Michael Lewis was researching a book about Sam Bankman Fried and the FTX cryptocurrency empire when it underwent a spontaneous implosion in November of 2022, because of… well… a “liquidity issue.“
Lewis published that book, Going Infinite, this past October 3rd, just as its main character, former FTX CEO Sam Bankman-Fried, first faced a federal judge in Manhattan on wire fraud, commodities fraud, securities fraud, and money laundering charges, with some violations of campaign finance laws thrown in for good measure.
Between the book and a media blitz he’d undertaken to promote it, Lewis has taken a lot of flack from the peanut gallery, his peers, and the general public for being a SBF apologist. This is not nor should it be surprising. Sam Bankman-Fried was the largest FTX shareholder, and the lone former FTX executive maintaining his innocence. The US Government has cut deals with all of his former inner circle, securing them reduced sentences in exchange for their testimony against Bankman-Fried.
So far all of them, including his ex girlfriend Caroline Ellison, have offered the court some version of “I committed financial crimes because Sam Bankman-Fried told me to.” The court hasn’t yet heard from the defense, but none of the trial’s observers have seemed impressed by the defense’s cross examinations of the Government’s witnesses. Bankman-Fried’s lone voice of support right now, it would seem, is Michael Lewis.
If we get technical about it, Lewis hasn’t ever offered a defense of Sam Bankman-Fried, insomuch as Lewis has never said that he wasn’t guilty. As a matter of law, Bankman-Fried’s enterprises had custody of other people’s money under conditions that required it to keep that money someplace, and when it came time to access that money in that place, it wasn’t there. Lewis hasn’t denied that or even offered an excuse. What he has done is humanize SBF with an account of the unorthodox and haphazard way that he operated, and it has turned broad public opinion against the formerly celebrated author.
Sam Bankman-Fried didn’t become less interesting or notable when his empire crumbled. Lewis’ embedded reporting would have yielded a fine, well-reviewed book about the financial markets’ quirkiest billionaire if it had been published 18 months earlier. The panic run that drove FTX under made it a book people want to read for an entirely different reason. Before that, by no coincidence, it was going to be a book about The Sam Show.
A character sketch of the former nerd king
Going Infinite depicts a Sam Bankman-Fried who understood math and applied probabilities in a way that made him especially valuable to Wall Street high-frequency trading firm Jane Street Capital from 2015 until he left in 2018 to trade crypto. Jane Street’s formula worked on identifying patterns that betrayed gaps in the market’s expression of reality and actual reality that had a high probability of closing quickly, then placing short term bets that could turn those gaps into dollars. This is effectively what all trading is. Jane Street and other modern high frequency traders just do it on shorter timelines.
Lewis recounts how Jane Street-era Sam identified movements in certain Japanese stocks that would lag movements in certain other Korean stocks by 12 hours consistently. He tracked the lag down to some German trader working a basket of stocks in Asian markets. The German trader would habitually put in his orders for the Korean stocks in the trade, then send orders for the Japanese stocks in the trade to his firm’s overseas desk to be executed when Japan opened, and leave for the day. Jane Street could let the action in the Korean stocks tell them when the Japanese stocks were due to be bought, front run the trades that were to be done in Japan, and take a profit from the effective value in the slack.
Well-regulated capital markets are considered legitimate and necessary parts of developed economies because the liquidity that they provide helps companies raise capital from investors in the form of equity and debt offerings. Modern financial markets include all manners of futures and derivatives markets where players can cook up bets on the value of pretty much any stock, bond or commodity, all in the name of price discovery and investor liquidity.
There’s no value added to the economy through high-frequency or short-duration trading, because there’s really no value added to the economy in any kind of trading. It’s just a clip. It’s legal, and nobody at the SEC, DOJ, or anywhere of consequence says it shouldn’t be. The reasonable constraints placed on these markets by the institutions tasked with policing them don’t include prohibitions on trades that flip a stock in a matter of nanoseconds for millions in profit, and why would they? If a flash trade meant to exploit an inefficiency that exists for an instant is immoral or against the spirit of the enterprise, then why isn’t a trade that exploits an inefficiency that exists for a week or a year just as wrong?
When SBF left Jane Street Capital in 2017 to start Alameda Research, cryptocurrency markets were full of gaps that could be exploited for money, and serious financial institutions didn’t want anything to do with them for a lot of solid reasons. A whole galaxy of coins and places to trade them, lend them, and borrow against them was exploding in a frothy turmoil that various types of US regulators were itching to find a way to control.
For any practical purpose, none of these coins were any good for anything but trading. They didn’t represent the equity or debt of companies like stocks or bonds do. They were (and still are) just pure, naked trade meat that the SEC would happily make an example of any brand name company for handling. Any competent compliance department at any firm that tried to trade crypto would have had a fit.
Who he is is interesting, but it’s what he does that’s relevant
Crypto trading was not accepted by polite society, and neither was Sam Bankman-Fried. He didn’t have or want a compliance department or any other kind of adult supervision. He just wanted to be the only one doing Wall Street grade clips in this unregulated market that was too hot for the United States.
Lewis goes on to describe a giant dork, allergic to managing people and to any other kind of work that wasn’t interesting to him, clomping around low-efficiency markets that never closed, picking up money that was just lying around. He was so good at it that brand name venture capital firms started throwing money at him to buy stakes in FTX, despite never getting a good look at his cap table, financial statements or anything else they’d generally demand from a company they were investing in.
What’s to know? FTX was printing enough money to name stadiums, advertise on umpires and buy Steph Curry and Tom Brady!
There, but by the grace of god, go all emotionally stunted billionaires with shadow banks
Co-mingling FTX customer funds with Alameda trading accounts, facilitated by a back door in the code that prevented FTX from liquidating Alameda’s accounts when they were in deficit, was the sort of thing that one might expect from a grown child who was accustomed to being able to make hundreds of millions of dollars a month trading. He never considered the fact that he might one day not be able to make money trading, or that the moment he wasn’t able to would be the same moment that the investors thirsty for his equity would suddenly want nothing to do with him.
Going Infinite‘s treatment of post-collapse FTX is where Lewis’ narrative diverts sharply from the more popular accepted version, in that it doesn’t cast Sam Bankman-Fried as a villain who was out to rip people off, that was too greedy to care who he hurt. Lewis has SBF operating an unconventional, sloppy, careless, and ultimately doomed shadow bank, and an engineered crash of its core asset, the FTT Coin, bringing about the inevitable. Lewis’ version of Sam certainly doesn’t consider himself greedy; but is clearly oblivious to the people he’s affecting.
Going Infinite makes John Jay Ray’s receivership out to be an unyielding grab at whatever money was left in FTX’s treasury, or could be clawed back from wherever FTX spent it through lawsuits… which it is, because that’s what bankruptcy proceedings are, and what receivership CEOs do. He points out that the law firm handling this bankruptcy, Sullivan and Cromwell, stands to earn hundreds of millions of dollars from it, which of course it does. Someone who didn’t know any better might think that everyone wrapped up in the life and death of an international shadow-bank was in it for the money.
Two weeks after the book’s publication, and two weeks into Sam Bankman-Fried’s trial, we’re beginning to see how SBF’s co-defendants’ versions of events measure up with Sam’s version, as it’s relayed by Lewis. They mostly square up, because Going Infinite doesn’t deal with the legally crucial factors of who knew what when.
In our reading, this isn’t a book about SBF, so much as a book about the mess he made and how he made it. It’s a book that deals with the financial markets in the same way as previous Lewis books; as an all-consuming, ruthless jungle that humans are practically forced to contend with, no matter how little sense they make and no matter how it warps them.
We’ll take a closer look at SBF’s ongoing trial, and how it relates to Going Infinite in part 2.
Information for this briefing was found via Going Infinite, OffshoreAlert, and the sources mentioned. The author has no securities or affiliations related to the organizations discussed. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.