“1) What”

- Sam Bankman-Fried

“There’s still a Sam Bankman-Fried shaped hole in the world that now needs filling.”

Michael Lewis, mega financial author, said that in his 60 Minutes appearance.

Lots of people aren’t happy with Lewis’ stance on crypto’s least-favorite Wunderschatten in his new book, Going Infinite, wherein he basically gushes:

While many suspect SBF of criminal behavior, no one can deny his eccentric and distinctive nature. It’s all just so unique!

And fair enough. It’s a helluva story. And Lewis was given dream-job access.

“FTX, nevermind Sam,” he said, “was the best collection of characters I’ve seen in a financial operation since Salomon Brothers.” 

For the record, contrary to popular thought…

I don’t think Lewis has been a staunch defender of SBF.

BUT

I noticed he is beginning to backpedal a little.

Perhaps it’s true he didn’t really understand what FTX was up to. Especially when he said (with his actual mouth) on 60 Minutes:

 “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.”

(Just like Madoff, it’s a great gig if you don’t get caught!) 

Now that the FTX case is fully underway, we’re gaining all kinds of insights into Lewis’ ‘zany cast of quirky characters.’

Very little of it, as expected, is flattering.

But what else do you suspect from rats on a sinking life raft?

Here’s what we know so far.

FTX 101

Sam Bankman-Fried and Gary Wang own both Alameda and FTX.

Alameda traded, and FTX was their exchange platform. Moreover, Alameda conducted its trades on FTX.

Things went sour in 2019, when Wang gave a special permission to Alameda's FTX accounts -- a fancy function called “allow negative”.

This allowed Alameda to withdraw more money than was in their balance.

Sam justified this move by saying they could just use FTX’s earnings to cover any excess withdrawals.

And yet, things didn’t go as planned.

As Alameda continued to withdraw to cover losses, they quickly exhausted FTX's revenue.

To temporarily solve this, Sam decided to count the value of the FTT token (a cryptocurrency he created) as part of FTX's revenue.

Despite this addition, Alameda kept drawing more, eventually forced to tap into customer deposits.

Gary provided Alameda a credit line of a staggering $65 billion, a huge sum compared to standard market practices.

They used $8 billion of it.

After some market downturns, with LUNA crashing and other financial mishaps, the total available funds in FTX decreased.

When FTX's financial details became public and other investors began to withdraw, it sparked a mass panic.

FTX couldn't meet all the withdrawal demands.

FTX was cremated on the spot.

SBF tweeted “1) What”

That’s it in a nutshell.

The #1 Lesson

We’ll get into the juicy details -- and surprising revelations -- emerging from the case tomorrow.

(Hint: Everything is beginning to revolve around CEO of Alameda Research, Caroline Ellison. And she’s out for blood.)

We’ll also go into WHY I don’t think FTX will crash the crypto markets. (Again.)

Lastly…

Many mainstream pundits wish to frame the FTX trial as “crypto is on trial.” 

FTX was not “crypto.”

FTX was everything wrong with the current banking system -- on methamphetamines.

(Literally and figuratively.)

Don’t worry.

I’m not going to turn this into a rant against fractional reserve banking. 

My philosophy is simple.

In the spirit of Hayek…

Give the people the freedom to choose.

Instead, regulators not only shoot down viable alternatives that would reduce risks to the system…

They also refuse to allow easy access to full-reserve banks.

(If “too-safe” banks threaten the entire system, it might be a problem of the system, not the too-safe bank.)

In short…

FTX is an argument for transparency, decentralization, and self-custody… not against it.

More tomorrow.