Byrne Hobart - FTX, Drugs, Twitter, Taiwan, & Monasticism

What drives the response to what happened with FDX and Alameda is that if you think the story is pure fraud, it's very easy to say you would never do that. (air whooshing) I do think that the impact of new drugs on financial markets is underrated. (air whooshing) It's maybe merciful that the atoms to bits interface has not been fully completed while we still have time to deal with malevolent unfriendly EA. So, um-

(laughs)

... that's, that's good. (air whooshing) Your big concern is not your portfolio in a world where an invasion is the reason AI does not happen. (air whooshing) One possibility is that every other society got it wrong and that the monastic tradition is stupid and it has been independently discovered by numerous stupid civilizations that have all been around for much longer than effective altruism. (air whooshing)

Okay. Today, I have the pleasure of interviewing Byrne Hobart again, for the second time now, who writes at thediff.co. The way I would describe Byrne is, uh, every time I have a question about a concept or an event in finance, I google the name of that event or concept into Google and then I'd put in Byrne Hobart at the end of that search query. And nine times out of ten, it's the best thing I've read about that topic. Um, and it's just, like, just so interesting, right? It's just, like, the most schizophrenic and galaxy brain takes about, like, how, you know, the discourses of l-, uh, you know, Machiavelli's Discourses relate to big tech or, like, how, uh, Soros' Theory of Reflexivity, uh, explains hiring in finance and tech. So just very interesting stuff. I'm glad to have him back on again.

Yeah. Great to be back.

Awesome. Okay. So at, at first, I, I really wanna jump into the FTX saga. What the hell happened? Le- let me just, like, leave an open-ended question for you.

Yeah. So I think, um, I think the first thing to say is that, uh, there's a lot we don't know, um, there's a lot we may never know because so many of the decisions at FTX were made through, um, self, like, auto-deleting encrypted chat. So, like, there, there are some holes we will never be able to fill in. The lack of accounting is also gonna make it tough. Like, basically, I think you can tell a bunch of different stories here. The really obvious one is, um, fraud and you can debate over exactly when it started. Like, one version of the story, which is getting some currency, is that, um, SBF had this entity Alameda and it was supposed to be this really hot crypto trading fund, but maybe it was a Ponzi scheme all along. And then, um, maybe at some point that Ponzi scheme started to run short on cash, so he decided to start an exchange, and the exchange got more cash, and then he used the cash to pay off previous investors, whatever. Um, I think that's, that's one version. And then kind of the, the maximally exculpatory version, which actually is still really bad, is, um, Alameda was a real company, they really made money trading, um, they took tons of risks, and, um, SBF has talked about why he thinks that's a good thing, that, um, FTX cut some corners when they were raising money and that they had really bad internal accounting and, um, that basically the, the extended entity of Alameda and FTX sort of lost track of whose money was where and ended up, uh, it ended up with Alameda spending FTX customer money. Which, um, I think is like, like one way to look at that is, like, if you think, "Okay, fraud is, like, twice as bad as just incompetently losing money," well, it's not as if, um, if we had a four billion dollar fraud instead of an eight billion dollar fraud, everyone would be like, "Well that's, that's fine. That's normal." Like, "Why are you giving this guy a hard time?" Like it's, it's bad no matter what. Um, you know, running a big company that is systemically important in crypto and then having that company completely vaporize over the course of a couple of days, um, really, really bad and worth understanding what happened. But it's partly worth understanding what happened because there are just different solutions that present themselves depending on what you think the story is. Like if the story is fraud, it's actually a lot harder to solve because there are just a lot of, um, a lot of people who are willing and able to commit fraud and to, to lie. Um, if the story is bad accounting, then that's actually a lot more solvable because then you could say things like, "The solution is, um, make sure you never invest in a crypto exchange that doesn't have a real auditor and, um, you know, make sure that they have, like, their, uh, proof of reserves calculation and it's happening consistently and that you can audit that." Um, you know, there are, there are different solution sets. And then I think the actual story is probably going to be somewhere in the middle of, um, extreme risk tolerance, plus extremely poor accounting, plus, um, fraud at some point. But I suspect the fraud actually happened pretty late, um, you know, if it, if it happened. Which I think there's like, you know, 80, 90% chance that there was some level of fraud, um, versus pure incompetence. But if so, I think it may have happened, um, fairly late in the story and as kind of a last desperate move. Like, and I think, I think part of, part of what drives the response to what happened with FDX and Alameda is that if you, if you think the story is pure fraud, um, it's very easy to say you would never do that. Like I, I can say very easily I would, I would definitely never start a Ponzi scheme and then start another bigger Ponzi scheme to pay off the first Ponzi scheme. That, that's not me, um, that's not most people. But, um, I think if you, if you draw the scenario where they discover at some point, like a couple of months ago or even a month ago, they realize, "Hey, we actually, um, there's a billion dollars plus that was supposed to be customer money but, uh, we thought it was Alameda money and we actually spent it and now it's gone. We've lost it." What would you do in that circumstance? And you know, I think the ideal answer is, "Well, I'd immediately come clean and, you know, step down and commit myself to getting everyone paid back and made whole." And I think there's also the possibility that, you know, I would, like the answer, the realistic answer is more like, "Well, I would scramble and try to make sure that that, uh, didn't cause the company to collapse and I'd try to pay people back later." And so at that point, you've sort of backed your way into fraud through earlier episodes of incompetence. But I think, like, one of the problems with the fraud story is, um, frauds, frauds have to be good at accounting because, um, they have to like-... you know, there's very rough schematic sense they have to be twice as good as- at accounting as everybody else because not only do they have to have the, the real books that tell them how much money the business has and whether or not the next check they write will bounce, but they have to have this, the fake set of books, and they have to w- have a way to make those tie out with one another. So they actually, like, frauds, accounting frauds tend to be fairly sophisticated. They tend to really dive into edge cases. I was reading up on, um, MF Global, which was a big futures brokerage that collapsed in part because they were dipping into customer funds and making some investments they shouldn't have. And, um, they, they did a lot of, um, clever and shady stuff. Like, one of the things they would do is, um, there was one point where they were transferring money at the last minute out of their consumer, out of their customer funds in order to make margin calls. And, um, what they would do is they would send the wire from the customer account to a different company account, and they'd send it a couple minutes before the wires closed for the night, and then they would send this email right after the wires closed saying, "Hey, we just realized we sent this transfer to the wrong account. We've got to reverse it tomorrow." But that gave them at least one night of enough liquidity to survive. Now, you can only do that kind of fraud if you are actually keeping really close track of where your money is, where it's supposed to be, what the rules are, so that you know exactly how to break those rules. Um, I don't think SBF, I don't think FTX was in any position to commit that kind of fraud. I think that they could have, if they tried to do something like that, like they'd wire the money from an account that didn't have any money in it or something, or send it to the wrong account, um, there were these stories about them accidentally burning a bunch of USDC by sending it to an address that didn't exist or something like that. Like, they, the operational slip- slip-ups actually make it harder for them to have committed fraud, and it's unquestionable at this point that their, their record keeping was very bad.