Sam Bankman-Fried with Michael Lewis

26:40So the money, customer's money right from the beginning is piling up inside of Sam's private firm. At the peak,$10 billion of customer's money piled up in the wrong place. There were no lines between these two firms. And the added problem is that Alameda Research, right from the beginning, is the biggest trader on FTX. So there are questions in the air about like, are they allowed to see other people's trades? You know, what are the walls between these two businesses? And the fact was, there weren't really any walls, that it was all one big thing. And wasn't his on-off girlfriend also involved with running Alameda?

27:17Involved. He made a woman, Caroline Ellison, who was obsessed with him, more than in love with him and constantly expressing her obsession with him. He made her the CEO of Alameda Research while he became the CEO of FTX. So yes, they're sleeping together while supposedly running these businesses that are supposed to be entirely separate. And the point is this money's all piling up in what amounts to SBF's private piggy bank. And he begins spending it big, but not on Ferraris and lamborghinis but on things like political influence he begins to become a you know a political player and and on things like venture capital investments where he's buying whole buying companies um it's but this is where it gets a little complicated so for the first two and a half almost three years of the exchange's existence it seems true at least the prosecutors seem to accept.

28:20And it's plausible that the sum total of liquid assets inside of this world, Sam's world, is greater than the sum total of customer deposits. So if at any moment up until June of last year, if all the customers who put money on FTX or who thought they'd put money on FTX showed up and asked for their money back, they had the money on hand to give it back to them. starting last June when crypto prices collapsed, that ceased to be true. So up to last June, anything he spent on other things, whether it's marketing or political campaigns or venture capital investments or fancy condos in the Bahamas is actually coming out of his pocket.

29:06After last June, it's coming out of customers' pockets. And the question was, did he even know when he crossed that line. But it was true that from a distance or even up close, the people inside of FTX who were his closest associates assumed that there was so much money inside of Alameda Research. At one point, if you asked them, they'd say there's$100 billion in there, that whatever Sam spent was trivial. And Sam behaved as if. Even as Forbes was saying he was worth$22.5 billion, he secretly thought he was maybe worth$50 or$60 billion and behaved accordingly. So if he forked out a billion dollars to buy, I don't know, a Kazakhstani Bitcoin mining operation, it wasn't that big a deal.

29:53If he gave a few hundred million dollars to either effective altruist causes or American politicians, that's a trivial sum of money. So I'm trying to think of a case of this, but where someone who actually had so much money was behaving as if he had even more and somehow managed to be profligate in an environment you think it would be impossible to be profligate. It kind of reminds you of Scrooge McDuck diving into this mountain of gold coins and hitting the bottom very hard. yes yeah it's it's and it was you know sam alameda research becomes run by his girlfriend on again off again girlfriend becomes sam's dragon's lair there's all this stuff inside of it and no one's quite sure what it's worth or what it is he alone sort of knows and the whole enterprise depends on everybody believing there's a lot more there than there actually is as you point out that His company moved from Hong Kong.

30:50He relocated to the Bahamas. This is outside the kind of the perimeter of what we consider normal financial regulation. I mean, could this have happened on the US mainland or in Europe? It's a really, I know US better. So let's imagine you tried to do what he did in the United States. This is what you would have not been allowed to do. You would not have been allowed to own both a big trader and the exchange. which the same person would not have had control of those two things. The exchange would not have been allowed to have customer money on it. Exchanges in this country don't hold the money.

31:28Brokerage firms hold the money. So there had been that separation. They would not have been able to commingle funds between the two. So the answer is in the highly regulated US financial system, no, he would not have been allowed to do that. In the Bahamas, they regarded it as okay. It was much lighter touch. And it's interesting why. So it wasn't like some of these places don't have any regulator. Like there are stateless crypto exchanges. You're taking your chances on it. But in order to sell themselves to customers, they like to find a country that says, we bless this operation and we know about this operation.

32:06The problem is that there are a bunch of countries, and the Bahamas is one of them, that are scrambling to try to capture the crypto industry. It looks like it might be the next big thing. And so they're doing this dance with the crypto industry where they offer really pleasant regulation to attract the businesses. Dubai is doing the same thing, but Gibraltar is doing the same thing. Uruguay is doing the same thing. Israel was doing the same thing for a while. And so there's all this pressure on the country not to ask too many hard questions. Otherwise, you scare away the crypto people. And at the time, wasn't Sam also kind of portraying himself to be like the good, sensible boy of crypto?

32:50He was talking to journalists. He was explaining stuff to the public. He was really setting himself up to be the trusted man. That was actually the tactical play. That's how he sold himself to venture capitalists. The way this place is going to grow is that when people realize that we are actually the trusted source and we're blessed by various governments and we have the most licenses to have crypto exchanges in various countries, that we will capture more market share because everybody else will be scared of the other exchanges. So it was totally a trust play. I mean, it's ironic in retrospect, but that's exactly what he was doing.

33:24And it was also true that he was or seemed to be radically transparent. I'll tell you a funny story. At Sam's crypto conference in the Bahamas last April, I bumped into a character from a book of mine, The Big Short. This character, he had seen through the frauds of Wall Street leading up to the financial crisis. He was famously cynical about people and institutions. That's how he made his fortune. He liked Sam. And I say, well, why do you like Sam? And he says, how many times do you meet a guy with$20 billion who's not a jerk and has nothing to hide? So Sam was viewed, even by extremely cynical people, as someone who had nothing to hide.

34:12And the Bahamas, the regulators of the Bahamas said to me repeatedly, we are so lucky that when we hung out our shingle and invited crypto businesses to come, that this is the one that came because there's so many dubious enterprises and we got the one that's not. So that's the situation circa even October of last year. But then it all fell apart so quickly, right? I mean, within a matter of days, what was the kind of turning point for SBF and FTX? Well, it was a matter of time before someone threw the match on the kerosene-soaked kindling. The way it was run, it was always vulnerable, especially since June of last year.

34:54But what triggered it was someone leaked what was purported to be Alameda's balance sheet, like their assets and their liabilities. It wasn't their balance sheet. It was just some numbers scribbled on a piece of paper. But it looked kind of damning. And it was published in a crypto journal. And then Sam's chief rival, Binance, and the head of Binance, a guy named CZ, started to tweet about how vulnerable he thought FTX was. It started a run. So the customers started to ask for their money back. I mean, this is one of the traits of crypto land. It's very trusting on the surface. Like people are giving their money to Bahamas crypto exchanges without asking too many questions.

35:39But the minute there's trouble, everybody heads for the doors as fast as they can because they've had this experience of these places imploding over and over and over. So everybody ran for the door at once asking for their money back. It was supposed to be 15 or 16 billion dollars of customer deposits sitting in cold storage on FTX. After they've handed back five billion of it, they announced that actually we don't have any more. We have to freeze withdrawals. At that point, they're done. It's at that point, it's like we don't have the money. Now, what's bizarre about this is a few months ago, the bankruptcy team released its most recent report.

36:17And they've revealed that there were actually, in the end,$8.6 billion of customer deposits that went unreturned. But that they had found$7.3 billion of those dollars already. And they were still sitting on a portfolio of companies that Sam had bought that looked like they're worth between$5 and$7 or$8 billion. So in fact, it looks like the customers are going to get all their money back eventually with interest. It was tied up in stuff that could not be sold. Effectively, what Sam Bankman-Fried had done was grant himself a free loan of customer deposits and used it to buy a lot of stuff and take reckless risks with it without letting anybody know.

36:57So that's how the thing comes to an end. That's how... And Sam Bankman-Fried's wealth goes from, according to Forbes magazine, it's probably right 22 billion dollars or so to zero in a matter of a week wow wow and you were there at the time you were there i mean you were there you went down i think you went down there to check him out for someone who was thinking of doing business with him and and you had this relationship with him and you know talk us through that i mean what happened in those last days so um what you might think happened is you saw people getting sweatier and sweatier palmed and more and more uncomfortable and less and less willing to talk to me in the run-up to their collapse.

37:42In fact, there was zero sign that was anything wrong. There are people who had it out for FTX like there are people who have it out for every business, but no one on the planet said the thing you would say if you knew what the problem was. And what you would say is, hey, they're keeping the customer deposits in the wrong place and Sam Bankman-Fried is using them as his own private piggy bank. No one said that. So there was no sign even inside the company or on Sam Bankman-Fried's face on the run-up that there was anything wrong. Even as crypto prices were collapsing, they seemed to be the strong hand in a weak market.

38:19It looked like they were actually going from strength to strength. So it was strange when it turns on a dime like that. So when it turned, I was there. I mean, what happens is it turns and everybody's scared. There were 200 people who were working for FTX in the Bahamas. In a matter of 36 hours, they've all fled the country and run back to their parents' house. It's the first financial crisis where all the perpetrators went and hid in their parents' basements. You know, they were all 27 years old and all scared to death. And in the end, it's me and Sam Bankman-Fried and his parents and his psychiatrist.

38:55I get to spend that time with him, basically sitting with him and grilling him about what it happened. And I'll tell you, since your subject is billionaires and how they are, and this is a peculiar one, I'll tell you something peculiar about him. That at no point did I sense any kind of change in him. At no point did I sense he's fundamentally affected by this. I saw his parents crumble. His parents, six months after this happened, look 10 years older than they did before. Their lower jaws tremble when they're not speaking. They're shell-shocked. Sam Bankman-Fried was exactly the same person two weeks after his company collapsed as he was two weeks before.

39:39If you sat and talked with him, you would never guess anything bad had happened. It was strange. I tell you what, and at bottom, he doesn't feel things. It's why he's so good. He was so good in chaotic, risky situations. He does not feel the stress. He just like does not. So it doesn't get to him. Now that's dangerous. It sounds like it's a good thing in high-pressured situations not to feel the pressure, but it's a bit like if you're incapable of feeling pain, you're more likely to put your hand on a hot stove and have it burn off because you don't get the signal. He doesn't get the signal. That was apparent even, well, especially after the collapse.

40:19And so the company collapses. It goes bankrupt. But at what point did the police start getting involved and start investigating him? And, you know, you talk about him not having any kind of reaction to this empire crumbling around his ears. Did he, I don't know, even break out in a cold sweat when he heard that he was being investigated by police? No, he didn't. He was calm even as he went to jail. The police in the Bahamas get involved right away. The police first want to arrest him right away. and the regulators say, you can't do that because we need to know where the money is and what the hell happened.

40:52We need him. And plus, they don't think he's a flight risk, which is interesting because every other person in crypto gets in trouble, flees. There are places you can go if you're a billionaire crypto person who's been disgraced and whose companies fall apart. They're called Dubai. You go there, there's no extradition treaty. They welcome you. There are 20 other people like you who've stiffed investors and you can live the rest of your days there. He doesn't even make one step in the direction of fleeing. He stays. The police interview him. They let him they let him remain at large for six weeks until the U.S.

41:28government gets his act together. And of course, Sam Beckman-Fried is then an asset in the legal system. Any prosecutor that gets their hands on him has a high profile career making case. And my sense is that there were several jurisdictions that might have prosecuted him, even within the United States. And so there's a race inside the United States to grab him so that you can have him for your very own self. And the Southern District of New York federal prosecutors at the end of December tell the Bahamas government that we want him and we have an extradition treaty. We want to extradite him. And the Bahamas put it to Sam and they make it more persuasive by sticking Sam in jail then.

42:04So he has a choice of being in the world's most miserable jail in the Bahamas or going to the United States and facing prosecutors in the United States. And he decides to go to the United States. So the court case arrives. There's a massive scrum outside court. It's become a media spectacle, a legal spectacle. And not least because some of his colleagues and his on-off girlfriend strike a deal, plead guilty to fraud themselves and agree to testify against him. So he was charged with multiple cases of fraud. He's been to court and been just convicted. But Sam Bankman-Fried has never admitted guilt.

42:41But now we are going to judge him.

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45:45so what we do michael is we we take a bunch of categories like wealth rags to riches how far they've come from where they started to where they ended up we judge them on villainy we've also got philanthropy which is obviously really interesting because sbf's whole deal was he believed in effective altruism and we rank them out of zero to a 10. You can get a zero, not one to 10? All right. So we're going to start out with wealth. So in terms of absolute wealth, he's not the richest guy who ever lived, but boy, he was the richest under 30 year old. I mean, in terms of absolute wealth accumulation, pretty phenomenal.

46:22Oh, nine or a 10. The speed of the wealth creation was, was according to Forbes who are the authorities on this unprecedented and uh so so nine or ten okay Zing yeah I mean I'm gonna go with Michael the expert I mean a nine out of ten probably the richest millennial of that era right I think it only Zuckerberg accumulated wealth quicker and it was pretty close was that true for another under 30 persons so yeah I mean for our millennials he basically hits a 10. He's not quite Elon, he's not quite Bezos, but for sheer precocity, a 10. There you go. There you go. And then the next category is rags to riches.

47:01So it's basically rating how far they've come. Have they come from humble origins? You know, we've talked about Oprah previously on the show and she literally grew up in rags to the journey they've made to make their billions. I mean, for me, he doesn't quite have a rags to riches tale, right? I mean, he seems solidly middle class. starts out solid middle class but with a with a handicap he's raised by academics to be an academic and not think about money or so he had to learn to think about money so he wasn't pre he wasn't predisposed to to go and make a fortune it was an unnatural act for him so he gets some credit for that i'd say i'd say as a rags to riches story six and a half but we often say on this program people don't become billionaires by accident um but it sounds like he almost did Well, he set out to become a billionaire, so it certainly wasn't an accident.

47:49Right. But there was a huge number of accidents required for it to happen. Yeah. So you're right. He was determined to become not just a billionaire, but a trillionaire. Right. He had that kind of appetite for wealth. So for rags to riches, I'm going to give him a middle of the road five. I'm going to give him five out of 10 from rags to riches, but a 10 out of 10 from riches to rags. Yes. The first ever 10 out of 10. Okay. Yes. No one ever lost it faster. Okay. Okay. Villainy. In a way, this is the heart of this entire podcast in a way. Villainy, you know, is he a dastardly dude who's trying to, you know, screw over rivals and pull a fast one on both his customers or his rivals?

48:34Where do you place him on this one? Because this is really fundamental to the whole story. Yeah. Is he a James Bond villain or not? No, he's not a James Bond villain, but he's not innocent either. I'd give him a four. And I tell you why. So what he is, is not honest. And usually his duplicity or his dishonesty took the form of withholding information that really he should divulge. On the witness stand, I think he outright lied a few times. But it's telling when the dust settles on this, that Sam Bankman-Fried is going to be in jail for 30 years and all the customers are going to have their money back.

49:11That the actual end damage he did was mainly to himself and his closest friends and some venture capitalists who maybe learned a lesson from it. He certainly didn't set out to do harm. I mean, one of the curious things about him is he ends up achieving almost the opposite of what he sets out to do. And he isn't malicious. He isn't unlike, say, Elon Musk. He's not a bully. He's conflict avoidant. He's almost a scaredy cat. But he did bad things and they did have consequences. And they may have made sense to him by his own moral lights, but they don't make sense to most people by their moral lights.

49:52So I give him a four. Okay. As you say, he's sometimes outright dishonest on the stand. But in the run-up to that was kind of like you said, he lost money the way that someone might misplace their keys or not realize that what a chief financial officer was even for or what regulations were about or why we should do this or these rules don't make any sense. Is it lost in that kind of fog of not understanding norms? Yes. Or establishing or insisting on his own norms. It wasn't it wasn't so much not understanding them as thinking they were stupid and I'm going to have this impose this other set of better norms on the world.

50:29He is very easy in a superficial way to paint as a diabolical villain. If you know the less you know about him, the more you can do that. Another telling fact that affects my judgment, my answer to this question. The people most dramatically harmed by his actions were the people who work for him. They all had their money on the exchange. They often had their parents' money and their cousins' money on the exchange. They believed the place. They lost all their wealth and they lost their reputations because they trusted Sam. I'm in touch with all these people. If you ask them what they think of him, they all say, I tried to hate him, but I can't because I know him too well.

51:10They all say, I feel more sad than angry about this whole thing. um those people's judgments i think should be listened to they sense that it isn't like it's not evil exactly it's it's more complicated than that it's a it's a misguidedness it's a it's a disconnectedness and so you can't give him a zero okay but he's not a 10 okay okay i i mean i'd give him a five he sounds sort of arrogant right you know this entire idea of norms not applying to you. You have to make your own and everyone has to fall in line. Yeah, I would say he's sort of impatient with the human race, arrogant. I love that line in your book when he said, I'm so bored, I think I'm going to die.

51:53He just sort of rather sort of distracted. So I'm going to give him a three for villainy, actually, because as you say, people are going to get their money back, the investors, even the people, his staff, who lost all their money can't actually bring themselves to hate him. But three more categories very quickly. One is philanthropy. and he certainly intended to score highly on this one, right? Yeah, I mean, effective altruism says you have to give away most of your money, right? Did he actually end up doing any of that? Oh, he gave away most of his money when he was at Jane Street and they were just ramping up.

52:24They gave away$300 million last year in really interesting ways. They didn't do what the normal philanthropy does is sort of send us your proposals and we'll evaluate them and spend lots of money doing so. they would find experts in areas they wanted to do something about, like, for example, what to do about artificial intelligence so it doesn't kill us all. They would find someone who they knew was an interesting thinker. They'd send them an email with a million dollars and say, give this million dollars away the best way you know how. Tell us how you did it, but there are no constraints. And it's a really interesting way to do philanthropy.

52:57So he was going to be very creative about it. However, on this particular measurement, I give him a zero. And I tell you why. It isn't because he gave it away or didn't give it away. He crippled a philanthropic movement that the effect he had on philanthropy was to discredit it, that he's made a mockery of effective altruism. So he's had horrible effects on just the altruistic movement. And he's made it much easier for selfish people just to be selfish. So I think he gets a zero. Wow, that's bold. I like your reasoning. I'm going to give him three for effort. Oh, well. We're awarding threes for effort now.

53:41We're going to have to re-evaluate the whole show. I'll give him a one, just because, you know, when he started out, he had the good intention, I guess. But yeah, you are right. Effective altruism is sort of a joke now. Well, we are judging him by the way he would judge himself by his consequences. And his consequences are disastrous for philanthropy. Now we come on to the second and last category, which is power. How much power do you think he had at the height of his fame and wealth? Sam is a rising five and a half or a six. A rising because he had every intention of using his fortune to maximize his political consequences.

54:15and he was going to be pretty smart about it. And he had he mesmerized the culture like there was not a politician he couldn't go visit if he wanted to go visit. There wasn't a political committee he couldn't go testify in front of if he wanted to testify in front of it. There wasn't a celebrity he couldn't go see and talk to about doing something on his behalf. He was on his way to being extremely influential, but he was so it was it was it all came and went so fast. He didn't have a chance. I doubt Rupert Murdoch a year and a half into his existence as a press baron had all that much influence.

54:48Sam was on his way to being very powerful. So on his way to becoming an eight or a nine, but crippled halfway through. I find this one really interesting because you say that, you know, because he gives money to Biden's campaign, gives more money, we think, to Democratic causes than to Republicans. But it seems like he kind of enjoys this bit of somebody who basically didn't liked doing much and was kind of antisocial. This seems to be the one area where he seemed to have a genuine interest and would show up to do it and remember to be there. And I just wonder whether he was slightly entranced by it.

55:20This was the one area where I think, hey, this is actually quite interesting. I'm not too bored. I'm going to die. So there's a reason for it. He and his movement, the effective altruist movement, had refocused themselves on existential risks to humanity for better or worse. And the way you deal with these existential risks, whether it be asteroid strikes or preventing the next big pandemic or artificial intelligence regulation is through government and politics. And so to this list, Sam had added Donald Trump because he regarded Donald Trump as an existential risk to democracy. And he thought without democracy, all these other existential risks won't be dealt with.

55:55So he was meddling for a reason and with a purpose. And that's why he was so engaged. And that meddling, you know, it might have been useful. like it is true that the united states government in the wake of covid has been woefully inept in figuring out what to do the next time this happens and has not has not really responded in a really meaningful way and it was kind of i thought it reassuring to know that someone who had these kind of resources was throwing himself at that problem is that why he said that he had use for an infinite amount of money yes because the problems required an infinite amount of money That was why the hundredth billionth dollar was going to be as useful to him as the 99th billion dollar.

56:39There are people who will argue that, you know, without his donations to Biden, Biden might have lost the last time out. But that's not power. That's influence. Power, his power was a cultural thing. Like he was, and it was in a, it was, it was still pretty confined to the narrow crypto world. Right. The boy of crypto. Yeah. So I don't think he was narrow. He didn't get to be that. He was, again, he was just getting going. Oh, so for power, this is an interesting one. I genuinely don't think he had that much power outside of crypto and the rolodex of people who were willing to pick up his phone call.

57:14So I'll also probably just give him a five. I think it's probably fair to say that until it all came crashing down, not everyone in the world knew who Sam Bankman-Fried was. He was a celebrity in the crypto world and in political circles and whatever, and he had enough money to curry favour with whoever he wanted to. But he wasn't a worldwide household name until it all came crashing down. I'm going to give him a four for power, which brings us on to our last category, which is legacy. How will he be remembered? What will he what mark will he leave on the world as he wiles away the next few decades in a jail cell?

57:48My first answer to that is going to strike you as perplexing. My first answer is he's going to be remembered as a comic figure. that that that it's front with distance. It's going to seem funnier and funnier what happened, especially after the customers get all their money back. It's going to be what it looks like really ripe social satire. And people will read it to read the story of him and revisit the story of him to shine kind of comic lights on our culture. So that's my first answer. My second answer is he has I mean, Mark Zuckerberg got there first. But Sam, it was even faster. It may be that we are, apropos of your show, in an age, because of what's happened with technology, where these instant vast fortunes can be created, and that we're going to see it happen over and over and over again.

58:44And what happens when that happens is a different dynamic. We've always had billionaires. We haven't always had billionaires who we don't know because they just showed up with a billion dollars that they made overnight. The idea of the instant billionaire who has the culture has no read on, has no sense of how to react to, doesn't know what their real intentions or purposes are. That may be a phenomenon that people that say, oh, this this is just an extension of Sam Bankman Freed. So what would you give him from zero to 10? Zero being someone who will leave no legacy at all and 10 being someone who's going to leave a mark on the world forever?

59:23Two. Maybe he'll be a pub quiz question in 10 years' time. Who knows? I'm going to give him a bit more than that. I'm going to give him a sort of four or five because I think it will colour the way people feel about crypto deregulation, that kind of stuff. You know, there will be that warning sign when people will say, oh, you don't remember what happened to FTX. But as you say, Michael, you know, people will eventually get their money back. But it won't. I think it will still be seen as one of those kind of hazard warning signs on the crypto road to financial deregulation that people and authorities will bring up from time to time.

1:00:03So I think his name will live on in crypto folklore, if nothing else. I will add to this one other thing. He may end up being significant in the criminal justice system that if, as I suspect, he's given like a 50 year sentence, it may be cause for people to revisit the idea of what these sentences are for. Your country limits sentences for fraud, I think, to 10 years. That seems about right to me that I'm not sure Sam Battenfried deserves to spend 50 years in jail for what he's done. And it's possible his case because it's attracted so much attention and because it's so bizarre and it's going to be such an outlier in terms of punishment and he's so young when he goes to jail, it may have some knock-on effects in criminal justice.

1:00:49Interesting. I think for that I might have to revise my opinion to 5 out of 10. Who knows? Come 2024, we'll see what happens with the sentencing. Okay. He's a convicted fraudster. He's a felon. Is he good, bad, or just another overnight and short-lived billionaire, Michael? are those my only three choices yes good bad or good bad or you can kind of sit on the fence and just say he's a person who made a ton of money and then lost it but he's a wonderfully complicated literary character who did some bad things so marginally bad if you had to put if you had to inch one way off the fence good or bad bad marginally bad i'd agree with that marginally bad but like you say it is the stuff of great gatsby-esque novels isn't it yeah yes i'm gonna ago, marginally bad.

1:01:39I just think that when you have that kind of control over that kind of money, then it's incumbent on you to have some responsibility for how it's actually managed. Only slightly. And you should know that no matter how weird your upbringing is, whatever, you know, you don't go and walk on Wall Street and be totally unaware of the rules. And it seemed to me that he rode roughshod over those. Yep, it's true. Well, thank you so much, Michael. It's been a great pleasure. Pleasure being with you. Thank you so much for joining us. so Zing who have we got next episode? Well we've got Mr Microsoft Mr Windows 95 Tech geek monopolistic crusher of competition world's greatest philanthropist William Henry Gates III the richest man in the world for a very long time And for everyone else it's Bill Gates Thanks for listening to Good Bad Billionaire This podcast is produced by Hannah Hufford and Mark Ward James Cook is our editor and it's a BBC Audio production And with thanks, of course, to our special guest, Michael Lewis, chronicler of all financial dramas over the last few decades.