Yahoo Finance 'A much riskier approach': What concerns about SBF and FTX looked like a year ago
This is a story about a story.
A story about Sam Bankman-Fried, yes him, the now disgraced, former billionaire, founder, and CEO of crypto trading platform FTX which has just flamed out in spectacular fashion and filed for bankruptcy.
You’ve probably read about Bankman-Fried — known as SBF by the cryptoscenti — and his implosion, the details of which are still unfolding. SBF hasn’t been shy about talking up his endeavors and/or giving his take, now one part apology, ten parts blame. And yet until he went splat, few called into question his business model or delved much into his background.
One notable exception was a piece published by Yahoo Finance last August written by then-contributor Roger Parloff, well before the crash and burn. In fact, difficult as this may be to believe, Bankman-Fried was then still an obscure enough figure that I remember being skeptical about Roger spending so much time writing about him.
In the piece, Roger raised multiple red flags and also made a number of points about SBF that, in retrospect, look prescient, ironic and, well, even creepy.
There’s a lot here, with the story drawing “chiefly on interviews with eight people, including more than five hours of conversations with four who know him extremely well, plus more than four-and-a-half hours of Zoom interviews with Bankman-Fried himself.”
I want to focus on two threads in the story: the danger signs that Parloff saw and Bankman-Fried’s origin story.
'A much riskier approach'
First, Roger noted that the whole notion of FTX being an overseas entity which allowed for more leveraged and esoteric crypto trading, but not for U.S. customers, was fraught.
Parloff described this as much more lucrative but also “a much riskier approach”: “There’s just inherent risk associated with this business model,” says Lee Reiners, the executive director of the Duke University School of Law’s Global Financial Markets Center. “Major, major regulatory risk,” he continues.
“There have been a few like FTX over the years,” says one player in the U.S. crypto community who is bullish on bitcoin, yet takes a dim view of the offshore exchanges. “U.S. regulators caught up with every one of them,” says this person, who requested anonymity. “FTX is relatively new, and the wheels of justice grind slowly.”
Parloff also pointed out that the relationship between Alameda Research, the now bankrupt trading company which SBF co-founded, and FTX was problematic.
Parloff wrote that early on, “Alameda played a crucial role at FTX. It was the main ‘liquidity provider,’ accounting for ‘half the volume on the exchange,’ Bankman-Fried acknowledges,” which he acknowledged was “not a healthy long-term setup.” SBF insisted that this was no longer a problem as of last summer.
But Parloff pressed Bankman-Fried on another point: “If Alameda is based in Berkeley, how could it be dealing with FTX? I thought FTX didn’t accept trades from U.S. customers.”
Parloff highlighted SBF’s long, contorted, and unsatisfactory response to this question.
Parloff continues: The other obvious followup question about the Alameda’s relationship with FTX relates to potential conflicts of interest. Theoretically, such a close connection between a trading firm and an exchange—albeit a very transparent one in this case—could create opportunities for abuses, like front-running.
“I have a hard time believing the S.E.C. or C.F.T.C. would permit that sort of [relationship between a trading firm and an exchange],” says Reiners, “and to my knowledge it’s not happening” on any U.S. exchange now.”
In fact, a Wall Street Journal story from Monday indicates that Alameda was front-running FTX listings. And then of course the even bigger issue: that Alameda and FTX were too closely intertwine.
FTX reportedly lent $10 billion to Alameda, which is what in part contributed to the firms’ implosion writ large. What Bankman-Fried was doing, Parloff concluded, “is dicey.”
Parloff didn’t presage that FTX would blow up, but he did predict that it would run afoul of regulators, which is of a piece really. As in, the regulators are going to get you, unless you hit the wall first.
A self-described Benthamite
Now to SBF’s backstory. Parloff notes that Bankman-Fried came from a deeply intellectual background, specifically “a family of ‘take-no-prisoners utilitarians.’” (We’ll get back to that in a second.)
Sam Bankman-Fried was born March 6, 1992, on the Stanford University campus. Both his parents were—and are—law professors there. Barbara Fried writes about the intersection of law, economics, and philosophy, while Joseph Bankman mainly teaches tax policy.
[A family friend] “describes Barbara Fried as a “consequentialist.” That’s an “umbrella” term, [the friend explains], for a set of philosophies of which “utilitarianism is one specific instantiation.”
“The ethical goal of utilitarians,” [Barbara Fried] explains in a followup email, “is to maximize the total well-being of the world’s people (and for some, animals as well). . . . That goal leads utilitarians to focus their efforts on helping people in the direst straits . . . and on policy interventions that will lower the risk of existential threats to present and future generations.”
Parloff also describes SBF as an “autodidact moral philosopher—a self-described “Benthamite,” “effective altruist,” and vegan—who is, nevertheless, devoting his career to a sector that many associate with crime, ransomware, and environmental irresponsibility.”
A few points here about utilitarianism, effective altruism, and the aforementioned Jeremy Bentham and what it means in the context of the FTX scandal.
Simply put, this all has to do with believing one should focus on doing the greatest good for the greatest number of human beings on the planet. The father of this school of thought being Bentham, a British philosopher who lived in the late 18th and early 19th century.
About effective altruism and SBF, Parloff writes: In his sophomore year [as an undergraduate at MIT], Bankman-Fried became exposed online to “effective altruism,” which he regards as a turning point in his life….“EAs,” as effective altruists call each other, use empirical analysis to determine which charities are most efficient in terms of alleviating suffering in the world, and then try to advance those causes through either direct action or donation.
After working at Jane Street, a Wall Street hedge fund after college, SBF took a position as director of development at the Center for Effective Altruism in Berkeley,” [in 2017.]
SBF went on at great length to maintain that effective altruism, et al. informed his thinking. That his money-making was a way of accumulating wealth so he could be massively philanthropic.
There are some problems with mixing this line of philosophy and commerce. First, it might engender an ends-justifies-the-means playbook, which SBF addresses in his shocking interview with Vox this week. Second, it might all be bunk, or have become bunk, and was merely a sales pitch for someone who wanted to get rich and needed to motivate employees to help him do so.
And third, this intellectual hot-house stuff looks like it was perverted into ugly forms.
Exhibit A is the apparent thinking of Caroline Ellison, CEO of Alameda, who was also Bankman-Fried’s former girlfriend as well as another child of ivory tower academics. Her father is Glenn Ellison, Professor of Economics and Department Head, and her mother is Sara Fisher Ellison an economics professor, both at MIT—cozily Bankman-Fried’s alma mater.
Caroline Ellison weighs in on EA stuff on Twitter here, fair enough. But on a since-deleted Tumblr blog that Decrypt reports Ellison apparently kept, Ellison goes on to describe polygamous sex amongst the Alameda/FTX crowd. The blog veers into more disturbing stuff. This from the Decrypt piece:
“The Tumblr account, active from 2014 until its deletion Sunday, went by the name of “Fake Charity Nerd Girl” and the handle “worldoptimization.” The Ellison-linked account also demonstrated a substantial preoccupation with “hbd” or “human biodiversity,” an online euphemism for the discredited fields of race science and eugenics popularized by the alt-right.”
On Wednesday night, John J. Ray III, the new CEO of FTX said this about the company in a legal filing:
“Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here. From compromised systems integrity and faulty regulatory oversight abroad, to the concentration of control in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals, this situation is unprecedented.”
When I look at FTX, I now see a daisy chain of malfeasance and reckless behavior which unequivocally, though unintentionally, screams for regulatory oversight of crypto.
Something Roger Parloff saw 15 months ago.
This article was featured in a Saturday edition of the Morning Brief on November 19, 2022. Get the Morning Brief sent directly to your inbox every Monday to Friday by 6:30 a.m. ET. Subscribe
Follow Andy Serwer, editor-in-chief of Yahoo Finance, on Twitter: @serwer
