Note: I tried writing this as one piece and it just didn’t work, because of the need to establish background information and set the tone for the type of ‘stuff’ that FTX was into. Part two will further explore Sam Bankman-Fried and FTX’s activities during covid.
I’ve been reading a lot about the FTX saga, and most places around the internet characterize it as a “crypto story”. And while that’s true in a general sense, FTX is only a crypto story in the way that “The Wolf of Wall Street” was about finance or “The Smartest Guys in the Room” was about running an electric company — these backdrops just set up the details of that particular fraud.
I know we’ve got a lot of Gen-Xers around, so I’m going to attempt to explain the FTX scam using a highlight of our youth:
Take yourself back to peak time of shopping malls in America. Stores are packed, the food court is jammed, and the live music downstairs is clearly a hit. As a mall owner (congrats!), you’re pulling in a cool $1 million a month in fees. Life is good - but you decide it could be better.
Creating Something out of Nothing
After twirling your villain mustache and polishing your monocle, you decide to establish “Mall Bucks”, which you sell to mallgoers for $1 and are treated exactly as dollars inside your mall with one exception — stores paying ‘mall fees’ get a 2% reduction in said fees. These stores can even trade their “Mall Bucks” (MB) at the end of each day for cash if desired.
Now you let the incentives take over.
Very quickly, the stores realize all their fees should be paid in MB and encourage customers to use them. (Even back then, rent was thousands of dollars a month!) Since they don’t know how many MB they’ll get each month, they’ll likely hold some amount back to cover times when ‘normal’ purchases dominate and they can’t cover their bills with newly received MB. Customers will also hold onto some portion of their MB between purchases. (How many half-spent gift cards do you have in your wallet RIGHT NOW?)
This means that at any given moment, the system has some amount of ‘unredeemed’ MB floating around, paid for with ACTUAL dollars that are sitting in your bank account (earning interest, of course).
At this point, things are still under control. You have the assets to meet your obligations, and you’re earning ‘free’ interest while you do it. This is where you should stop.
But after a while of stable MB usage, you realize that nobody’s checking to see if the money ‘backing’ the MBs is actually there. As long as you cover the occasional MB to dollar conversion, the system holds. At this point, there’s two major ways the plan can go sideways:
Inflation of the MB supply without dollar backing. Since nobody knows how many MBs are ‘supposed’ to be in the supply, they won’t know you’re creating more MBs than you have dollars.
Stealing the original money but leaving MB in place.
(Spoiler alert, it looks like FTX did both)
So maybe you zap up some MB to go on a little mall shopping spree, or ‘misappropriate’ some cash that is supposed to be backing MB in first place. What’s the worst that could happen?
Uh oh — Nordstrom is leaving the mall and wants to convert its [arbitrarily large amount of] MBs to cash! You can’t just go get that from the bank anymore (either because you spent the real cash or inflated MBs to the point you couldn’t back them right away). So you stall the company a few days trying to scrounge up the cash to cover the deal — which by itself sets off alarm bells, because you normally respond to Nordstrom immediately (typically wearing kneepads).
Soon there are whispers between the retailers that Nordstrom is having trouble getting cash for its MB. Some retailers decide THEY want to cash in THEIR MB as well, leading to even more funding problems, leading to more stalling, leading to further loss of confidence, leading to more retailers (or even customers at this point) trying to redeem their MB — exacerbating the cycle and eventually exposing the fraud.
………………………..it’s time to head for the Bahamas.
This is basically how it went down. Instead of Mall Bucks, FTX created “FTT” tokens that were used to pay fees on the exchange (giving them some ‘actual’ value). Then, once that value was established, Sam Bankman-Fried used those tokens (and customer deposits) to buy actual things. Whispers of insolvency turned into shouts of INSOLVENCY! — and the death spiral was a certainty.
This type of ‘exit scam’ is possible anywhere that there’s a large pool of money lying about — no matter if that money is supposed to be earmarked for investment accounts, poker bankrolls, political donations, or cryptocurrencies.
……..It’s Who You Know
So how did Sam Bankman-Fried, who seems to always looks like “The Drunk Frat Guy” from ‘80s movies (with scenes at the mall!) get so many people to put their hard-earned money into his run-like-toddlers company?
The answer (as usual) is a blend of cronyism, credentialism, connections, and regulatory capture. The credentialism Sam Bankman-Fried was born into; he comes from a very……….privileged family. His parents are both professors at Stanford, and both his brother and his mother are especially well-connected in the Democratic party — which was one of the prime beneficiaries of Sam Bankman-Fried’s fraudulent ‘generosity.’
That kind of ‘generosity’ earns a level of access that in turn provides a company a level of legitimacy — for example, Obama’s CFTC Commissioner Jill Sommers sits on the FTX Board — as well as access to ‘friendly regulators’.
And when that ‘generosity’ is aimed at media — what do you know? — they fill the air with glowing stories about how Sam Bankman-Fried is changing the world. (Even now, their reporting on the FTX scandal is shockingly tepid.)
Shovel ‘generosity’ to MLB, and umpires will wear an FTX patch on their uniforms. Throw a little ‘generosity’ at the Miami Heat and the team will sell naming rights to the stadium!
To use our mall owner analogy: Sam Bankman-Fried used his ill-gotten gains to buy off the mayor and the owner of the town newspaper. So it was really no surprise that when he declared he was only interested in earning money so he could spend it altruistically (and coincidentally on every progressive pet project possible) and threw some ‘generosity’ at progressive causes and candidates, the captured media and regulators didn’t ask too many questions about the hows or whys — they simply declared “SBF” to be one of the “good billionaires”. (A group that until recently included Elon Musk)
And it was further not a shock that when the opportunity for funneling money back to Democrats via ‘aid’ to Ukraine, the by-then fusion of the Democratic Machine and FTX (if the swamp had a form!) jumped at the chance. To help the Ukrainians, of course.
But as always seems to be the case, the ‘altruists’ always seem to manage to do pretty well for themselves — and their families. Sam Bankman-Fried’s mother, Barbara Fried, founded and chaired Mind the Gap — an organization that directs millions of dollars in political funding into Democratic pockets. (That’s also technically her house above!) This gave her power over politicians that you can only buy (or withhold).
And while Sam Bankman-Fried’s brother Gabe was also involved in Mind the Gap, his more important role was as executive director of Guarding Against Pandemics — the major focus of the second half of this article. Hopefully in the first half, the links between Democrats and progressive causes and FTX have been adequately established, and we understand the ‘swampiness’ of the entities we’re dealing with as we move into part two. A teaser before we drop the curtain on part one:
Reminder that Sam Harris was so smitten with the Billionaire Effective Altruist Sam Bankman-Freid that he featured the wunderkind on his podcast less than a year ago. This happened shortly after Harris mindfully and publicly betrayed his friend Bret Weinstein because Bret expressed reservations about the Covid-19 origin narrative, the safety and efficacy of new unproven immunotherapy, and government mandates.
https://www.samharris.org/podcasts/making-sense-episodes/271-earning-to-give
To my ear effective altruism sounds like plain old utilitarianism. Coincidently Bret Weinstein has noted the EA movement is a bit of a con whereby any wrong action can be justified by expanding the temporal framing for judging the effect of such action.
Ugh, throwing money around to curry favor with people in power is not altruism. I wish they would stop repeating the canard that funneling money to democrats is altruistic. It buys into their bogus self-conception of being heroes fighting an existential battle against evil and saving the world for democracy. How self-absorbed and deluded can they be?