The Most Entertaining Outcome
market update, elon, and SBF-FTX saga
I was on the Pathless Path with Paul this past week!
Market Update
Lots of things keep on happening.
Elon almost blowing up Twitter, the continuation of the SBF-FTX trainwreck, housing market continues to get weirder with negative prints in NAHB home builders and single family starts, bond market flashing recession, and Target cratering. However, food deflation is coming, the job market is hanging in there, retail sales were okay, rents are slowing, freight rates have tumbled, and PPI came in soft.
Disinflationary data is coming through, but inflation is still a bright spot of worry.
The Fed brought out the hammer again this week, making sure everyone understands that They Are Serious This Time.
Bullard is absolutely waving his hands and saying “everyone CALM DOWN” and is subscribing to “do more now to do less later” which probably works in some cases, but maybe not in an economic environment where turning the oven up to 400 degrees won’t cook the cake any faster?
And they are Exceptionally Serious about controlling the market, which is sort of funny, because that is not part of their dual mandate! Powell will be speaking at the end of November, and that certainly will be another mallet to the stone.
Elon and the SiliconValleyTechBro™️
There are some parallels between Elon Musk and SBF, the idolization of a SiliconValleyTechBro™️, the pedestalization of people, the founders first thesis that Anthony Bardaro highlights well, that I want to quickly discuss. There’s a quote that I love from Melanie Exler:
When god became lonely
he created man,
Or was it when man become lonely
he created god
Elon tweeted this out yesterday.
“The word of the people is the word of God”
He said this while reinstating Donald Trump’s twitter account? And if I were a God, I would probably be doing something different, but sure. And of course, I don’t really want to red string this and say “oh look, it surely seems like Elon Musk is comparing himself to God, maybe?” because that’s not really what is going on probably, but there is an underlying theme of us-ness in how Elon is approaching Twitter.
“Together, Me and lowercase-you, if you just take my hand, we can build a less-terrible-version-of-this-place”
But of course, us-ness is not *truly* us-ness. Rather, it’s an overcorrection.
We are emerging from the Land of the Silicon Valley Elite (which Musk is a part of!) where the dynamic has become Us (the people) vs. Them. Us vs. Big Tech, Big Money, Big Media.
And now, there is an idea that Things Need to Belong to People again
The problem with the populism that Elon Musk inadvertently champions is that he is still a “god” in that story. And going back to Exler - “when god becomes lonely, he created man.”
"There is in our future a TV or Internet populism, in which the emotional response of a selected group of citizens can be presented and accepted as the Voice of the People." - Umberto Eco
The narrative always needs someone to tell it. A God is always going to need to ensure his own existence by having people be there. One could argue that what Elon is doing with Twitter is weaponized incompetence or planned demolition, the most entertaining outcome, whatever.
But then of course, you have to ask - the most entertaining, to whom?
SBF-FTX Saga Summary
This is a very high overview of what has happened so far with SBF-FTX. It’s not quite a timeline, but rather, a representation of the vortex of the universe that this is.
One sentence summary: This was dumb, big bets that worked until they didn’t; financial engineering that morphed (or always was) fraud and beyond.
Before: FTX was a powerhouse in the industry - so much so that they were bailing out companies like Voyager and BlockFi a few weeks ago (this will haunt them later). They were sort of associated ? with a hedge fund/vc called Alameda - but it was like a situationship, they weren’t dating but everyone knew they were together, you know? And there was zero downside, to any of this!1
SBF was a regulatory darling - he was in DC, shoes untied, playing video games, the total OhBoyFounderGeniusExtraordinaire vibes.
The balance sheet leaked: On November 2nd, Alameda’s balance sheet was leaked by CoinDesk. And everyone was like “hey why do you have like $3.6b of FTT and $2.16b of ‘FTT collateral’?” FTT is a token issued by FTX for trading fees, so it was very much a “oh wow the situationship was marriage”
Alameda said “oh noo haha that’s not our balance sheet, that’s a figment of your imagination” (which was somewhat true, some of their assets were imaginary) and then CZ, who is the CEO of Binance, another crypto exchange was like “Buckle up”
Crypto Exchange Beef: CZ and SBF had a bit of beef. SBF was designing regulation to hurt Binance (and the broader industry) so I mean, beef warranted.
Binance had helped to spin up FTX, sold their stake about a year ago, and in exchange, got $2b FTT amongst other things.
CZ said that he was going to sell *his* stake of FTT and said “hey y’all are giving me Luna vibes lol bye.” This was a nuclear situation for FTX so Caroline from Alameda said “all of it, we can buy $22” and the market freaked.
A bank run happened! FTX was flailing, and so was Alameda. People took out $6 billion. FTX then paused withdrawals. Bad.
Binance steps in and then out: Binance was like “hey we can save you?” and then they saw the pit of hell that is the balance sheet, and quickly said nevermind!!2 SBF was tweeting wildly during this time, assuring everyone that everything was fine and trying to find $9b to close holes, which is what we all do right before things completely implode.
And so many things came to surface! Imagine that you are crawling around in a sewer and shining a light down various hallways! That’s this!
Alameda: Alameda wasn’t good at trading (but thought they were but maybe not!)3 - they got too aggressive with venture, had a large margin position, pledged illiquid collateral to do more bets - they were well-capitalized gamblers.
When lenders were like “our money pls” Alameda did not have it! FTX had lent $10b of client funds to Alameda and said “whoopsie, we are completely misusing assets that aren’t ours - it is also BIGGER THAN WE THOUGHT IT WAS”
The worst thing is that Alameda was FRONTRUNNING tokens ahead of FTX listing?? How do you LOSE when you ARE the game???
The Bahamas: The Bahamas froze FTX assets and directed those assets to their own digital wallet? FTX had allowed withdrawals for Bahamian users, but they weren’t actually supposed to do that (now they are asking for that money back) so it created a black market for Bahamas FTX accounts.
FTX Digital Markets filed for Chapter 15 bankruptcy, and the Bahamas was NOT happy about that. So they now own a bunch of ETH? And are also squaring up with US bankruptcy courts.
FTX had filed for bankruptcy - them and their 134 associated firms. John J. Ray III - the man who liquidated Enron - steps in as CEO, throws his hands in the air and releases a small scream
I would be screaming too if I also had more than million creditors and $50b+ in liabilities and counting
Binance becomes a central bank during this time, and helps with an “industry recovery fund” which is very J.P. Morgan era 1913 of CZ! But also, CZ needs to check the industry out, understand the exposure, and also, win this game, probably.
SBF-Alameda gets worse: But then things got spookier, because turns out SBF had built some sort of backdoor - so basically Alameda could borrow an unlimited amount of money from FTX - your $1m is *their* $1m which is so cute and awesome and illegal (and incredible hindsight in this clip here)
The balance sheet was a nighmare, a crayola copy of some other dimension of reality. FTX’s balance sheet was composed of tiers of liquidity -liquid, less liquid, and illiquid. They had less than $1b of assets against $9b in liabilities, which is not good.
Their most liquid asset was Robinhood shares (which somehow feels like the A and B plot connecting, like of course it was) and hidden, poorly internally labled ‘fiat@’ account which was an accidental $8b sent to Alameda (who amongst us hasn’t sent an accidental $8b between friends) and TRUMPLOSE
Also their two biggest assets were FTX and something called Serum, which is also something that FTX helped to create. Collectively, those were worth $10b pre-crash. Everything is worth $10b if you say it is! Like yes, my toaster is theoretically worth $10b until it’s time to sell - and then it isn’t.
Hack: Somewhere in all of this, FTX also got hacked too. And that person is moving money around all over the place.
THE TWEETS: This whole time, SBF is tweeting (and other fraudsters are crawling out of the sewer too). The NYT releases this absurd puff piece and says “hey everyone, our guy is sleepytime bear vibes, like all good over here”
SBF is also *still* trying to raise money and says that Alameda had enough assets “mark-to-market (but not liquid)” which in that case, I also have enough assets, too. And so do you. Instant-millionaire recipe right there.
Dominoes tip: Then, contagion really starts to come through4
BlockFi, Ikigai, Multicoin Capital and so many more were all impacted - The Block has a good breakdown of exposure here
But the really big deal is Genesis, a child company of Digital Currency Group, a big component of the institutional crypto system seeking a $1b credit facility and pausing withdrawals. Genesis is the center of crypto markets - custody funds, help earn yield, and are the yield product for Centralized Finance platforms as Jason Yanowitz writes.5
Grayscale, another child company of Digital Currency Group, won’t share proof of reserves because they are “worried about security”. 50+ market makers and fund managers have exposure to FTX, and presumably, they aren’t going to want to open their books either - the holes would rip open.
Ram Ahluwalia posted a good thread walking through the consequences of Genesis going under - the only full-service prime broker in crypto might need a a buyout from an investment bank - or declare bankruptcy. Which is bad.
MORE TWEETS: SBF does a Twitter DM interview with Vox, where he says “heh” one too many times for someone in his situation, says effective altruism was only meant to be effective and not altruistic, and just shows zero signs of remorse. Also, he is not even good at League of Legends.
Caroline from Alameda explained that only 4 people knew what was happening - her, SBF, Nishad Singh, and Gary Wang (who SBF also threw under the bus in the Vox interview)
Enron guy health check: The new FTX CEO guy is screaming even louder and beating the walls with his fists as SBF continues to tweet - and in the first day declaration bankruptcy filing6 he writes "Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information.” Like ??? worse than ENRON
Yes, yes. Auditors in the metaverse. Spending customer funds on real estate. No one knows how many employees they have? Also they *kept printing* FTT tokens, after filing for bankruptcy! They had no accounting department.
Larry David, Tom Brady, and others that did advertisements for FTX are getting sued and Kevin O’Leary somehow would back SBF again
Dilly dally: The VCs that invested are like “hehe whoopsie, marking this down to $0, due diligence? we thought you meant do dilly dally in a field of daisies.”
Of course, FTX cross-invested in some of the VCs so… everyone gets a piece of the pie, I guess. And some VCs passed! They said “hey not for us, we prefer to pump and dump our coins :-) hehe!”
FTX raised a ridiculous $420 million from 69 investors last year, and turns out SBF pocked $300 million of that
But don’t worry, they are going to “dream a little less 🥺”
And it just keeps getting worse. Michael Lewis was there somehow of course though, so at least we will get a good book out of this. But millions of people lost a lot of money, and it created a cascade that probably just begun.
I’ve been covering this extensively on YouTube and the podcast, and have done two pieces for Bloomberg and Bankless on it too.
My big takeaway is that this is fraud, criminal behavior, yep.
Disclaimer: This is not financial advice or recommendation for any investment. The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.
David Fauchier tweeted out the whole Alameda pitch deck and it’s a sight to see
CZ did an interview with the Milken Institute that is pretty comprehensive of his views
There is also speculation that they were intentionally bad? Which is truthfully a level of meta beyond my comprehension. Milky Eggs has a good article that dives into what they think happened and nansen.ai traced fund flows
Alfa posted a great graphic detailing the daisy chain mess of all of this.
DCG owns Genesis and Coindesk as Tree of Alpha writes “Genesis is forced to halt withdrawals after a bankrun initiated by a Coindesk exclusive regarding Alameda's balance sheet is almost poetic.”
They took a long time to do this, they have several filings, John Wu has a good recap of this one
I love Kyla's excerpt from Melanie: When god became lonely he created man, Or was it when man become lonely he created god. Each time I read a Kyla Scanlon article, I am torn between classifying the work as philosophy, economics or simply sheer brilliance!