Byrne Hobart: evaluation

Transcript context

…First, I really want to jump into the FTX saga. What the hell happened? Let me just leave that as an open ended question for you. I think the first thing to say is that there's a lot we don't know and there's a lot we may never know because so many of the decisions at FTX were made through auto deleting encrypted chat. So there are some holes we will never be able to fill in. The lack of accounting is also going to make it tough. Basically, I think you can tell a bunch of different stories here. The really obvious one is fraud and you can debate over exactly when it started. One version of the story which is getting some currency is that SBF had this entity Alameda and it was supposed to be this really hot crypto trading fund but maybe it was a Ponzi scheme all along. And then at some point that Ponzi scheme started to run short on cash so he decided to start an exchange and the exchange got more cash and then he used the cash to pay off previous debts. That's one version and then the maximally exculpatory version, which actually is still really bad is — Alameda was a real company. They really made money trading. They took tons of risks. SBF has talked about why he thinks that's a good thing. FTX cut some corners when they were raising money and they had really bad internal accounting. And the extended entity of Alameda and FTX sort of lost track of whose money was where and it ended up with Alameda spending FTX’s customer money. One way to look at that is you think “Fraud is twice as bad as just incompetently losing money.” Well, it's not as if we had a $4 billion fraud instead of $8 billion fraud, everyone would be like, “Well, that's fine. That's normal. Why are you giving SBF a hard time?” It's bad no matter what. Running a big company that is systemically important in crypto and then having that company completely vaporize over the course of a couple of days is really, really bad and it’s worth understanding what happened. It's also partly worth understanding what happened because there are just different solutions that present themselves depending on what you think the story is. If the story is fraud, it's actually a lot harder to solve because there are just a lot of people who are willing and able to commit fraud and to lie. If the story is bad accounting, then that's actually a lot more solvable because then you could say things like, the solution is make sure you never invest in a crypto exchange that doesn't have a real auditor and make sure that they have their proof of reserves calculation and it's happening consistently and that you can audit that. There are different solution sets. I think the actual story is going to be somewhere in the middle. Extreme risk tolerance plus extremely poor accounting plus fraud at some point. But I suspect the fraud, if it happened, actually happened pretty late. I 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. 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.…

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