: How did they think this would go? What was the good outcome here? Why do all this? Many financial crimes have essentially the shape of Ponzi schemes, which by their nature snowball: You take some money from new customers to pay fake returns to old customers, which requires you to take even more money from newer customers to keep paying the fake returns, etc., until the hole gets too big and you go to prison. If you start by stealing $1,000, pretty soon you need to steal $10,000, and then $100,000, and then you find yourself running a billion-dollar Ponzi. And there’s rarely a way to come back from that. It is hard to make back a billion dollars at the roulette tables.

You can keep this going for a while, if you are good and lucky; Bernie Madoff ran a huge Ponzi for years. But that doesn’t really help. The longer you run the Ponzi, the deeper the hole gets; being respectable and trusted for decades doesn’t really get you the billions of dollars you need to plug the hole. It is hard to grow your way out of it; growth mostly makes the problem worse.

And that’s it: “the deeper the hole gets.” They should have walked away years ago, after the first day of this confidence game. Levine, by the way, saw this as a confidence game months before FTX collapsed. In a podcast with Bankman-Fried, Levine’s questions to Bankman-Fried made plain that Bankman-Fried’s thinking was like someone running a Ponzi scheme. See Odd Lots Podcast and Sam Bankman-Fried Described Yield Farming and Left Matt Levine Stunned.

But Bankman-Fried, Ellison, and Wang kept going, with hubris that only invited Nemesis.  

They should have done better by others, but then, truthfully, they didn’t see better even of their own limits.

Extreme winter snow storm leaves buildings covered in icicles:

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