Byrne Hobart: belief

Transcript context

…think there's like a 80, 90% chance that there was some level of fraud versus pure incompetence. But if so, I think it may have happened fairly late in the story and as kind of a last desperate move. I think part of what drives the response to what happened with FTX and Alameda is that if you think the story is pure fraud, it's very easy to say you would never do that. I can say very easily, I would definitely never start a Ponzi scheme and then start another bigger Ponzi scheme to pay off the first Ponzi scheme. That's not me. That's not most people. But I think if you draw the scenario where they discover at some point, like a couple months ago or even a month ago, they realized, “Hey, we actually there's a billion dollars plus that was supposed to be customer money, but we thought it was Alameda money and we actually spent it and now it's gone. We've lost it.” What would you do in that circumstance? And I think the ideal answer is, “Well, I'd immediately come clean and step down and commit myself to getting everyone paid back and made whole.” But there's also the possibility that the realistic answer is more like, “Well, I would scramble and try to make sure that that didn't cause the company to collapse and then try to pick up later.” And so at that point, you've sort of backed your way into fraud through earlier episodes of incompetence. I think one of the problems with the fraud story is that frauds have to be good at accounting. In a very rough schematic sense, they have to be twice as good at accounting as everybody else, because not only do they have to have the real books that tell them how much money the business has and whether or not the next check they send will bounce, but they have to have the fake set of books and they have to have a way to make those tie out with one another. So actually accounting frauds tend to be fairly sophisticated. They tend to really dive into edge cases. I was reading up on MF Global which was a big futures brokerage that collapsed in part because they were dipping into customer funds and making some investments they shouldn't have. They did a lot of clever and shady stuff. There was one point where they were transferring money at the last minute out of their customer funds in order to make margin calls and what they would do is, they would send the wire from the customer account to a different company account and they'd send it a couple of minutes before the wires closed for the night. And then they would send this email right after the wires closed saying, “Hey, we just realized we sent this transfer from our account. Got to reverse tomorrow.” But that gave them at least one night of enough liquidity to survive. Now, you can only do that kind of fraud if you are actually keeping really close track of where your money is, where it's supposed to be, what the rules are, so that you know exactly how to break those rules. I don't think FTX was in any position to commit that kind of fraud. I think that if they tried to do something like that, they would wire the money from an account that didn't have any money in it or something or send it to the wrong account. ommit that kind of fraud. I think that if they tried to do something like that, they would wire the money from an account that didn't have any money in it or something or send it to the wrong account. There are these stories about them accidentally burning a bunch of USDC by sending it to an address that didn't exist or something like that. The operational slip-ups actually make it harder for them to have committed fraud and it's unquestionable at this point that their record keeping was very bad. Yeah, to your point about the fraud being harder, it's like the classic story about if you just tell the truth, it's just gonna be much easier for you. You just don't have to keep track of that many things. I interviewed SBF for like an hour and before that I tried to do quite a bit of research into how FTX worked and what was going on. I had this impression that this guy was the most competent genius that had ever graced finance. And this was a common impression, it wasn't just me. Then it turns out that out of sheer incompetence he loses track of billions of dollars, the internal operations are just him putting together spreadsheets and throwing them around and putting emojis on slack messages asking for payments. I want to understand how it is that this guy put out the impression out there that he is just hyper competent and it turns out that it's the opposite. It's not even that he's mediocre, it's the opposite.…

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