A review of Michael Lewis' Going Infinite
Sam Bankman-Freid (SBF) is weird. So was FTX. And Crypto. As is this book review.
“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of light, it was the season of darkness, it was the spring of hope, it was the winter of despair.” — is how Charles Dickens’ classic, A Tale of Two Cities begins.
Michael Lewis’ latest book, Going Infinite: The Rise and Fall of a New Tycoon could easily have started the same way. But strangely enough for Lewis, who is at his best when depicting the hero’s journey in his books (The Big Short, Flash Boys) or even painting whole groups as villains (Liar’s Poker), he can’t seem to make up his mind on whether Sam Bankman-Fried (also known as SBF) is his typical hero or villain.
This is probably because:
Everything about Sam Bankman-Fried is weird;
Almost everything about the way FTX was run was weird;
And a lot of what happens in the crypto world (Binance especially) is weird.
So in that spirit, let me write you the weirdest form of book review possible:
1. Everything about Sam Bankman-Fried is weird
“Sam’s general demeanor was that of a kid pretending to be interested when his parents hauled him into the living room to meet their friends.”
That first TV show Natalie watched from her own desk, but later, during future interviews, she’d walk around behind Sam to confirm that, yes, his eyes moved around so much because he was playing a video game. On live TV!
Sam shifted in his chair. From his wrinkled cargo shorts he pulled his ChapStick. He twiddled it. Valuable seconds ticked away. Finally, he hit a button. The Hoard Dragon vanished, and Anna Wintour reappeared. Curiously, only when he was talking did he want to see her.
The question Ramnik wanted to ask Sam was, “Why the f**k did you spend the last year playing Storybook Brawl?”
Sam on philosophy
In the end murder is just a word and what’s important isn’t whether you try to apply the word to a situation but the facts of the situation that caused you to describe it as murder in the first place.
“Mass delusions are a property of the world, as it turns out,” he said.
“Fault is just a construct of human society. It serves different purposes for different people. It can be a tool to discourage bad actions; an attempt to recover pride in the face of hardship, an outlet for rage, and many more things. I guess maybe the most important definition—to me, at least—is how did everyone’s actions reflect on the probability distribution of their future behavior?”
It’s easy to praise something that society praises.
Sam on Effective Altrusim
Eventually he came to the view that we needed to give what we had to others until the cost to ourselves outweighed the benefits to them. We needed to stop thinking of charity as a thing that was nice to do but okay not to do, and begin to think of it as our duty.
Sam was weirdly pragmatic when it came to people,
But he wasn’t going to change human nature, and so he decided that, going forward, he would bury any negative reactions he had to anything anyone said or did.
… and in his relationship with Caroline Ellison
Sam wanted to do whatever at any given moment offered the highest expected value, and his estimate of her expected value seemed to peak right before they had s*x and plummet immediately after.
Sam’s girlfriend Caroline was just as weird …
“She’s cold as ice,” said Ray. “You had to buy words by the vowel.
All was not right with Caroline, however. Which was why she was now writing to her boss. “What is the problem?” she asked, in what at first glance appeared to be a business memo.
I have pretty strong romantic feelings for Sam.
Not a business memo! It was merely written in a businesslike manner.
Why is this a problem? These feelings consume a ton of my brainspace
2. Almost everything about the way FTX was run was weird
Alameda Research was the only entity exempt from risk limits at FTX.
(FTX) had exempted Alameda from the risk rules that governed all the other traders. The trades made by every other trader on FTX were liquidated the moment their losses exceeded the collateral they had posted. That's why FTX felt so much safer than the other crypto exchanges. No single trader was allowed to lose so much money that it put the exchange, and everyone who traded on it, at risk. For Alameda Research, however, an exception had been made. Sam's private trading firm was allowed to lose, in effect, infinity dollars before its trades were liquidated.
FTX’s exchange customers deposited their money into Alameda Research because FTX didn’t have a bank account until late 2021.
Up until late 2021, when she had moved her own dollars from her personal bank account onto FTX, she’d needed to wire it not directly to FTX but to various accounts owned by Alameda Research.
Even those who had expressed suspicion about Sam or FTX had failed to say the one simple thing you would say if you knew the secret they were hiding: the customers’ deposits that are supposed to be inside FTX are actually inside Alameda Research.
The FTX team had all of their incentives tied to FTX, but the bulk of the cash was in Alameda.
None of the characters in this financial drama had behaved as financial characters are expected to behave. Gary had owned a piece of Alameda Research, but his stake in FTX was far more valuable. Nishad owned a big chunk of FTX and none of Alameda Research. Ditto Caroline, who ran Alameda Research but owned shares only in FTX.
SBF as J.P. Morgan in Fall 2021
Two years earlier, Ramnik was just a guy hoping to be able to walk to work in the morning. Now he was the right-hand man to the J. P. Morgan of crypto.
“What I don’t get is how he knows how to do all this,” I said to his wife, as we walked into jungle hut number 27. “I know!” she said brightly. “I ask him that all the time. How do you know? He just knows.”
I’d soon be asking Nishad Singh for the same premortem I’d ask of others at the top of their psychiatrist’s org chart: “Imagine we’re in the future and your company has collapsed: tell me how it happened.”
“Someone kidnaps Sam,” Nishad would reply immediately,
The Board at FTX had one job. DocuSigning.
“It’s unclear if we even have to have an actual board of directors,” said Sam, “but we get suspicious glances if we don’t have one, so we have something with three people on it.”
(Sam) admitted he couldn’t recall the names of the other two people (on the Board). “I knew who they were three months ago,” he said. “It might have changed. The main job requirement is they don’t mind DocuSigning at three a.m. DocuSigning is the main job.”
The FTX HQ in the Bahamas was weird
Along the way, Ryan had paid $4.5 million to acquire, as a site for a new corporate headquarters, 4.95 acres of the jungle itself, on a narrow West Bay beach. He handed the land and a budget of several hundred million dollars to the young architects and basically said, “Have at it.”
“We said just give us a list of the employees, give us anything,” said Ian. “Claire said, ‘I know it’s weird, but we don’t have any of that—even the number of employees.’” Lacking direction from above, the architects set out to observe FTX’s employees in the makeshift jungle huts they now occupied.
At some point the architects realized that Sam had no clue what they’d designed, or that they’d designed anything at all. That they’d made all the decisions about FTX’s new headquarters, projected to cost hundreds of millions of dollars, without the slightest input from the person who was paying for it. Soon they’d learn that even the list of Sam’s desires they’d been given had not come from Sam—and that Sam himself wasn’t aware that he had stated any desires.
Ian seized the moment to finally ask him directly the question he’d been trying for months to ask. What’s one thing you want out of these buildings, other than work? For the first time, Sam thought about it. Badminton courts, he said. That was it. That was all he wanted. Badminton courts. How many courts? asked Ian. Three, said Sam. Then he left.
Sam explained that he was trying to decide whether to simply pay off the $9 billion Bahamas national debt himself, so the country could fix their roads and build schools and so on.
“As long as the music is playing, you've got to get up and dance” - Chuck Price, Citibank in 2007
Global stocks traded $600 billion a day, crypto was now trading $200 billion each day, and the gap was closing. Inside of eighteen months, FTX had gone from nothing to the world’s fifth-biggest crypto exchange, and every day, it was seizing market share from its competitors. They were now the only crypto exchange making a priority of obtaining licenses and going legit. They were also the only crypto exchange that hadn’t in one way or another offended US financial regulators.
In the end, between the summer of 2020 and the spring of 2021, in four rounds of fundraising, they sold roughly 6 percent of the company for $2.3 billion.
Roughly one hundred fifty different venture capital firms invested.
FTX in a nutshell.
They’d granted themselves hunting licenses without ever really wanting to learn how to handle a gun.
3. A lot of what happens in the crypto world is weird.
Crypto maximalists want you to trust no one, except when it comes to you trusting their exchanges.
In traditional finance, founded on principles of trust, no one really had to trust anyone. In crypto finance, founded on a principle of mistrust, people trusted total strangers with vast sums of money.
Crypto futures exchanges were incredibly naive at margining at first. Did no one think of hiring someone who worked at an actual exchange?
Several of the Asian exchanges offered a Bitcoin contract with one hundred times leverage. Every now and then, some trader figured out that he could buy $100 million worth of bitcoin at the same time he sold short another $100 million worth of bitcoin—and put up only a million dollars for each trade. Whatever happened to the price of bitcoin, one of his trades would win and the other would lose. If bitcoin popped by 10 percent, the rogue trader collected $10 million on his long position and vanished—leaving the exchange to cover the $10 million he’d lost on his short. But it wasn’t the exchange that covered the loss: the exchange did not have the capital to cover the loss. The losses were socialized. The customers—usually those on the winning end of the trade—paid for them.
Until SBF (with his HFT Jane Street experience) came along…
The design that FTX (Gary) had come up with solved the problem, in an elegant way. It monitored customers' positions not by the day but by the second. The instant any customer's trade went into the red, it was liquidated.
(FTX’s) chief selling point back in 2019 was that it had found a better way to evaluate the gambles of the customers to whom it lent money
But then, FTX could also be incredibly naive. Did no one realize that exchanges don’t allow you to post thinly-traded small caps as margins against large cap positions?
(A Turkish trader) found a flaw in FTX’s risk management software. FTX allowed traders to borrow bitcoin and other easily sellable crypto against the value of their MobileCoin and BitMax holdings. The trader had inflated the value of MobileCoin and BitMax so that he might borrow actually valuable crypto against them from FTX. Once he had it he vanished, leaving FTX with a collapsing pile of tokens and a loss of $600 million worth of crypto.
The Product-Market Fit for Crypto is… speculation.
Government-backed money wasn’t what Bitcoin most easily replaced. Gambling was. The mad rise in bitcoin’s price in 2017 pulled in a generation of new speculators. It wasn’t like the stock market.
Salespeople at crypto companies need to be good chitchatters.
“Requirements are: pretty, big b**bs, have done live streaming before, born in 2000 or later, good at chitchatting,” read the job ad for a salesperson at the fastest-growing new exchange. By 2018 a lot of young Asian women were trying to meet those requirements.
The absence of Crypto regulation is weird …
It struck him as yet another strange and senseless feature of the grown-up world that the United States, which was otherwise willing to subject its poorest and most vulnerable citizens to state lotteries and casinos and other games of chance in which the odds were stacked against them, made an exception for securities, or anything that might be construed as securities.
Sam (weirdly) hopes that his relationship with CZ is friendly. But for CZ, the relationship is normally competitive (= not weird).
Sam had first met CZ not long after his move to Hong Kong at the end of 2018. Binance was looking for crypto companies to pay $150,000 apiece to sponsor its conference in early 2019 in Singapore, and Sam stepped in with the money. CZ had rewarded him by appearing onstage with him, and ever after, Sam was to say, “That’s what gave us legitimacy in crypto.” He’d effectively paid CZ to be his friend.
Sam hated conflict and so was almost weirdly quick to forget grievances; CZ thrived on conflict and nurtured the emotions that led to it. CZ had a complex web of allies and enemies.
It didn’t start to crystallize until I walked by CZ a few … times and each time he broke eye contact with his eye candy and embraced me: people were thinking about us, a lot. This was the first time CZ seemed more interested in me than I was in him.”
Out of thin air FTX minted three hundred fifty million FTT tokens. Sam offered a chunk of them to employees at five cents each, and another chunk to important crypto people, like CZ, who might be friends of the exchange, at ten cents. CZ initially declined. Just how cheap became clear when, a few weeks later, CZ called Sam and offered to buy a 20 percent stake in FTX for $80 million.
For the stake he’d paid $80 million to acquire, CZ demanded $2.2 billion. Sam agreed to pay it. Just before they signed the deal, CZ insisted, for no particular reason, on an extra $75 million. Sam paid that, too. Whatever gratitude CZ felt about his two-billion-dollar windfall he hid. “From then on, it was a cold war”, said Sam.
Alameda’s bots inserted offers a tiny bit cheaper than the offers from Binance bots. The Binance bot would offer to sell a Bitcoin future at $ 102, and, moments before the second Binance bot showed up to buy, the Alameda bot would leap in and offer it at $ 101.95. Instead of buying bitcoin from itself at an inflated price, Binance was buying it from Alameda Research at a price nearly as high.
It cost CZ around half a billion dollars of his own money to burn down FTX and become a monopoly.
The half a billion dollars of his own money that CZ had elected to incinerate was, in the grand scheme of things, such a trivial sum that hardly anyone paid it any more attention.
For the first time in his career, Lewis seems befuddled by his subject. He ends his preface with a question that 250-pages later, he still can’t answer: “Who was this guy?”
By the end of this walk I was totally sold. I called my friend and said something like: Go for it! Swap shares with Sam Bankman-Fried! Do whatever he wants to do! What could possibly go wrong? It was only later that I realized I hadn’t even begun to answer his original question: Who was this guy?
Enter John Ray III, the court-appointed wildcatter hired to take over as CEO of the failed firm (FTX), who prides himself on his snap judgements (it takes him ten minutes to know who a person is)
“Then you start looking at the kid,” said Ray, the kid being Sam. “I looked at his picture and thought, There’s something wrong going on with him.”
But unlike Lewis, Ray doesn’t hesitate to take a stance:
The men he evaluated he tended to place in one of three bins in his mind: “good guy,” “naive guy,” and “crook.” Sam very obviously was not a good guy. And he sure didn’t seem naive.