November 24, 2022

NIALL FERGUSON: FTX Kept Your Crypto in a Crypt Not a Vault.

Sam Bankman-Fried doesn’t read books. As he explained in a profile on Sequoia Capital’s website (which will be an assigned text in journalism courses for the rest of time), “I would never read a book.” “I’m very skeptical of books,” he said. “I don’t want to say no book is ever worth reading, but I actually do believe something pretty close to that.”

This error is not irremediable, because Bankman-Fried, founder of the now-defunct crypto exchange FTX, is likely soon to have a lot of time for reading.

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There is nothing in this story that would surprise the ghost of John Law, the Scottish financier who blew up the Mississippi Bubble in early 18th-century France. Bubbles are nearly always inflated with cheap credit. When monetary conditions tighten, the most leveraged players go down first, but the result is a cascade of illiquidity, which then turns into insolvency as asset prices plunge.

Another classic feature of the FTX story is the role of shady political influence. Just as Law ingratiated himself with the Duke of Orleans, the regent during the minority of Louis XV, so financial fraudsters through the ages have relied on friends in high places to protect them from legal or regulatory scrutiny.

Take Enron, the energy trading company that filed for bankruptcy in December 2001. Ken Lay, its chief executive, could not have inflated his castle in the air without Fed Chair Alan Greenspan’s monetary policy “put,” but Enron also bought itself protection with roughly $6 million of political donations, a third of which went to Republicans. In addition, the company sought to buy itself popularity by paying the Houston Astros to rename their ballpark Enron Field.

Sound familiar? In 2020, Bankman-Fried gave the Joe Biden campaign at least $10 million. In the 2022 midterm election cycle, he was the second-largest funder of Democrats, after George Soros, giving $39.8 million in federal contributions. The majority of those donations, about $27 million, went to the Protect Our Future PAC, which supported candidates who prioritized pandemic prevention.

Not all bubble-blowers present themselves as philosopher kings. Law did; Lay not so much. As the son of two law school professors, SBF was exceptionally well prepared for self-aggrandizement. The Sequoia profile is full of gems:

Q: You just happen to be alive in the most important time in the history of the future race. The existential point! Really?

SBF: It certainly would not be one’s prior — at least, not naively. But if you want to really needle on that, there are some anthropic considerations by which that might not be as crazy as it sounds.

When a young man sets out make billions of dollars very quickly, there is a common suspicion that he is actuated by greed. By raising him as a doctrinaire utilitarian, professors Bankman and Fried provided their son with the perfect alibi: He was making the money purely in order to engage in “effective altruism,” the get-rich-quick version of utilitarianism. Because you can only do the greatest good for the greatest number if you first make the greatest amount of money.

If, like SBF, you’re not a fan of book learnin’, the Internet’s preeminent online bookseller has you covered: Amazon’s already greenlit an FTX miniseries.

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