Are we allowed to talk about Bitcoin?

CNBC carried it. It was after the bell, and it was kind of stunning.

He didn't do himself any favors, basically he was saying he didn't mean to commit fraud; he was playing it as him having just been an idiot who mismanaged everything, while illegal stuff happened, but he had no idea it was happening. Andrew Ross Sorkin could have done a little better pushing him, but it wasn't total fluff.

My impressions:

He talked around most things related to the comingling of funds, compliance, his relationship with Alameda, etc. like he had no memory of such and such. ... but then he suddenly had total recall of things where he wanted to state unequivocally that Sorkin was wrong. I'm not a lawyer, but in the process I heard multiple things that sounded like incriminating statements and a number of contradictions. I can see several things from that interview being played in front of a jury and it ain't going to help him.

Several things got laughs from the audience, including this: Ross Sorkin: "What are your lawyers telling you right now? Are they suggesting this is a good idea for you to be speaking?" SBF: "No. They are very much not."

Ross Sorkin, to his face, "It sounds like a bunch of kids on adderall having a sleepover party."

My impression is that he is so used to being able to bullshit people and steamroll his way through life on the basis of being a genius, that he thinks he can talk his way out of the mess he is in, and that everyone is still going to remain stupid. There are so many people out money, though, that every detail of the truth is going to come out.

I don't think he set out to defraud people. I think he's really just a kid, one who thought he is way smarter than he is and that he had reinvented the wheel, and who didn't take leverage seriously because of his lack of experience. I also think he played very fast and very loose with other people's money and how the terms he had offered said he was going to steward it. As a bubble blew and he was getting fabulously wealthy, he got drunk on it and thought it was easy, and that led to leveraged bets that were downright insane, on something that was intrinsically worthless. He had no understanding about what would happen if (really when) that leverage unwound -- a run on the bank -- and how undercapitalized he was. Then, as is often the case, when it did happen. ... he and the people around him failed the true test of character in a situation like that and reached into a cookie jar that was supposed to be off limits in order to try to "fix" it, and caused massive losses for others.

Both of his parents are law professors at Stanford. They may be implicated as well when a criminal probe concludes, at the least, it sounds like he bought a very expensive vacation home for them in the Bahamas using company funds. But they should have kidnapped him and kept him from doing that interview.

 

I didn't see it, but just found the one clip. ... similar to when Andrew Ross Sorkin asked it, but Stephanopolous actually did a good job. It's the video at the top of this page.

FTX crypto collapse: Ex-CEO Sam Bankman-Fried denies 'improper use' of customer funds

On the one hand, I am sitting here thinking he should keep his mouth shut. On the other hand, I don't think that him being silent is going to change the fact that 1) he got in over his head, and 2) he reached into customer funds thinking he would just "borrow" a little and fix things. That is going to come out whether he talks or not.

 

BTW, I am trying to be understanding about why and how I think it happened. But at the end of the day, his company stole tens of billions of dollars of people's money, and the reason he did it doesn't mitigate the fact that he did do it. I'm sure he didn't intend to defraud or steal from people, he thought he would just "borrow" the money with the intention of suring up the mess Alameda had made, and thought he would return the money later and nobody would be any the wiser.

It doesn't matter. This isn't high school, where you get detention and everyone moves on with their lives.

 

The thing is, there is something like $10 billion that is missing that was just stolen. It's not that anyone invested in snake oil. He just stole their funds -- took money that was supposed to be segregated and left ready for redemption at any time, and "lent" it to another entity that he controlled, which had been making insane leveraged bets that blew up.

It had nothing to do with what those customers were doing with the money on his exchange. The majority of them might have been chasing cyrpto bubbles. But that isn't why their money is gone. He just flat out stole their money. If you funded an account at Charles Schwab or Fidelity and found out that they did that, would you say anything about snake oil, or would you say that you were a victim of a thief?

 

So segregated accounts are legally mandated if you are a regulated derivatives broker, for example if your clients are trading futures or commodities.

The rub of this is that in his interview yesterday, he may have been trying to lay the groundwork for a claim that while he made a "mistake," a crypto exchange was not subject to that regulation -- something he was lobbying Congress to keep in place.

Where he is screwed, though, is that his own customer agreements stated that none of the assets in customer accounts are “the property of, or shall or may be loaned to, FTX Trading,” and that the platform “does not represent or treat Digital Assets in User’s Accounts as belonging to FTX Trading.”

Just as a commodity broker would have to warrant that with or without CFTC regulation to get anyone to trust them with their money.

It's a minor distinction, but when they get him, it's likely not to be on securities law, it is going to be a garden-variety fraud. They'd actually like to make it a regulatory issue, though, not a simple fraud / theft, because they want to establish regulation of cryptocurrency brokers. It wouldn't have made any difference in this case.

 

Not really a ponzi scheme. They weren't taking money from new investors, a la Bernie Madoff, to pay old investors when they tried to redeem.

Unfortunately, people are going to take home the wrong things from this. Those digital tokens were perfectly legal, and the market caps of them were very real -- the prices of them got bid up to insane places. People were voluntarily paying more than $75 for an FTT token relatively recently. Nobody had a gun to anyone's head and nobody had been lied to about what the token was.

You saw it on here during the pandemic, when people were weighing in about their doge coin (which is still at an insane market cap even with how much it has deflated) buying and selling. It's no different. Nobody who buys these things is being duped or defrauded. They are willingly and voluntarily speculating on something.

The thing to take home from this is that we are in a monetary-induced megabubble that has created speculative manias all around us, and which blew up asset values (many of things that should be worthless) to insane valuations.

Interests rates = the price of money. As a matter of policy, the world decided to destroy the debt markets that calibrate that cost of money (and self regulate our behavior). ... in order to misprice that cost and make money artificially cheap for a very long time (in order to live a fantasy). That cheap money got valued for what it really was. ... and this is a small example of what it does (there is WAY more to come in the form of bad debt that permeates way more things than most people still realize).

In the case of FTT, it was a digital token, just like doge coin, that FTX issued itself. The speculative mania sent the value of FTT to a silly place, and the company used their holdings of it (they controlled most of it) to create a shit-ton of leverage, borrowing against it (which is only possible in debt markets in which price discovery has been destroyed -- we are reaping what we sowed).

It was going swimmingly well. ... until the inflation genie spread beyond asset price inflation to prices of a lot of other things climbing in the face of how much they blew up the money supply. And when the price of food and rent goes up the way it has, they had to take their foot off the scales of finance a little and at least make a show of not suppressing interest rates the way they had been for so long. That started to pop the bubble. ... and what you saw with FTX (and their token FTT) was an inevitability that was just a matter of when (as are a lot of things that are going to have to come back down to earth, or go bust in many cases, if they lose control or voluntarily stop manipulating interest rates and let an actual free market price the cost of money).

When things started to go bad in November, FTX essentially had a run on the bank (as FTT started to lose its value), and all of the leverage they had that was being collateralized by the FTT tokens started to unwind. They then went out in a panic and tried to find new financing. ... and the story you linked to was saying that potential sources of that financing weren't buying how they were still trying to value their FTT tokens. FTX was being absurd at that point, but something like that doesn't have a very liquid market for it, so you can't mark it to market easily the way you can a share of Apple stock. You can claim it is worth whatever you want. The question is, will anyone pay you that much for it?