Lex Fridman PodcastCoffeezilla: SBF, FTX, Fraud, Scams, Fake Gurus, Money, Fame, and Power | Lex Fridman Podcast #345
EVERY SPOKEN WORD
150 min read · 30,369 words- 0:00 – 0:38
Introduction
- LFLex Fridman
Do you think he is incompetent, insane, or evil? The following is a conversation with Coffeezilla, an investigator and journalist exposing frauds, scams, and fake gurus. He's one of the most important journalistic voices we have working today, both in terms of his integrity and fearlessness, and the pursuit of truth. Please follow, watch, and support his work at youtube.com/coffeezilla. This is the Lex Fridman Podcast. To support it, please check out our sponsors in the description, and now, dear friends, here's Coffeezilla.
- 0:38 – 2:48
Coffee
- LFLex Fridman
How do you like your coffee? Dark and soul-crushing? That was the, uh, number one question on the internet.
- COCoffeezilla
(laughs)
- LFLex Fridman
Do you like your coffee to reverberate deeply through the worst of human nature? Is that how you drink your coffee?
- COCoffeezilla
I've gone through a lot of phases on coffee.
- LFLex Fridman
Yeah.
- COCoffeezilla
I used to, in college, I would go super deep into, you know, grinding fresh beans, all of that kind of stuff, water temperature exactly right, and then I hit a phase where I was just, it was the maintenance dose, then I went to, like, espresso because I could get a lot more in.
- LFLex Fridman
Yeah.
- COCoffeezilla
And now I go through phases of, like, sometimes I like it with a little oat milk, sometimes a little half and half and sugar if I'm feeling-
- LFLex Fridman
Oh, you've gotten soft in your old age.
- COCoffeezilla
I've gotten a little, I, I have. But hey, if I'm doing a SBF interview, it's black that day, nothing less.
- LFLex Fridman
Yeah.
- COCoffeezilla
Just black, no sugar.
- LFLex Fridman
The lights go down. Wha- what do you actually do in that, in those situations, like, uh, leading up to a show? Do you get hyped up? Like, how do you put yourself in the right mind space to explore some of these really difficult topics?
- COCoffeezilla
I think a lot of it's preparation and then once it happens, it's mostly fueled by sort of adrenaline, I would say. Um, I really deeply care about getting to, like, the root cause of some of these issues because I think so often people in positions of power are let off the hook, so I really care about holding their feet to the fire and it translates into, like, a lot of energy the day of. So I, I never find myself, like, funny enough, I usually drink a lot of caffeine leading up to the interview and then I try to drink, like, minimum the day of because I have so much adrenaline I don't wanna be, like, hyper stimulated.
- LFLex Fridman
I have to say, uh, of all the recent guests I've had, the energy you, you had when you walked into the door... (laughs) Was pretty intense.
- COCoffeezilla
I'm excited!
- LFLex Fridman
...was crazy.
- COCoffeezilla
Are people not excited that you're here?
- LFLex Fridman
(laughs) I don't know. I think they are scared.
- COCoffeezilla
Hey, you're a big deal, Lex.
- LFLex Fridman
I th- I think they're scared.
- COCoffeezilla
I mean, I don't know if you know.
- LFLex Fridman
I felt like you were gonna knock down the door or something. You were very excited. Um, (laughs) like that just energy. Um, it was terrifying because I'm terrified of social interaction. Anyway, uh, speaking of terrifying-
- COCoffeezilla
You ch- you chose a good living of interviewing people for... (laughs)
- LFLex Fridman
Face your fears, my friend.
- COCoffeezilla
There
- 2:48 – 17:28
SBF and FTX
- COCoffeezilla
you go.
- LFLex Fridman
Uh, so let's talk about SBF and FTX. Who is, uh, Sam Bankman-Fried? Can, can you tell his story from the beginning as you understand it?
- COCoffeezilla
Yeah. So Sam Bankman-Fried is a kid who grew up sort of from a position of huge privilege. Both his parents are lawyers. I believe both of them were from Harvard. He went to MIT, went to, like, or sorry, backing up a bit more, he went to, like, this top prep high school, then to MIT, then he went to Jane Street, and after that he get, started a trading firm in, I think, 2017 called Alameda Research with a few friends. Some of them f- were from Jane Street, some of them worked at Google, and they were sort of the smartest kids on the block, or that's what everyone thought. They made a lot of their money on something called the Kimchi Premium, or at least the s- the story goes, which just to explain that, uh, the price of Bitcoin in Korea was substantially higher than in the rest of the world, and so you could arbitrage that by buying Bitcoin elsewhere and selling it on a Korean exchange. So they made their money early doing kind of smart trades like that. They flipped that into market making, which they were pretty early on that, um, just providing liquidity to ex- an exchange, and it's what's, it's a strategy that is considered delta neutral, which means basically if you take kind of both sides of the trade and you're making a spread, like a, a fee on that, you make money whether it goes up or down. So in theory, there shouldn't be that much risk associated with it. So Alameda kinda blew up because they would offer these people, you know, people who are giving out loans, they'd say, "Hey, we'll give you this really attractive rate of return and we're doing strategies that seemingly are low risk, so we're a low risk bet. We're these smart kids from Jane Street, and you can kind of trust us to be this smarter than everyone else," kind of thing. Uh, around 2019, Sam started FTX, which is an exchange. Uh, specifically it specialized in derivatives, so, like, margins, kind of more sophisticated crypto products, and it got in with Binance early on. So Binance actually has a prior relationship to FTX, which we'll explore in a second 'cause they're gonna play a role in FTX's collapse actually. Binance is the number one, uh, crypto exchange and they are led by, uh, he's called CZ on Twitter, I don't wanna butcher his full name, but, um, really smart guy, has played his hand really well and built up a quite large exchange, and Binance was funding a bunch of different, like, startups, so they funded, they helped invest into FTX early on. They invested 100 million. So these guys were kind of like teammates early on, SBF and CZ, and FTX quickly grew. They got, like, especially in 2020, 2021, they got a lot of endorsements. They got a lot of credibility in the space, and eventually FTX actually bought out Binance. They gave them $2 billion dollars, so pretty good investment for, for CZ in a couple years. Um, and now lead that up to 2022, what happens?... Luna collapse, Three Arrows Capital collapse, which if you don't know, there's just these kind of cataclysmic events in crypto, uh, led by some pretty risky behavior where the Luna was a token that promised really attractive returns that were unsustainable ultimately, and it just kind of spiraled. It did what's called a, uh, stable coin death spiral, which we can talk about if we need to.
- LFLex Fridman
Stable coin death spiral. I, I can't wait till that, like, actually enters the lexicon, like a Wikipedia page on it, like, uh, e- economic students are learning it in school.
- COCoffeezilla
Yes.
- LFLex Fridman
It's like a chapter in a book. Anyway, um, look, I mean, this is the reality of our world. This is a really big part of our, of the economic system, is cryptocurrency, and stable coin is part of that.
- COCoffeezilla
Yeah. It's weird because on the one hand, cryptocurrency is supposed to somewhat simplify or add transparency to the financial markets. The idea is for the first time you don't have to wait for an SEC filing from some corporate business. You can look at what they're doing on chain, right? Um, so that's good because a lot of big financial problems are caused by lack of transparency-
- LFLex Fridman
Mm-hmm.
- COCoffeezilla
... and lack of understanding risk. But ironically, you get some people creating these arbitrarily complicated financial products like algorithmic stable coins which then introduce more risk and blow everything up. So anyways, uh, Three Arrows Capital blew up, and all of a sudden this crypto industry which everyone thought was going to the moon, Bitcoin to 100,000, is in some trouble. And FTX seems like the only people who, besides like Binance who's also really big and stable and Coinbase, uh, they seemed like they were doing fine. In fact, they were bailing out companies in the summer. I don't know if you remember that SBF was likened to like Jamie Dimon who's the, you know, uh, CEO of Chase, who like kind of was like, "The buck stops here." Uh, you know, "I'm like the backstop," right? So SBF was supporting the industry. He was like the stable guy. So come to like around October and November, there's all this talk about regulation. Everything's been blowing up. SBF's leading the charge on regulation. And CZ, the CEO of Binance, gets word that maybe SBF is kind of like cutting him out or making regulation that would maybe impact his business, and, uh, he doesn't like that too much. They start kind of feuding a little bit on Twitter. So when it comes out, a CoinDesk report came out that FTX's balance sheet wasn't looking that good, like it looked pretty weak. They had a lot of coins that in theory had value if you looked at their market price, but for f- a variety of reasons, if you tried to sell them, they'd collapse in value. So it was sort of like this thing, a house built on sand, and, uh, a friend of mine on Twitter, he goes by Dirty Bubble Media, he released a report and he basically said, "I think these, uh, these guys are insolvent." Well, CZ saw that and he retweeted it and started adding fuel to the fire of like the speculation. 'Cause up till this point everyone thought FTX is super safe, super secure, there's no reason to not keep your money there. Tom Brady keeps his money there, whatever. And CZ kind of fuel- adds fuel to the fire by saying, "Not only am I retweeting this adding kind of like validity to this speculation, but also I'm going to take the FTT that I got," which part of their balance sheet was this FTT token, which is FTX's like proprietary token, and Alameda and, uh, FTX controlled a lot of it. They were using this token to basically be a, a large amount of collateral for their whole balance sheet. So it accounted for this huge amount of their value, and the CEO of Binance had a huge chunk of it as well. And he said, "I'm gonna sell all of it." And the i- the fuel that that introduced to the market is if he sells all this FTT and this FTT is underwriting a lot of the value of FTX...
- LFLex Fridman
Does FTT s- almost approximate like, uh, similar things if you were to buy a stock in a public company? Is that kind of like a stock in FTX?
- COCoffeezilla
It sort of was this proxy because what FTX was committed to doing was sort of like buying back FTT tokens. They would do this-
- LFLex Fridman
Ah.
- COCoffeezilla
... thing called the buy-and-burn. I think there was some amount of sharing in the revenue fees of FTX. It was kind of this convoluted thing. In my opinion, the exact value of FTT was speculative from the beginning.
- LFLex Fridman
Mm-hmm.
- COCoffeezilla
And it was clear that it was very tied to the performance of FTX, which is important because, we'll get to later, FTX sort of built their whole scaffold on FTT which meant that this scaffold was very wobbly, because if FTX loses a little bit of confidence, then your value goes down. When your value goes down, you lose more confidence, and this goes dow- so it was kind of like this thing that, this flywheel that when it was going well, you got huge amounts of growth. When it's going bad, you get a, uh, exchange death spiral (laughs) sort- so to speak.
- LFLex Fridman
Actually, this structure, it's a pretty non-standard structure. Did the, uh, architects of its initial design anticipate the wobbliness of the whole system? So putting fraud and all those things that happened later aside, do you think it was difficult to anticipate this kind of FTT, FTX/Alameda Research weird dynamic?
- COCoffeezilla
No, because I think sophisticated traders always think in terms of diversification and correlation. So if you're trying to... The way to think about risk in investing is like if I invest in you, Lex Fridman, and then I also invest in some product you produce, those, those, the performance of those two things will be pretty correlated.
- LFLex Fridman
Yes.
- COCoffeezilla
So whether I invest in you or I invest in this product that you, like, are completely behind, I'm not de-risking, I'm basically counting all on you doing well, right?
- LFLex Fridman
Mm-hmm.
- COCoffeezilla
And if you do bad, my investments do very bad. So if I'm trying to build a stable thing, I shouldn't put all my eggs in the Lex Fridman basket unless I'm positive that you're gonna do well, right? And these people...
- LFLex Fridman
As your financial advisor, I would definitely recommend-
- COCoffeezilla
Yeah. (laughs)
- LFLex Fridman
... you do not put all your eggs in this basket.
- COCoffeezilla
Right. And so you can think about it like if I know that, these people were trained to think like this, and so the idea that you could start this exchange, you're worth billions of dollars, and you underwrite your whole system by betting...... m- putting most of it on your own token is, is insane. And what, and what's crazy is we'll later find out that they were basically taking customer assets, which were real things, like Bitcoin and Ethereum, with, with risks that were not so correlated to FDX, and they were swapping them out. They were using them to go, go basically gamble those and putting FTT in its place as "value." So they were increasing the risk of the system in order to bet big, with the idea that if they bet big and won, we'd all be singing their praises, if we bet big and lo- if they bet big and lost, I don't know if they had a plan, but I think they were, I think they were being extremely risky and there's no way to avoid their knowledge of that.
- LFLex Fridman
So when you say customer assets, it's, "I come to this crypto exchange, I have Bitcoin or some other cryptocurrency," and it's, this is a, a thing that has pretty stable value over time. I mean-
- COCoffeezilla
Yeah, relatively.
- LFLex Fridman
... as crypto relative-
- COCoffeezilla
Relatively.
- LFLex Fridman
... relatively so.
- 17:28 – 26:36
$8 billion
- COCoffeezilla
he owned.
- LFLex Fridman
So like a compassionate but hard-hitting gangster that you are, uh, recent- very recently you interacted with SBF on... Uh, I like how you adjust (laughs) uh, the suspenders as you're saying this. Um, (laughs) you interacted on Twitter Spaces uh with SBF, and uh, really put his feet to the fire, uh, with some hard-hitting questions. What did you ask and what did you learn from that interaction?
- COCoffeezilla
Sure. I should say first, this was not a willing interaction. I mean, I thought that was kind of the funny part of it, 'cause I've been asking him for an interview for a while. He's been giving interviews to nearly everyone who wants one. Big channels, small channels. Um, he didn't give me one, but I managed to get some by sneaking up on some Twitter Spaces and DMing the people and like being like, "Hey, can I come up?"... so I didn't get him to ask everything that I wanted, because he, like, would leave, sometimes (laughs) , uh, you know, after I asked some of the questions. But really what I asked was about this eight billion, and h- zooming in on the improbability of his lack of knowledge, um, it's sort of like if you, if you run a company and you know the insides and outs, and you're the top of your field, top, top in class, and all of a sudden it all goes bust and you say, "I had no idea how any of this worked."
- LFLex Fridman
Yeah.
- COCoffeezilla
"I didn't, I didn't know," it's like the guy who runs Whataburger saying, "I didn't know where we sourced our beef. I didn't know where we," that's a Texas example, actually.
- LFLex Fridman
Thank you, I appreciate that.
- COCoffeezilla
Uh, let's, let's take it, like, worldwide. Walmart, like, "I didn't know we used Chinese manufacturers." It's like, that's impossible. To become Walmart, you have to know how, like, how your supply chain works. You have to know, even if you're at a high level, you know how this stuff works.
- LFLex Fridman
Can I do a hard turn on that, and go-
- COCoffeezilla
Sure.
- LFLex Fridman
... as one must, to Hitler? Uh, H-Hitler's writing is not on any of the documents around, as far as I know, uh, on the final solution. So in, in some crazy world, he could theoretically say, "I knew, I didn't know anything about the death camps," uh, so there's this plausible deniability, in theory. So that's, but that, most people would look at that and say, "Eh, it's very unlikely, you don't (laughs) know."
- COCoffeezilla
Well, especially if all the insiders are coming out and saying, "No, no, no, of course he knew. He was directing us from the top." I mean, um, what was clear, what's interesting about the structure, and, like, I love the nitty-gritty.
- LFLex Fridman
Sorry, we're back to SBF.
- COCoffeezilla
Yeah.
- LFLex Fridman
We went to Hitler-
- COCoffeezilla
Sorry, sorry.
- LFLex Fridman
... now we're back to SBF.
- COCoffeezilla
Sorry, I wanted to turn us as fast as possible away from Hitler.
- LFLex Fridman
(laughs)
- COCoffeezilla
Um, I, yeah (laughs) , I-
- LFLex Fridman
Apologies. So the insiders in what? Alameda Research?
- COCoffeezilla
Alameda Research.
- LFLex Fridman
Alameda Research.
- COCoffeezilla
What was interesting is that there was this sort of one-way window going on between Alameda and FTX, where FTX employees didn't know a lot of what was going on. Alameda insiders, and I would say by design, knew almost everything that was going on at FTX. Um, and so I think that was really interesting from the perspective of a lot of the so-called f- like, what you could, what he's trying to ascribe to as, like, failures or mistakes or ignorance and negligence, when looked at closely, are much more designed, and they sort of don't arise spontaneously.
- LFLex Fridman
Mm-hmm.
- COCoffeezilla
'Cause, like, let's say, so there's this thing in banking, and, like, trading, where if I run a bank and you run, like, a trading firm, we need to have informational walls between us, 'cause there's huge conflicts of interest that can arise, right? So the negligent argument might be that, like, "Oh, we just didn't know. We're sort of these dumb kids in the Bahamas, so we shared information equally." But when you see a one-way wall, that starts to look a lot different, right? If I have a back-end source of looking at, or sorry, you're the trading firm, so you have a back-end way to look at all my accounts, and I have no idea that you're doing that, that all of a sudden looks like a much more designed thing. When it would be plausible, let's say, going t- to- to use another- another analogy too, if you're saying, "Look, I co-mingled funds 'cause I was so bad at corporate structures," you would expect those companies to have a very simple corporate structure, 'cause you didn't know what you were doing, right? But what we see with FTX and Alameda is they had something like 50 companies and subsidiaries, and this inco- impossibly complicated web of corporate activity. You don't get there by accident. You don't wake up and go, "Oh, I designed, like, this watch that ticked a very specific way, but it was all accidental." If you really didn't know what you were doing, you'd end up with a simple structure. So even just, like, from a fundamental perspective, what SBF was doing and, like, the activities they were engaging in were so complicated and purposely designed to obfuscate what they were doing, it's impossible to subscribe to the negligence argument. And I wanna quickly say too, like, I don't think a lot of people have honed in on this, there was insider trading going on from Alameda's perspective, where they would know what coins FTX was going to list on their exchange, and there's a famous effect where, let's say you're this legitimate exchange, you list a coin, the price spikes.
- LFLex Fridman
Mm-hmm.
- COCoffeezilla
Insiders told me it was a regular practice for Alameda insiders to know that FTX was going to list a coin, and as a company, buy up that coin so they could sell it after it listed, and they made millions of dollars. How do you do that accidentally?
- LFLex Fridman
Yeah. And that's, that's illegal, right?
- COCoffeezilla
Totally illegal.
- LFLex Fridman
Right.
- 26:36 – 36:32
Evil vs incompetence
- COCoffeezilla
- LFLex Fridman
Okay. Do you think he is incompetent, insane, or evil? If you were to bet money on each of those.
- COCoffeezilla
Incompetent, insane, or evil?
- LFLex Fridman
Insane, meaning he's lying to everyone, but also to himself, uh, which you could, which is a little bit different than incompetence.
- COCoffeezilla
He's not incompetent. So the, I think he's some combination of insane and evil, but it's impossible to know unless we know deep inside his heart how self-, like, diluted he is versus a calculated strategy, and I think if you look at SBF, he's such a, I think he's a fascinating individual. Just, I mean, you know, he's a horrible human being. Let's start there. But he's also somewhat, um, interesting from a psychology perspective, because he's very open about the fact that he understands image and he understands how to cultivate image, the importance of image, so well that I think a lot of people, even though they've talked about it, aren't emphasizing that enough when interacting with him. This is a man whose entire history is about cultivating the right opinions at the right time to achieve the right effect. Why do you think he would suddenly change that approach when he has all the more reason to cultivate an image?
- LFLex Fridman
So he is extremely good naturally or, uh-
- COCoffeezilla
I don't know if he's good, but he's like, he's a w- hyperaware.
- LFLex Fridman
So he's deliberate in cultivating a public image and controlling that public image.
- COCoffeezilla
For sure. You, you know about the, like, Democrat donations. Like, he, he knew to donate to the right people, $40 million. He says on a call that we released with Tiffany Fong, he says on a call that he donated the same amount to Republicans. There's speculation on whether this is true, because he's a liar, whatever. So caveat there. But he said he donated to Republicans the same amount, but he donated dark, because he knew that most journalists are liberal and they would kind of hold that against him. So he wanted all the, all the sides to be on, in his favor, in his pocket, while simultaneously understanding the entire media landscape and playing them like a fiddle by cultivating this image of, "I'm this progressive, woke billionaire who wants to give it all away, do everything for charity. I drive a Corolla," while living in a million dollar penthouse, multimillion. Um, but, but that was sort of the angle. He, he understood so well how to play the media, and, um, I do- I think he underestimated when he did this how much people would put him under a deeper microscope, and I don't think he has achieved the same level of success in cultivating this new image, because I think people are so skeptical now. No one's buying it. But I think he, he's trying it. He's doing it to the best of his ability.
- LFLex Fridman
But it has worked leading up to this particular wobbly situation. So before that, wasn't there a public perception o- of him being a, a force for good, a financial force for good?
- COCoffeezilla
100%. Yeah. Somebody from Sequoia Capital, you know, wrote this glo- glowing review that he was gonna be the world's first trillionaire. There are so many pieces done on he's the most generous billionaire in the world, that, um, he was sort of like the steel man of, you know, it's possible to make tons of money. This is like the effective altruism movement. Make as much money as you can as fast as you can and then give it all away. And he was sort of like the, the poster child for that. And he did give some of it away and got a lot of press for it. And I think that was kind of by design. I want to address a real quick point.
- LFLex Fridman
Yes.
- COCoffeezilla
A lot of people have said that, like, Binance played a role. And while they catalyzed this, insolvency......is a problem that will eventually manifest either way. So I don't put any blame on CZ for basically causing this meltdown. The, the underlying foundation was unstable and it was gonna fall apart at the next push. I mean, he just happened to be the final kind of like, uh, I don't know, the straw that broke the camel's back.
- LFLex Fridman
Yeah. The catalyst that revealed-
- COCoffeezilla
But yeah-
- LFLex Fridman
...the fraud.
- COCoffeezilla
...but it's like I don't, I don't think he's culpable for FTX's like malfeasance in how they handled accounts, if that makes sense.
- LFLex Fridman
So what, what, what role did they play? Could they have helped alleviate some of the pain of, um, uh, investors, of people that held funds there?
- COCoffeezilla
Yeah. I, I mean, probably. Uh, I don't know. I, I would see some kind of weird obligation, like with the two billion they made on FTX. Remember, they got two billion. Some of it in cash, some of it in, some of it in FTT tokens, so I don't know how much actual cash they have from that deal, but they have billions from the success of what seems to be a fraud. It seems to have been a fraud for early on. They had the back door as early as 20, early 2020 from what I can tell.
- LFLex Fridman
So the, the back door between FTX and Alameda?
- COCoffeezilla
Alameda.
- LFLex Fridman
Alameda Research.
- COCoffeezilla
Yes, yes.
- LFLex Fridman
Uh, do you think CZ saw through who SBF is? What he's doing?
- COCoffeezilla
No. I think, I think CZ is like... He's a shark. I think he's, he's good at building a big business. Um, I don't-
- LFLex Fridman
Like a good shark or a bad shark? I don't know.
- COCoffeezilla
I don't know. I think sharks just eat. I mean, I, I don't, I don't know. I think, uh-
- LFLex Fridman
My relationship with shark has... Like in Finding Nemo, there's a shark in that.
- COCoffeezilla
Sure.
- LFLex Fridman
I don't know. So-
- 36:32 – 49:50
Key lessons from FTX collapse
- COCoffeezilla
- LFLex Fridman
So you are one of, if not the best f-... like, fraudster investigators in the world. Did you sense, did you, uh, was this on your radar at all, SBF, i- in the, over the past couple of years? W- were any red flags g- going off for you?
- COCoffeezilla
Yes. So funny enough, like, one of my videos from six months ago or so blew up because, um, I gotta give a lot of credit to Matt Levine of Bloomberg, great journalist, great finance journalist, and I wanna say, when I, like, talk about media elite, there are people doing great work in these mainstream institutions. It's not a monolith. Just like independent media isn't all doing great work and all of corporate media is bad or whatever. There's, like, these overarching narratives that I don't subscribe to. So Matt Levine's a great journalist. He, he did an interview with SBF where he got Sam to basically describe a lot of what was going on in DeFi, but at kind of a larger philosophy around crypto, and he described a Ponzi scheme, where he des- described this black box, it does nothing, but if we ascribe it value, then we can create more value and more value and more value, and it kind of was this ridiculous description of a Ponzi scheme, but there was no moral judgment on it. It was like, "Oh yeah, this is great. We can make a lot of money from this." And Matt is like, "Well, it sounds like you're in the Ponzi business, and p- and business is good."
- LFLex Fridman
Mm-hmm.
- COCoffeezilla
And I made a video about that. I said, "This is ridiculous. This is absurd." Whatever. "It's obscene." But, um, I didn't explicitly call SBF a fraud there, and I think if, if I'm being, I think I saw some of it, but like many people, I think a l- a lot of us were kind of like... I think a lot of us missed how wrong everyone could be at the same time.
- LFLex Fridman
Mm-hmm.
- COCoffeezilla
I did notice leading up to the crash what was happening and I, and I called it out a day b- a day or a day and a half before it happened, 'cause I saw my friends post, uh, Dirty Bubble Media, and this was the first real look into the heart of their finances, 'cause they were this black box. You just kinda had to evaluate them without knowing much. And once we got a peek under the hood of what their finances were, I realized, oh my gosh, these guys might be completely insolvent. So I made a tweet about it. I hope some people saw it and got their money out. Um, but pretty quickly after that, I caught the narrative of what was really going on at Alameda, that it was basically this Ponzi scheme they, that they had built.
- LFLex Fridman
Do you ever s- sit like Batman in the dark since you fight crime and wonder, like, sad, just staring into the darkness and thinking, "I should've caught this earlier"?
- COCoffeezilla
Yeah, I think-
- LFLex Fridman
In your, in your, uh, $10 billion do- 10-
- COCoffeezilla
$10 million.
- LFLex Fridman
$10 million.
- COCoffeezilla
We're, we're working our way there. Um-
- LFLex Fridman
With, with a bunch of cocaine on the table.
- COCoffeezilla
Sure, like, it- it's never enough. It's never enough. Like, you always could be catching stuff sooner. You always could be doing more.
- LFLex Fridman
I mean, the fascinating thing you said is that one of the lessons here is that a large number of people, influential, smart people could all be wrong at the same time in terms of their evaluation of SBF.
- COCoffeezilla
This is, this is one thing that I don't understand too, is like, I think it's one thing to not see something. I think it's another thing to, like, rubber stamp or explicitly endorse. I feel like a lot of people didn't look too close at SBF because I think a lot of the warning signs were there, but my feeling is if you're a Sequoia, if you're a BlackRock, wouldn't you do that due diligence? I mean, like-
- LFLex Fridman
Yeah.
- COCoffeezilla
... like before just endorsing something, especially in the crypto space. This is just why I don't do any deals in the crypto space ever, 'cause it's impossible to know which ones are the, gonna be the, like, big hits or the big frauds or, you know, whatever. Um, but if you're gonna make that bet, if you're gonna make that play, you would think that you would do all the research in the world and you would get sophisticated looks at their liabilities, at how they were structured, all that stuff, and that is the most shocking part, is not that, you know, people missed it, because you can miss fraud, but that there was so much, so many glowing endorsements like, "This guy is not gonna be that thing. We explicitly endorse him." I saw a Fortune magazine, he was called the next Warren Buffett. It's just crazy.
- LFLex Fridman
D- do you think it's possible to have enough, like, Tom Brady, uh, endorsements that you don't really investigate? So like-
- COCoffeezilla
Yes.
- LFLex Fridman
... that there's a kind of momentum-
- COCoffeezilla
Yes.
- LFLex Fridman
... like societal, social momentum.
- COCoffeezilla
Yes. I think that's the problem. I actually think that's hugely a blind s- like a, a blind spot of our society is we have all these heuristics that can be points of failure where, like, a rule of thumb is if you go to an Ivy League, well, you must be smart, right? A rule of thumb is if your, both your parents are Harvard lawyers, you must not, you must know the law. You must, like, kinda be sophisticated. The rule of thumb is if you're running a, a billion dollar exchange, you must be somehow somewhat ethical, right?
- LFLex Fridman
Mm-hmm.
- COCoffeezilla
And all of these heuristics can lead to giant blind spots where you kinda just go, "Oh, we'll check. Like, I don't really..." It's a lot of energy to look into people and if enough of those rules of thumb are met, we just kind of check them off and put them through the system. So, uh, yeah, it's been hugely exposing for sort of, like, our, our blind spots.
- LFLex Fridman
And you don't know wh- maybe how to look in, for example, there's a few assumptions. Now there's, a lot of people are very skeptical of institutions, of government and so on, but f- um, perhaps too much so.
- COCoffeezilla
I agree.
- LFLex Fridman
But for some part of history, there was, uh, too much faith in government.
- 49:50 – 57:36
Should SBF go to jail?
- LFLex Fridman
Can you think of possible trajectories, how this FTX, SBF saga ends? Uh, and which one do you hope for? Do you hope that SBF goes to jail? That's the individual. And in terms of the investors and the customers, what do you hope happens, and what do you think are the possible things that can happen?
- COCoffeezilla
So A, yeah, I definitely think SBF should go to jail. Um, for nothing else, for a semblance of justice, the facsimile of justice to occur for all the investors. Um, I also think there are people probably several steps down the chain that probably knew, at least Caroline Ellison. You can have questions about sort of their, you know, Dan Friedberg, who I'd love to talk about as well, um, there are a lot of people in that room who I think knew. I think we do so much of like the one guy is all to blame, let's throw everything at him, when clearly this was a company-wide issue. So everyone who knew, I think, should face the same punishment, which I think should be jail for all of those people. Um-
- LFLex Fridman
In part to send a signal to anybody that tries this kind of stuff in the future?
- COCoffeezilla
Yeah, absolutely.
- LFLex Fridman
A harsh, harsh punishment.
- COCoffeezilla
I mean, one of the big things that you saw, like okay, take a microcosm of all of this action and just look at like the influencer space, right? There's a ton of deals that were done that I've covered ad nauseum about influencer finds out they can make a lot of money selling a crypto coin. The first thing they wonder is, "Am I gonna get caught? If I do this, is there a consequence?" And if the answer is no, then it's a pretty easy decision as long as you don't like have any moral scruples about it, which apparently none of them did, or a lot of them didn't, I should say. So as soon as somebody steps in and regulates, that math changes, and all of a sudden there's a self-interest reason to not go do the bad thing. So for ex- and I can give a concrete example of this. There was a NFT, the first ever NFT sort of like official indictment or the DOJ released this press release that they're charging these guys who ran a NFT project, that they didn't follow through on their promises, they made all these promises, lied, and then ran away with the money. First ever consequence for anyone in the NFT space, that day that that press release came out, I saw several NFT, um, projects come back to life from the dead. Why? Because all those founders are freaking out and they realized, "We scammed people. We have to go at least make it, make it look like we're doing the right thing," right? Even just, so that's on the optic side, but there's also tons of people who now go, "Oh, the basically law enforcement is on the scene. We can't do the same thing." So there is a very pragmatic reason to, for this punishment. It's very much just because people work it into their math of, "Should I commit fraud?" And the last several years have been very, um, sort of it's been like a little bit of a nihilistic landscape where no one was getting punished.
- LFLex Fridman
Mm-hmm.
- COCoffeezilla
And so there was this question of you're almost an idiot if you didn't take the deals. Um, so I think it's really important, extremely important for kind of law enforcement to play a role, regulation to play a role to make it harder to commit those crimes, and if you commit those crimes, there's actual real world punishment for it. To your point about like what's gonna happen to the investors, I think that was-
- LFLex Fridman
Mm-hmm.
- COCoffeezilla
... kind of your question, it's tough because the, if the money's not there, the money's not there. I mean there's gonna be, the guy, they got the best in class guy, the, it's the guy who ran the dissolving of Enron, so I mean, I can't imagine someone better equipped to run a complicated corporate fraud like dissolution. But yeah, it's, it's, it's tough 'cause everyone's gonna get probably, I don't know, 10 cents on the dollar, maybe less.
- LFLex Fridman
I wonder if there's a way to do a progressive redistribution of funds. So it, I just-
- COCoffeezilla
Sure.
- LFLex Fridman
... I'm just really worried about the pain that small investors feel.
- COCoffeezilla
I think-
- LFLex Fridman
You know?
- COCoffeezilla
Yeah. I think, um, there's a lot of thought around that. I forget if, if they actually do do this. I mean there, I know there's a lot of law about like you can't treat creditors differently. You have to treat them all the same.
- LFLex Fridman
Mm-hmm.
- COCoffeezilla
So I think it'll be some kind of proportional payback. It's certainly not gonna be that the guys at the top get, you know, a significant amount of m- their money back and the rest get nothing. Unfortunately I think there's such a small amount of assets that back this whole thing in the end, and that value is actually declining every day because it was inextricably tied to FSBF. It was like the FTT tokens, which now what are those worth? The Serum tokens, that was his project or the project they made, what is that worth? Basically nothing. So you know, it's a very, it's a hard situation and you know, there's a bigger ethical concern which is FTX US, it's unclear how backed it was, but it was clearly more backed than FTX International. Do you take all that money and throw it into a big pot and give people money back?... or do you give the US people back their amount of money, which is probably gonna be significantly more, and leave everyone internationally out in the cold? And to add to that ethical issue, let's say you're a liquidator and you're US-based. There's a tremendous question, like legal questions about, you know, how do you ethically do that? It's not, it's not clear. There's a tremendous incentive to, to just favor the US people over everyone else 'cause it's our country, America, whatever. But, um, I don't know if that's necessarily fair. It's- it's really hard. It's like, it's impossible.
- LFLex Fridman
And some, uh... I forget where you said this, but one, one of the... I mean, it probably, uh, permeates a lot of the investigations you do-
- COCoffeezilla
Mm-hmm.
- LFLex Fridman
... which is this idea that it's really sad that the middle class, in most situations like this, get fucked over. So the, the IRS, uh, go after the middle class, they don't go after the rich. It's basically everyone who doesn't have a lot of leverage in terms of lawyers, money get fucked over.
- COCoffeezilla
Yes, and then they're the ones... Like, it's always the rich and powerful who get the favorable treatment. As a, like a microcosm of this, it's a funny story. So one of the big criticisms of crypto, and I think rightly so, is the irreversibility of the transaction. So if I accidentally send a transaction somewhere, it's gone, right?
- LFLex Fridman
Yeah.
- COCoffeezilla
So crypto.com accidentally sent a lady $10 million, and now they want the money back, and they're suing her. But the funny thing is, is if you are on crypto.com and you send... Let's say I accidentally send you money and I come knocking on your door, "Lex, I didn't mean to send you, you know, like, uh, $1,000. I need my money back," or if I go to crypto.com and I said, "Hey, I sent that to the wrong person. Can you reverse it?" They'll say, "Screw off, no way." If I go to court, they'll kill me in court 'cause they're gonna go, "Look, this is how the blockchain works." But then they do it. They do the exact same thing. They send this lady $10 million. They're suing her and they're gonna win. Now, it's... Now what's in court is not whether they get the money back. It's should she be liable for theft, I believe. So... And that's in... just another case of the same rules apply differently to different people, whether you have the money to back you or not. It's a very sad thing. And that's why I think people like you need journalists fighting for the little person. We really need it. And it's kind of like this unfortunate thing where that's the most risky thing to do, like legally. You should not be doing that. But, um, I think it's important to do.
- LFLex Fridman
It's the ethical thing. It's the right thing to do.
- 57:36 – 1:02:04
Role of influencers and celebrities
- LFLex Fridman
Uh, what do you think about influencers and celebrities that supported FTX and SBF? Do they... should they be punished?
- COCoffeezilla
Yeah, I think, I think they should take a huge reputational hit. I mean, I think they should be embarrassed. I think they should be ashamed of themselves. (laughs)
- LFLex Fridman
But it was really hard to know, sorry to interrupt, th- for them to know... Like for example, I- I think about this a lot.
- COCoffeezilla
Yeah.
- LFLex Fridman
It's like, who do I... Because I don't investigate, you know, like a (laughs) sponsored by Athletic Greens, okay? It's a n- nutritional drink. Should I investigate them deeply? I don't, I don't know. You just kind of use reputational, like it seems to work for me. Should I, like, uh, invest in them deeply?
- COCoffeezilla
I think, I think it really depends on... I think your credibility hit will depend on what domain you're an expert in.
- LFLex Fridman
Okay.
- COCoffeezilla
If you're sponsored by a robotics company and you're an expert in robotics-
- LFLex Fridman
Sure.
- COCoffeezilla
... if that company turns out to be a disaster and a fraud, then you should have looked more deeply. We're talking mostly about... Like I hold Tom Brady a lot less accountable than financial advisors, financial influencers because that is their world of expertise, and you treat their recu- rec- recommendation differently proportionally to what you think their expertise is. So in some ways I don't actually think... Tom Brady, I'm sure he reached a lot of people. I personally didn't feel at all moved by his recommendation 'cause you know it's just money. But when you hear somebody who should be an expert in that thing endorse a product in that space, you hold that opinion to a higher standard, and when they're completely cata- cataclysmically wrong, it's gonna be a different level of, of accountability. And I think rightfully so. When, um, Jim Cramer in- was saying Bear Stearns is fine, he made that terrible call in Be- with Bear Stearns in 2008, he was rightfully reamed for all of that, even though it could be considered that like, "Well, you know, did he have all the information? Maybe not." But he's a financial advisor. He does this for a living. If you go on and you make a big call and you turn out to be wrong and people lose tons of money, you are going to take a hit, and I think rightfully so. But no, I don't think these people should go to jail or anything like that, like.
- LFLex Fridman
Oh, but it's such a complicated thing. I mean, I just feel it personally myself. I get it, but you still feel the burden of the fact that your opinion has influence. I know it shouldn't. I know Tom Brady's opinion on financial investments should not have influence, but it does.
- COCoffeezilla
Right. Right.
- LFLex Fridman
That's just the reality of it.
- COCoffeezilla
Right.
- LFLex Fridman
That's a real burden. I didn't know anything about SBF or FTX. It wasn't on my radar at all.
- COCoffeezilla
Mm-hmm.
- LFLex Fridman
Um, but I could have seen myself like taking them on as a sponsor. I've seen a lot of people I respect, uh, Sam Harris and others, like talk, talk with SBF, uh, like he's doing good for the world. So I could see myself being hoodwinked-
- COCoffeezilla
Yeah.
- LFLex Fridman
... ha- having not done research. And the same thing, it makes me wonder. Like I- I don't want to become cynical, man. Uh, but it makes you wonder.
- COCoffeezilla
Sure.
- LFLex Fridman
Who are the people in your life you trust that are like... that could be the next SBF or, or worse, big powerful leaders, Hitler and all that kind of stuff. Um, to what degree do you want to investigate? Do you want to, uh, hold their feet to the fire, see through their bullshit, call them on their bullshit? And also as a friend, if you happen to be friends or have a connection, how to help them not slip into the land of fraud? I don't know. All of it is just overwhelming. So-
- COCoffeezilla
Yeah, I mean, I mean, we should be clear, like finance is sort of a special space where-...you're talking about people's money. You're not talking about whether pe- someone takes a bad supplement, or like a supplement that is just, they're $50 out, right? I think the scale of harm-
- LFLex Fridman
Yeah.
- COCoffeezilla
...and therefore responsibility escalates depending on what field you're in. Just like I wouldn't hold Tom Brady as, like if he gives a bad football opinion, right, and he should've known better, that is a different scale of harm than a doctor giving bad advice, right? Like life sa- like he tells you a pill works and the pill kills you, or something like that. There's just le- different levels of accountability depending on the field you're in, and you have to be aware of it. Finance is an ext- you have to be extremely conservative if you're gonna give financial advice because you're playing with people's lives, and you cannot play with them haphazardly. You cannot gamble with them, you cannot play with them on a bet, 'cause you're getting paid a lot of money. It's just the nature of the space. And so with the na- with the space comes the responsibility and the accountability. And I, I don't think you can get around
- 1:02:04 – 1:06:00
How FTX covered up fraud
- COCoffeezilla
that.
- LFLex Fridman
Who was, uh, Dan Friedberg that you mentioned? Some of these figures-
- COCoffeezilla
Yeah.
- LFLex Fridman
...in the SBF around that, uh, are interesting to you?
- COCoffeezilla
Super interesting kind of subject, because Dan Friedberg is, uh, the former General Counsel for Ultimate Bet. Ultimate Bet is a, was a poker site where famously they got in a scandal because, uh, the owner, Russ Hamilton, was cheating with a little software piece of code they called Godmode. Godmode allowed you to see up, the guy across from you's hand. Obviously, you can imagine you can win pretty consistently if you know exactly what your opponent has. Very unethical. They, uh, I should be clear that for some inexplicable reason, I don't think they were ever charged and convicted of a crime, but they were investigated by a gambling commission that found they made tens of millions of dollars this way, for sure. And Dan Friedberg is the General Counsel. He's caught on a call basically conspiring with Russ to hide this fraud. He's saying, "We should blame it on a cons-, you know, a consultant, third party." And Russ Hamilton famously says, you know, like, "It was me. I did it. I don't wanna give the money back. Find basically a way to get rid of this." So that's Dan Friedberg's big achievement. Like that's what he's known for, he's most known for. And this is the guy they pick as their Chief Regulatory Officer for FTX. Why do you hire somebody who... I, I get it. The not formally charged and convicted, investigated, there's all the, and there's tape out there, so I wanna be clear about what's actually available evidence. But someone who's seemingly own ache- only achievement is hiding fraud, why do you hire that guy if the intention is not to hi-, is not to hide fraud? So this is a question I put to A-, you know, Sam Bankman-Fried, and his answer was, "Well, we have a lot of lawyers. Well..." And I said, "Well, he's your Chief Regulatory Officer." He's like, "Well, it wasn't... We, we did regulate a lot." And it was just this big dance of, you know, basically he's done great work, he's a great guy. And I think that tells you everything you need to know.
- LFLex Fridman
And there's figures like that probably even at the lower levels, like just infiltrate the entire organization.
- COCoffeezilla
Well, it's just like why... Yeah. Why wasn't there a CFA? Why, why wasn't there anyone in that space who could seemingly be the eyes that goes, "Holy whatever, we need to, we, we're in dangerous territory here," right? Um, so yeah. It seems very deliberate. I mean, I talked to one FTX employee that they talked about, who's told me they talked about taking, I think it was taking FTX US public, and Sam was very against the idea. And the employee, in retrospect, speculated that it might've been because you'd face so much scrutiny, like regulation wise. Like you'd have to, you know, go through a lot, like more thorough audits, all that kind of stuff, that basically he knew they would never pass. Um, so yeah. I mean, it's, it's red flags all the way down with that guy.
- LFLex Fridman
And you hope all of them get punished?
- COCoffeezilla
Everyone who knew. I mean, I think for sure there are people at FTX who didn't know. I think there are some people at Alameda who didn't know.
- LFLex Fridman
There's degrees. Sorry to interrupt, but there's degrees of not knowing.
- COCoffeezilla
Yes.
- LFLex Fridman
There's a looking away-
- COCoffeezilla
Yes.
- LFLex Fridman
...when you kind of know-
- COCoffeezilla
Yes.
- LFLex Fridman
...shady stuff. That's still the same as knowing, right? That might be even worse.
- COCoffeezilla
Well, yeah. Like I was talking to one insider, and we were talking about the insider trading. He, they were telling me about this insider trading, and I said, "Do you think this was criminal?" And they said, "It was probably criminal in hindsight, yes." And the question is someone who answers a question like that, what does that like mean?
- LFLex Fridman
(laughs)
- COCoffeezilla
You know? Like it was probably cr- So you're right. There, there are different degrees. I mean, I'll say at the most basic I would be very happy if everyone who had direct knowledge went to jail, which I don't think will happen, to be clear. I think a lot of people are gonna cut deals, prosecutors are gonna cut deals so they actually nail Sam Bankman-Fried. I think that's their
- 1:06:00 – 1:21:03
Interview with SBF
- COCoffeezilla
only focus.
- LFLex Fridman
What about his reputation? What do you think about all these interviews? Um, do you think they are helping him? Do you think they're good for the world? Do you think they're bad for the world? Like what, what's your sense, and like say you get to sit down, interview with him for three hours and I'm holding the door closed. What, uh, what kind of... Is that a useful conversation or not? Or at this point it should be legal and that's it?
- COCoffeezilla
I think it's useful. Uh, I mean, I think with res- it's all, it's all about how you interview him. You can interview someone responsibly, you can interview him irresponsibly. I think we've seen examples of both.
- LFLex Fridman
What's an irresponsible... I keep interrupting you rudely.
- COCoffeezilla
That's okay. No, no, no.
- LFLex Fridman
This is unacceptable.
- COCoffeezilla
No, no, no. I think it's fine. Um, there was like a New York Times interview which spends an amount of ti- any amount of time talking about his sleep, and he's like, "Yeah, I'm sleeping great." I mean, I think that's so deeply disrespectful to the victims, and especially when you're, you're not even releasing an interview live. It's like you have time to triage what you're gonna talk about. Why would you spend any amount of time talking about the sleep that a fraudster is get- getting? It's just so weird. And-
- LFLex Fridman
Well, it's in that case. I don't, I don't-
- COCoffeezilla
Sure.
- LFLex Fridman
I don't, uh, I don't think-
- COCoffeezilla
Yeah.
- LFLex Fridman
...it turned out well.
- COCoffeezilla
I think that's, I think that's-
- LFLex Fridman
I, I think... Okay. Here's the thing-I could see myself talking about somebody's sleep or getting in somebody's mind if I knew I have unlimited time with them, if I knew I had like four hours-
- COCoffeezilla
Yes.
- LFLex Fridman
... because you get into the mind of the person-
- COCoffeezilla
Yes.
- LFLex Fridman
... how they think, how they see the world. Because I think that ultimately reveals if they're actually really good at lying, it reveals the depths, the complexity of the mind that through like osmosis you get to understand like this person, this person is not as trivial as you realize. Also makes you maybe realize that this person is, has a lot of hope, has a lot of positive ambition that's like, uh, that has developed over their life and then certain interesting ways things went wrong-
- COCoffeezilla
Yes.
- LFLex Fridman
... they become corrupt and all that kind of stuff.
- COCoffeezilla
You just, that's all fine. But this was, this conversation was not properly contextualized-
- LFLex Fridman
Yes.
- COCoffeezilla
... in the world of what he did. It, and I, you know, I've, I've asked about this interview 'cause I was like so curious. It was out, out of the New York Times and there was not much mention of fraud or jail or the, the big crimes, like misappropriation of even client assets. It was just sort of this, you know, Sam sat down with me, he's, he's under investigation but there's not much specifics and then it's like, yeah, he's playing Storybook Brawl, he's sleeping, he's... And it's just like, okay, this isn't adding-
- LFLex Fridman
Oh, yeah.
- COCoffeezilla
... to the conversation.
- LFLex Fridman
Oh, no, no, no, no, no. Especially when the New York Times, it's like a, you should be grilling him.
- COCoffeezilla
Right. Right. Exactly. So, um, but as I've said, I mean, it's, it's all ranged the gamut and some interviews like some of it's okay and then some of it's weird, like the Andrew Sorkin interview, he asked some hard-hitting questions, which I really appreciated. And then at the end he goes, "Ladies and gentlemen, Sam Bankman-Fried," and everyone gives like a, like an ovation for Sam. I mean, the steel man of that, of course, is like they're actually applauding Andrew Sorkin, but the way you like lay it up, I wouldn't go like, "Ladies and gentlemen..." It's like an applause line. It's like, "Ladies and gentlemen, the Eagles, Elton John, Lex Fridman."
- LFLex Fridman
Yeah.
- COCoffeezilla
And so to go to... So you have this like deal book summit where you have all these important figures that are positively important and at the end you have Sam Bankman-Fried, a fraudster, and you go, "Ladies and gentlemen, Sam Bankman-Fried," everyone's applauding, that I think is a net... like, I think that's a negative. I think the way that, the optics of that just were all wrong.
- LFLex Fridman
Yeah.
Episode duration: 3:46:18
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