“There is a simple rule here, a rule of legislation, a rule of business, a rule of life: beyond a certain point, complexity is fraud.” P.J. O’Rourke
I’ve missed many bandwagons in my life. I missed buying in early with Enron. I missed investments with Bernie Madoff that could have made me rich. I completely missed the wave to be rich because I wasn’t born yet when Charles Ponzi schemed, won, then lost. (shown in his mug shot picture here).
Could have won the last big Powerball at $1.9 billion if only I had bought a ticket.
I think my timidity limits my potential to be a billionaire. Maybe it has to do with my atavistic fears of the concept of anything that starts with “crypto” like cryptocurrency. Crypto derives from the Latin and before that the Greek “krypto” meaning hidden or secret like crypto-fascist or crypto-communist or crypto-trumpster. “Krypto” is also the root of “crypt” where we all wind up unless we get creative with ashes and wind.
Depending upon your hardware, expertise, and software, it takes between ten minutes and thirty days to “mine” (or concoct ex nihilo) one Bitcoin, the most recognized cryptocurrency. Mining for Bitcoins by constructing blockchains is energy intensive; each Bitcoin fabrication eats enough kilowatt hours to power the average American household for 11 to 12 years. Ninety million of them so far[iii]. Not a ‘green’ process. I have tried to understand the safeguards, the protection from fraud and counterfeiting that is provided by transparency and complexity for cryptocurrency. Of how exactly the blockchains create and hold value, I am ignorant, and I will probably remain in the dark until I rest in my crypt.
Of course, for most of us it’s a lot easier to just buy some gold or fractions of Bitcoins rather than getting out the gold sifting pan or firing up our antiquated desktop to whirl away fabricating blockchains. If I had looked for an inflation hedge and in November of last year had sunk the farm into gold, the farm would have lost less than 2 % of its value. If I had gone with Bitcoin, I’d be about 75% down[iv]. If I had climbed aboard FTTs (and I have no idea how I could have done that), the farm would have disappeared into the river like a block of ice thrown in by mischievous boys. I don’t have the mind or stomach for that kind of volatility.
Gold has an unfair advantage as an inflation hedge and refuge from the storm since it has been used as such for five or six millennia, and you can hold it in your hands. Heavy stuff. Gold also has intrinsic value as it is used in many industries for many purposes and can be formed into lustrous beautiful designs[v]. Cryptocurrencies on the other hand were invented thirteen years ago or so and were promoted as the clever modern way to escape from the tyranny of the global monetary system or petrodollars or whatever. When folks realized after their original enthusiasm that crypto is a commodity without a reality portfolio except what the sentiment of the market says it’s worth and has no supporting cash flow from profits of any kind, the story changed, and it is marketed as a value option and hedge against inflation – a value option without a scintilla of intrinsic worth or usefulness, but a value option, nonetheless.
“Cause if you lie like a rug
And you don’t give a damn
You’re never gonna be
As happy as a clam..”[vi] John Prine, “It’s a Big Old Goofy World”
JFK. MLK. LBJ. GWB. BHO. FDR. OBL. Many others exist in the lexicon, each conjuring up many images, both loved and hated. In the last couple of years, we’ve added a new set of well recognized three letter name initials: SBF. Sam Bankman-Fried.[vii] This brings back the topic of FTX, a good explanation of which is in the article “What You Need to Know about the Colossal Mess of FTX.” The fabrication of an MIT physics grad genius, Bankman-Fried parlayed his innovative Alameda Research crypto trading company. Alameda used code to take advantage of changing prices and big differences for crypto currencies like Bitcoin and Ethereum in different countries. SBF would buy one place and sell another in seconds, gleaning billions a few bucks at a time. He next started his own crypto currency trade exchange to allow others to do their own trading. In August Fortune Magazine called him the next Warren Buffet. He was favorably compared to other tech mega billionaires like Bill Gates and Mark Zuckerberg. FTX was valued at over $32 billion, starting from vapor three years earlier.[viii] Gates, Buffet, and Zuck will probably not wind up in prison, although hope never fades.
The problem when an unregulated immature genius owns both a trading company and the exchange on which it trades is the mixing of money and the lack of controls. Be like an out-of-control Bill Gates owning Microsoft and NASDAQ, but with less oversight. In August, SBF was the wunderkind who last year cashed out $300 million burying it into his own maze of tax haven Bahamian bank accounts. He allegedly took and mixed investor’s money who traded on FTX with his corporation’s and used it to prop up Alameda, which had started to hemorrhage.
Now FTX has filed for Chapter 11 bankruptcy, and its value dropped to somewhere near vapor (or worse) overnight. The CEO brought in by the court to untangle the mess is the same person brought in to untangle the Enron wreck: John Jay Ray III. When he took over Enron, he found accounting irregularities and fraud. Last week when he took over FTX, he found chaos, no human resources department or even a good list of employees, no real accounting department, a balance sheet on an Excel spreadsheet and no controls worth mentioning. After Toto pulled the curtain back and the little guy pulling the levers and cranking up the smoke was revealed, FTX has been said to resemble Animal House more than a business enterprise.
Sam lived with ten or 12 sort of employees in a luxury condo commune in the Bahamas, one of whom was his ex-part time-girlfriend, Caroline Ellison, another late twenties nerd/entrepreneur, a math major grad from Stanford and CEO of Alameda Research. Part of the SBF legend is how little sleep he needed. Apparently, Caroline had the same gift. She Tweeted in 2021, ““Nothing like regular amphetamine use to make you appreciate how dumb a lot of normal, non-medicated human experience is.” Sam was a little more subdued. He suggested, “In general, probably half of all people or more should be taking meds of some kind, because they just make your life a lot better.”
Before the fall this month, FTX bought the naming rights for the Miami Heat’s arena, and SBF was second only to George Soros in donating to Democrats in the 2022 election cycle – around $37 million, $10 million went in one form or another to Joe Biden’s campaign through various channels. There will be a hole in Democrat financing next time around. Cynics might suggest that massive political donors like Mr. Banker-Fried get a wide berth with Federal regulators, but a liquidity crisis at Alameda brought it all down like a Jenga tower waiting for someone to pull out the wrong block. A sloppily stacked Jenga tower. But far be it from me to suggest chicanery among politicians and the very rich.
In Mr. Ray’s first statement after he looked at the books, he said, ““I have over 40 years of legal and restructuring experience. I have been the Chief Restructuring Officer or Chief Executive Officer in several of the largest corporate failures in history. I have supervised situations involving allegations of criminal activity and malfeasance (Enron). Nearly every situation in which I have been involved has been characterized by defects of some sort in internal controls, regulatory compliance, human resources, and systems integrity. 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 multibillionaire playing in his self-created paradise in the Bahamas to pauper probably headed to prison in less than a month. SBF has some new images associated with his initials.
“To forgive is to set a prisoner free and discover that the prisoner was you.” Lewis Smedes
The guilty temptation is to gloat, to indulge in a bit of titillating schadenfreude, to tsk, tsk in smug delight at the folly of young egoists who have fallen far. But I discover that my primary emotion is sadness over SBF’s plight. He was a kid playing at a high level with toys perhaps he didn’t fully understand could hurt real people. His conscience, such as it was functioning, was informed by the utilitarianism of our age, especially out there at Almeda and in Silicon Valley. If it works, especially if it works and sucks up huge profits in a hurry, and I have the genius to come up with the idea first and write the code all through the night to make it happen, well, that’s got to be a good thing, right? Another mark of our times is the ‘freedom’ to be all that we can be. SBF is a prime exemplar of where a malformed conscience can lead us, any of us.
Sam made choices, some of which made him very wealthy very quickly, and some of which now have him looking for a new country to live in that doesn’t have an extradition treaty to his homeland. Somalia, Russia, Iran, and Russia come to mind. Somalia has beaches I understand. Or he might have benefitted from the advice given last century by the Venerable Bishop Fulton Sheen: “Freedom does not mean to do whatever we please but rather to do as we ought.”
I will pray for Sam Bankman-Fried and that he learns, repents, grows, and is changed by this, transformed, healed, made whole. And I will pray for the culture of “I’m OK, You’re OK” and self-actualization that created, formed, and nurtured SBF. That seems like the right thing to do.
“One of the criminals who were hanged there was hurling abuse at Him, saying, “Are You not the Christ? Save Yourself and us!” [ix]But the other responded, and rebuking him, said, “Do you not even fear God, since you are under the same sentence of condemnation? And we indeed are suffering justly, for we are receiving what we deserve for our crimes; but this man has done nothing wrong.” And he was saying, “Jesus, remember me when You come into Your kingdom!” And He said to him, “Truly I say to you, today you will be with Me in Paradise.” Luke 23: 39-43
[i] Contrary to what you may think, FTT in this context does not refer to “Failure To Thrive,” although that interpretation might be appropriate. FTT is the ‘utility token’ of the FTX trading system and holding them gives one access to the “FTX ecosystem.” Got it?
[iii] Quick calculation is that there about 123 million households in the United States, so the energy consumed to produce 90 million Bitcoins would power every one of them for about 8 years. Seems reasonable to me as we wring our hands about reducing fossil fuel power generation.
[iv] Bitcoin dropped from about $68,000 each last November to about $16,000 at last look. That’s considerably better than the fraction of a cent they could bring in 2010.
[vi][vi] I have never been able to determine how happy a clam is. I have often watched clams exposed at low tide carried to great heights by herring gulls and dropped onto jetty rocks to prepare a meal. I suspect those clams are not happy.
[vii] It would be unkind to draw attention to a switch in the position of Mr. Bankman-Fried’s name to ‘fried bankman,” which apparently, he is.