Going Infinite: Book Review
Going Infinite: The Rise and Fall of a New Tycoon, Michael Lewis, 2023. I finished this book just at the time Sam Bankman-Fried (SBF) was convicted on all counts of fraud and related criminal charges. Lewis was much more sympathetic to the crypto gang than the prosecutors, judge, and jury. He viewed Bankman-Fried as more of a brilliant nutcase, a math prodigy with zero empathy and few feelings of any kind—more or less making Elon Musk seem relatively normal.
My interest was crypto currency, which I viewed as a convenient way to launder money for criminals around the world. [Key point: I’m not a fan.] The first question is defining what money is. It does not have to be gold or something shiny of any kind. The major purposes are a store of value (a buck is worth a buck) and medium of exchange (a 10-dollar bill will be accepted to purchase a $10 item). Finance folk add other characteristics like durability, portability, and divisibility.
Crypto currencies are called “digital tokens,” that can be made to exchange or make deposits and purchases with others using crypto currency. It is a limited medium of exchange, but is not a store of value—which can go up or down or become worthless like Sam’s FTX. It can be used for gambling, with several crypto’s like bitcoin going way up in value.
Preface: SBF liked the Bahamas because it had regulations, presumably legitimatized crypto futures exchanges. [Because his companies had no internal control or particular focus, this made little sense, apparently part of SBF’s ambiguous character.]
Act 1: Chapter 1: Yup. Natalie Tien, without experience, was named head of public relations, becoming SBF’s scheduler. Sam would go on TV while simultaneously playing video games or do other things. Forbes thought he might be worth $20 billions about 2020, partly in trading firm Alameda Research. He bought any number of other companies, with no apparent strategy. He agreed to appear or do other things and might or might not follow through.
Chapter 2: The Santa Claus Problem. SBF was born in 1992 and, not surprisingly, was a strange kid. He even wrote about Bayesian priors about Shakespeare: “pretty damning;” he also viewed religion as absurd. He was considered “hyper-rational and extremely kind” (p. 31). Communicating was difficult. SBF did well in math camp.
Chapter 3: Meta Games. While at MIT he interned with Jane Street Capital, a high-frequency trading operation, which found his rational math mind a perfect fit. He was also introduced to the cult of Peter Singer’s “effective altruism,” maximize human life or welfare, which seems a utilitarian approach [economists use utilitarianism to “maximize satisfaction.”] Sacrifice your own well-being to aid the world: direct benefiter like doctor, money maker giving away money, researcher like ethicist, and influencer, like a teacher.
Chapter 4: The March of Progress. Jane Street trading: assuming trading risk as a modern version of hedge funds using fast software and focus. Sam started working there in 2014. Computers traded with other computers rather than people, which made them faster and more frequent. Computer bots were not necessarily efficient relative to milli-seconds. SBF traded on ETFs (exchange traded funds), keeping the market prices in line with the market value of the ETF. Part of high-frequency trading was determining what computer code could do relative to the trader, based on statistical patterns. Jane Street bet big bucks on expected impact of the Trump presidency on markets around the world. Turned out, they were wrong and the markets didn’t adjust much.
Sam noticed that cryptocurrency had become a “semi-serious” financial market by 2017, with total value rising from $15 billion to $760 billion.
Act II. Chapter 5: How to Think About BOB. SBF quit Jane Street to attempt a crypto killing. He started off small and lost money, attempting an automated trading system called Modelbot. The crypto market was mainly retail and traders did not pay attention to price discrepancies. That would be his job at the firm he created called Alameda Research, somewhat similar to Jane Street. They started occasionally making money in 2018 because of crypto price distortions. Laws governed money, but “the law is what happens, not what is written” (p. 92). Bad recordkeeping was a problem, one of many things SBF did not care about. The employees quit, but expected severance from this money-losing company. “Was Sam a reckless, phony effective altruist who was going to steal or lose all their money, or were these other people simply unsuited to working in a start-up hedge fund?” (p. 99). Sam then bet bigger and made money.
Chapter 6: Artificial Love. The idea of Bitcoin as an electric coin was published in a paper in 2008. When it was established, price rises pulled in more speculators. “In traditional finance, founded on principles of trust, no one really had to trust anyone. In crypto finance, founded on a principle of mistrust, people trusted total strangers with vast sums of money” (p. 108). SBF was not approachable by employees, made negative comments and failed to offer useful advice.
SBF set up FTX as a crypto futures exchange in 2018 using tokens called FTTs (initially created 350 million, offered at $1 each). The computer code was written by one person, Gary Wang. They were not legal to sell in the US by the Securities & Exchange Commission. So FTX was incorporated in Antigua and operated in Hong Kong. Sam appeared in media and surprisingly did well, at least in crypto circles. Without regulations there were no internal controls. FTX became a major crypto player. As crypto trading efficiency went up, their trading profit went down, made up by increased volume.
Alameda Research remained a quant trading company with more money with the success of FTX. There were strange goings on and there was little or no separation between FTX and Alameda, plus Alameda used FTX as collateral for its own activities. Alameda had about half the FTT tokens.
Chapter 7: The Org Chart. Sam wanted his firm regulated and acquired licenses to operate in many countries [at least that was his claim, not so much the prosecutors]. Another crypto company, Binance opened a US exchange without clearance from regulators. Perhaps they used “wash trading” (trading with themselves) for the illusion of activity.
Act III: Chapter 8: The Dragon’s Hoard. Sam met with Mitch McConnell on pandemic response to Covid. There was a money-giving part of FTX, related to effective altruism. But hundreds of millions went to various irrelevant places included digs for employees in the Bahamas and “marketing.”
Chapter 9: The Vanishing. In late 2022 there was a run on FTX in the billions. SFG signed the bankruptcy documents for FTX in the US and most employees fled. They did not want to be prosecuted and the Bahamas police were making arrest arrangements. They threw the company into liquidation. Some $8 billion that belonged to crypto traders inside FTX were in Alameda, then disappeared. There was a struggle to find money, difficult given the lack of internal control and sloppy accounting.
Chapter 10: Manfred. Reviewing financial information meant little consideration for an accurate balance sheet, plus outlandish expenditures. (This is detailed in the book.) Much of the liquidity was in other cryptocurrencies, difficult to value, but they dropped in the run. Billions of FTX dollars ended up at Alameda and millions of account holders were owed some $8.7 billion including high-frequency traders. Some amount of money was lost to hackers, perhaps a billion dollars. Three US banks had crypto accounts like Silicon Valley Bank and all three went bankrupt.
Chapter 11: Truth Serum. Lawyer John Ray from Sullivan & Cromwell was sent to investigate (and apparently charge as much as possible for services) and he’s the one who convinced Sam to sign FTX into bankruptcy (and named the new CEO). His job was to find money and return it to creditors. Ray could find no structure and refused to talk to anyone at FTX that might know. He did assume that everyone was a crook. Lewis wanted to know where all the money went and, according to him, was still there (wherever there was). FTX executives Caroline, Gary, and Nishad pleaded guilty early to take prosecutor deals. SBF was jailed in the Bahamas and extradited to the US, then went to trail—convinced of his innocence based on intent.
Coda. The Bahamas headquarters was deserted.