WEBVTT 00:00:00.000 --> 00:00:03.100 March 28, 2024. Most people probably don't have 00:00:03.100 --> 00:00:05.219 that date circled on their calendar, but in the 00:00:05.219 --> 00:00:08.720 timeline of financial history, that was the asteroid 00:00:08.720 --> 00:00:11.439 impact. That was the day the gavel finally came 00:00:11.439 --> 00:00:14.080 down in a Manhattan courtroom and the sentence 00:00:14.080 --> 00:00:18.140 was read out 25 years. And let's not forget the 00:00:18.140 --> 00:00:21.350 forfeiture order. Eleven billion dollars. Right. 00:00:21.589 --> 00:00:23.710 Eleven billion. It's a number so large it just 00:00:23.710 --> 00:00:26.089 it turns into an abstraction. You can't even 00:00:26.089 --> 00:00:28.589 visualize eleven billion dollars. Yeah. But you 00:00:28.589 --> 00:00:31.329 can visualize a 25 year sentence. That is a quarter 00:00:31.329 --> 00:00:33.390 of a century. And what really struck me about 00:00:33.390 --> 00:00:35.270 that day wasn't just the finality of it. It was 00:00:35.270 --> 00:00:39.450 the absolute the starkness of the contrast. The 00:00:39.450 --> 00:00:42.009 contrast between the inmate and the icon. Exactly. 00:00:42.009 --> 00:00:43.829 I mean, you just rewind the clock two years before 00:00:43.829 --> 00:00:46.759 that. Sam Bankman free at SBF. He wasn't just 00:00:46.759 --> 00:00:48.820 some rich guy. No, he was phenomenal. He was 00:00:48.820 --> 00:00:51.859 the 41st richest American. He was on the cover 00:00:51.859 --> 00:00:54.280 of Forbes, Fortune, you name it. He was sitting 00:00:54.280 --> 00:00:57.159 on panels with Bill Clinton and Tony Blair. He 00:00:57.159 --> 00:01:00.799 was sold as the white knight of crypto. The one 00:01:00.799 --> 00:01:03.840 who is going to bridge this gap between the chaotic 00:01:03.840 --> 00:01:08.140 digital frontier and the serious world of Washington 00:01:08.140 --> 00:01:12.680 regulation. And then just like that. Snap. He's 00:01:12.680 --> 00:01:15.579 standing there in a beige prison jumpsuit, listening 00:01:15.579 --> 00:01:18.019 to Judge Cackling completely dismantle his entire 00:01:18.019 --> 00:01:20.640 existence. It's the ultimate Icarus story, isn't 00:01:20.640 --> 00:01:23.719 it? But I think people get the Icarus metaphor 00:01:23.719 --> 00:01:26.459 wrong in this context. How so? Icarus flew too 00:01:26.459 --> 00:01:28.540 close to the sun because he was reckless. He 00:01:28.540 --> 00:01:30.739 was high on the thrill of it. SBF wasn't just 00:01:30.739 --> 00:01:33.000 reckless, as we're going to get into. This was 00:01:33.000 --> 00:01:37.239 a calculated, almost mathematical deconstruction 00:01:37.239 --> 00:01:39.480 of the rules. Right. Because he truly fundamentally 00:01:39.480 --> 00:01:41.579 believed the rules didn't apply to him. That's 00:01:41.579 --> 00:01:43.340 the key distinction, isn't it? This wasn't some 00:01:43.340 --> 00:01:45.500 kind of accident. And that is what we are unpacking 00:01:45.500 --> 00:01:47.760 today. We are doing a proper deep dive into the 00:01:47.760 --> 00:01:51.879 rise and the catastrophic fall of SBF and FTX. 00:01:51.939 --> 00:01:53.540 And I don't want to just recycle the headlines 00:01:53.540 --> 00:01:56.359 everyone saw on Twitter. We have a massive stack 00:01:56.359 --> 00:01:59.680 of sources here, biographical records, the raw 00:01:59.680 --> 00:02:01.859 court transcripts from United States via Bankman 00:02:01.859 --> 00:02:06.000 Freed, the bankruptcy filings, and even the prison 00:02:06.000 --> 00:02:09.370 incarceration logs. Honestly, the source material 00:02:09.370 --> 00:02:12.370 is darker and weirder than the headlines ever 00:02:12.370 --> 00:02:14.909 captured. When you really dig into the mechanics 00:02:14.909 --> 00:02:18.349 of the fraud, the specific lines of code they 00:02:18.349 --> 00:02:20.909 wrote to steal the money, and the psychological 00:02:20.909 --> 00:02:23.789 environment they built around themselves, it's 00:02:23.789 --> 00:02:27.219 genuinely terrifying. Our mission today is to 00:02:27.219 --> 00:02:29.699 really understand those mechanics. How do you 00:02:29.699 --> 00:02:32.539 actually steal $8 billion without the auditors 00:02:32.539 --> 00:02:35.340 noticing? What is the psychology of a guy who 00:02:35.340 --> 00:02:37.500 plays video games while pitching Sequoia Capital? 00:02:37.659 --> 00:02:39.740 And wins. And wins. And then how does that same 00:02:39.740 --> 00:02:42.719 brain adapt to, you know, trading fish packets 00:02:42.719 --> 00:02:45.319 in a federal penitentiary? It is quite the arc. 00:02:45.500 --> 00:02:47.300 So let's start at the very beginning, because 00:02:47.300 --> 00:02:49.319 usually when we hear about financial fraudsters, 00:02:49.400 --> 00:02:51.500 there's this narrative of the scrappy outsider, 00:02:51.780 --> 00:02:54.259 the guy who wanted to break into the club but 00:02:54.259 --> 00:02:56.280 wasn't invited. He, you know, he kicked the door 00:02:56.280 --> 00:02:58.879 down. Right. That is not Sam Bankman Freed. Not 00:02:58.879 --> 00:03:01.439 even close. He was born inside the club. March 00:03:01.439 --> 00:03:05.979 5, 1992, Stanford, California. I mean, his parents, 00:03:06.159 --> 00:03:09.039 Joseph Bankman and Barbara Freed, are both tenured 00:03:09.039 --> 00:03:11.599 professors at Stanford Law School. At Stanford 00:03:11.599 --> 00:03:15.580 Law. And we aren't talking about obscure academics 00:03:15.580 --> 00:03:18.479 here. They are titans in the fields of tax law 00:03:18.479 --> 00:03:20.979 and legal ethics. Which adds a very thick layer 00:03:20.979 --> 00:03:23.439 of irony to this whole story. It does, but I 00:03:23.439 --> 00:03:25.599 think you have to look at what they taught. His 00:03:25.599 --> 00:03:28.900 mother, Barbara Freed, is a prominent consequentialist. 00:03:28.939 --> 00:03:31.639 Okay, let's pause there. Consequentialist. For, 00:03:31.740 --> 00:03:33.580 you know, for the listener who hasn't touched 00:03:33.580 --> 00:03:36.219 a philosophy textbook since college, break that 00:03:36.219 --> 00:03:38.120 down for us because I have a feeling this is 00:03:38.120 --> 00:03:40.159 the root of the whole problem. It's a huge part 00:03:40.159 --> 00:03:42.639 of it. So consequentialism is the ethical theory 00:03:42.639 --> 00:03:44.580 that the morality of an action is determined 00:03:44.580 --> 00:03:47.259 solely by its consequences. So the ends justify 00:03:47.259 --> 00:03:50.039 the means. In a nutshell, yes. If the outcome 00:03:50.039 --> 00:03:51.960 is good, the action itself is good. It stands 00:03:51.960 --> 00:03:55.090 in direct contrast to, say, deontology which 00:03:55.090 --> 00:03:57.750 says there are certain hard rules like do not 00:03:57.750 --> 00:04:00.650 lie or do not steal that you must follow regardless 00:04:00.650 --> 00:04:04.159 of the outcome so if i lie to you But that lie 00:04:04.159 --> 00:04:06.599 ends up saving five people from a burning building. 00:04:06.759 --> 00:04:09.780 A consequentialist would say the lie was not 00:04:09.780 --> 00:04:12.360 just acceptable, but it was the moral thing to 00:04:12.360 --> 00:04:15.719 do. Exactly. Now, imagine growing up in a household 00:04:15.719 --> 00:04:17.660 where that is the dinner table conversation. 00:04:17.680 --> 00:04:20.939 Yeah. Where rigid rules are viewed as sort of 00:04:20.939 --> 00:04:23.459 irrational and everything is just a calculation 00:04:23.459 --> 00:04:27.120 of utility. Right. SBF didn't just learn this. 00:04:27.360 --> 00:04:30.720 He breathed it. He grew up in a world of. high 00:04:30.720 --> 00:04:33.040 -level intellectual debate where you could basically 00:04:33.040 --> 00:04:35.519 argue your way out of anything if the math on 00:04:35.519 --> 00:04:37.740 your side worked out. It explains so much about 00:04:37.740 --> 00:04:40.300 his later defenses in court. Mistakes were made, 00:04:40.339 --> 00:04:42.899 but my intentions were good. Precisely. So that's 00:04:42.899 --> 00:04:44.589 the home environment. And then you move on to 00:04:44.589 --> 00:04:47.290 his education. He goes to the Kennedy USA math 00:04:47.290 --> 00:04:49.449 camp. This isn't just summer school. No. This 00:04:49.449 --> 00:04:51.589 is for the outliers, the kids who see the matrix. 00:04:51.850 --> 00:04:54.310 Yeah, the real prodigies. And that nationally 00:04:54.310 --> 00:04:56.990 funneled him right into MIT. He graduated in 00:04:56.990 --> 00:05:00.449 2014, physics major, math minor. But I think 00:05:00.449 --> 00:05:03.110 the most telling part of his MIT experience wasn't 00:05:03.110 --> 00:05:05.149 the classroom. It was where he lived. Epsilon 00:05:05.149 --> 00:05:07.430 theta. Epsilon theta. Yeah. I've read about this 00:05:07.430 --> 00:05:09.689 place. It sounds less like a frat house and more 00:05:09.689 --> 00:05:13.100 like a... A social experiment or something. That's 00:05:13.100 --> 00:05:14.680 a great way to put it. It was a co -ed group 00:05:14.680 --> 00:05:17.980 house and they prided themselves on being very 00:05:17.980 --> 00:05:20.860 distinct from the frat bro culture is intensely 00:05:20.860 --> 00:05:23.300 intellectual, you know, heavily focused on games, 00:05:23.439 --> 00:05:27.040 puzzles, high level debate. But they also had 00:05:27.040 --> 00:05:29.620 this culture of what's been called polycule adjacent 00:05:29.620 --> 00:05:32.579 living. Very few boundaries, lots of shared intimacy, 00:05:32.800 --> 00:05:35.000 sleep piles, that sort of thing. Which effectively 00:05:35.000 --> 00:05:38.120 became the blueprint for the FTX corporate housing 00:05:38.120 --> 00:05:40.459 later on in the Bahamas. Precisely. He never 00:05:40.459 --> 00:05:43.019 really left Epsilon Theta. He just recreated 00:05:43.019 --> 00:05:44.899 it in the Bahamas with a billion dollar budget. 00:05:44.980 --> 00:05:47.379 He learned that you could blend your work life, 00:05:47.579 --> 00:05:50.220 your social life, and your romantic life into 00:05:50.220 --> 00:05:53.089 one indistinguishable blob. and that there were 00:05:53.089 --> 00:05:55.790 no real boundaries. So he leaves MIT. He has 00:05:55.790 --> 00:05:58.810 the math brain. He has this consequentialist 00:05:58.810 --> 00:06:02.069 ethical framework. And he lands at Jane Street 00:06:02.069 --> 00:06:04.410 Capital. Now, we need to spend some time here 00:06:04.410 --> 00:06:07.439 because... Every profile mentions Jane Street, 00:06:07.519 --> 00:06:09.079 but they usually just say it's a high -frequency 00:06:09.079 --> 00:06:11.620 trading firm. But Jane Street is a very specific 00:06:11.620 --> 00:06:13.620 type of beast, isn't it? Well, it is. It's almost 00:06:13.620 --> 00:06:16.079 like a cult of rationality. Jane Street is a 00:06:16.079 --> 00:06:18.100 proprietary trading firm. That means they trade 00:06:18.100 --> 00:06:20.740 their own money, not clients' money. They are 00:06:20.740 --> 00:06:23.480 famous, absolutely famous, for their obsession 00:06:23.480 --> 00:06:28.180 with one concept, expected value, or EV. EV. 00:06:28.300 --> 00:06:30.579 Okay, this is the concept that seems to drive... 00:06:30.720 --> 00:06:33.319 everything SBF did. Explain how that mindset 00:06:33.319 --> 00:06:35.279 works in practice at a place like Jane Street. 00:06:35.500 --> 00:06:37.120 So at Jane Street, they would bet on anything, 00:06:37.360 --> 00:06:39.339 literally anything. What's the weather going 00:06:39.339 --> 00:06:41.120 to be in an hour? Will this person walk through 00:06:41.120 --> 00:06:43.920 that door in the next 60 seconds? They are constantly 00:06:43.920 --> 00:06:46.379 calibrating their probability assessments. The 00:06:46.379 --> 00:06:49.560 core idea is this. If you offer me a bet where 00:06:49.560 --> 00:06:52.160 I have a 51 % chance of winning a dollar and 00:06:52.160 --> 00:06:55.240 a 49 % chance of losing a dollar, I should take 00:06:55.240 --> 00:06:57.600 that bet every single time. Because over a thousand 00:06:57.600 --> 00:07:00.279 flips, the expected value is positive. Even if 00:07:00.279 --> 00:07:02.480 the downside of losing is really painful in the 00:07:02.480 --> 00:07:05.699 short term. That's the catch. In pure EV theory, 00:07:05.879 --> 00:07:09.100 if the math is positive, you take the risk. Jane 00:07:09.100 --> 00:07:11.540 Street teaches you to be completely risk neutral. 00:07:11.860 --> 00:07:14.600 You don't fear loss, you just fear bad math. 00:07:15.959 --> 00:07:19.180 SBF absorbed this completely. There's a now famous 00:07:19.180 --> 00:07:21.240 anecdote where he discussed a theoretical coin 00:07:21.240 --> 00:07:24.500 flip. Heads, the world becomes twice as good 00:07:24.500 --> 00:07:27.259 as it is now. tales, the world is completely 00:07:27.259 --> 00:07:29.740 destroyed. And he said he would take that flip. 00:07:29.860 --> 00:07:31.379 He said he'd keep flipping it. He'd take the 00:07:31.379 --> 00:07:34.079 50 % risk of total annihilation over and over 00:07:34.079 --> 00:07:37.180 because the expected value of creating a paradise 00:07:37.180 --> 00:07:39.839 world was technically infinite. That is a dangerous 00:07:39.839 --> 00:07:42.439 way to operate a civilization. And it turns out, 00:07:42.439 --> 00:07:45.639 a terrible way to run a bank. It completely desensitizes 00:07:45.639 --> 00:07:47.800 you to catastrophe. If you go bankrupt, you just 00:07:47.800 --> 00:07:49.720 say, well, the math was right. I just got unlucky 00:07:49.720 --> 00:07:52.379 on the variant. Exactly. And that brings us to 00:07:52.379 --> 00:07:55.360 his exit from Jane Street. He leaves in 2017 00:07:55.360 --> 00:07:57.939 to start Alameda Research. And this is where 00:07:57.939 --> 00:08:00.740 the legend really begins. The kimchi premium. 00:08:01.060 --> 00:08:03.300 The kimchi premium. This is the origin story. 00:08:03.579 --> 00:08:06.279 It's the started in a garage moment for crypto. 00:08:06.800 --> 00:08:10.180 But I feel like people gloss over how hard this 00:08:10.180 --> 00:08:12.279 actually was. They just say, oh, Bitcoin was 00:08:12.279 --> 00:08:14.199 more expensive in Japan, so he bought low and 00:08:14.199 --> 00:08:16.540 sold high. If it was that easy, why wasn't everyone 00:08:16.540 --> 00:08:19.220 doing it? That is exactly the right question 00:08:19.220 --> 00:08:21.779 to ask. The arbitrage opportunity itself was 00:08:21.779 --> 00:08:24.439 obvious. You know, Bitcoin might be trading at 00:08:24.439 --> 00:08:27.920 $10 ,000 in the U .S. and $11 ,000 in Japan or 00:08:27.920 --> 00:08:31.540 Korea. That's a free 10 % spread. Yeah, free 00:08:31.540 --> 00:08:34.820 money. But the friction. The real world friction 00:08:34.820 --> 00:08:37.899 was immense. The Japanese and Korean banking 00:08:37.899 --> 00:08:40.899 systems are notoriously insular and bureaucratic. 00:08:41.019 --> 00:08:43.820 You can't just wire $10 million into a Japanese 00:08:43.820 --> 00:08:46.159 bank account as a foreigner without triggering 00:08:46.159 --> 00:08:48.779 every single money laundering alarm bell in Tokyo. 00:08:48.980 --> 00:08:50.840 So the hard part wasn't the crypto side of it. 00:08:50.919 --> 00:08:52.960 It was the fiat currency. It was getting the 00:08:52.960 --> 00:08:54.980 dollars and yen moved around. It's always the 00:08:54.980 --> 00:08:58.519 fiat. SBF's genius here, and it was a form of 00:08:58.519 --> 00:09:01.909 genius. was navigating that bureaucracy. He set 00:09:01.909 --> 00:09:05.169 up this incredibly complex web of intermediaries 00:09:05.169 --> 00:09:08.210 and local directors to satisfy the Japanese banks. 00:09:08.470 --> 00:09:11.049 He essentially built a logistical pipe that allowed 00:09:11.049 --> 00:09:14.090 him to move up to $25 million a day out of Japan. 00:09:14.350 --> 00:09:16.690 And that's where the boy genius myth crystallized, 00:09:16.730 --> 00:09:19.090 right? He wasn't just another coder. He was this 00:09:19.090 --> 00:09:21.690 guy who could hack the real world banking system. 00:09:21.850 --> 00:09:24.970 It validated his entire worldview. He proved 00:09:24.970 --> 00:09:26.909 he could solve a problem that stumped the rest 00:09:26.909 --> 00:09:29.110 of the market. And he made an absolute fortune 00:09:29.110 --> 00:09:31.970 doing it. This gave him the capital and, more 00:09:31.970 --> 00:09:34.730 importantly, the confidence to launch FTX in 00:09:34.730 --> 00:09:37.690 2019. But before we get to FTX, we have to talk 00:09:37.690 --> 00:09:39.610 about the motivation he presented to the world. 00:09:39.669 --> 00:09:42.750 Because SPF wasn't buying Ferraris. He was driving 00:09:42.750 --> 00:09:44.990 a Toyota Corolla. He was famous for sleeping 00:09:44.990 --> 00:09:48.149 on beanbags. He claimed this was all for a philosophy 00:09:48.149 --> 00:09:51.429 called effective altruism. Yay. earning to give. 00:09:51.549 --> 00:09:53.889 We touched on his utilitarian upbringing, but 00:09:53.889 --> 00:09:56.009 EA takes it a step further. It's not just about 00:09:56.009 --> 00:09:58.169 doing good. It's about optimizing good, right? 00:09:58.309 --> 00:10:00.870 Right. It's about maximizing your impact. The 00:10:00.870 --> 00:10:03.210 classic example is, you know, if you work at 00:10:03.210 --> 00:10:05.090 a soup kitchen, you help maybe 50 people a day. 00:10:05.169 --> 00:10:08.190 That's nice. Feels good. But if you become a 00:10:08.190 --> 00:10:10.610 billionaire trader and donate that money to, 00:10:10.710 --> 00:10:13.330 say, mosquito net distribution in Africa, you 00:10:13.330 --> 00:10:16.159 could save 50 ,000 lives. So therefore, the most 00:10:16.159 --> 00:10:18.740 moral imperative is to get as rich as humanly 00:10:18.740 --> 00:10:21.440 possible. Exactly. But there's a darker, more 00:10:21.440 --> 00:10:25.220 extreme side to EA that SBF fully subscribed 00:10:25.220 --> 00:10:27.860 to called long -termism. Okay, this is crucial. 00:10:28.100 --> 00:10:30.379 This is crucial. Long -termism posits that the 00:10:30.379 --> 00:10:33.320 lives of the trillions of humans who will potentially 00:10:33.320 --> 00:10:35.919 live in the future, thousands, even millions 00:10:35.919 --> 00:10:39.019 of years from now, are just as valuable, if not 00:10:39.019 --> 00:10:42.009 more valuable, than the people alive today. So 00:10:42.009 --> 00:10:44.309 your priority shouldn't be fixing poverty now 00:10:44.309 --> 00:10:47.370 or curing cancer now. No. It should be preventing 00:10:47.370 --> 00:10:51.529 a future AI apocalypse or a meteor strike that 00:10:51.529 --> 00:10:53.409 could wipe out the entire future of the human 00:10:53.409 --> 00:10:55.590 species. And this creates a terrifying moral 00:10:55.590 --> 00:10:58.289 license. Because if your stated goal is to save 00:10:58.289 --> 00:11:00.789 a trillion future humans from a rogue AI, then 00:11:00.789 --> 00:11:03.429 stealing from a million current humans is, what, 00:11:03.570 --> 00:11:06.110 a rounding error? It's a justifiable sacrifice 00:11:06.110 --> 00:11:09.460 in that framework. Exactly. If you truly believe 00:11:09.460 --> 00:11:11.620 you are the Messiah for the future of the species, 00:11:11.919 --> 00:11:16.139 then standard everyday ethics like don't commit 00:11:16.139 --> 00:11:19.399 wire fraud look like petty, irrational hurdles. 00:11:19.600 --> 00:11:22.539 Wow. SBF viewed himself as a soldier fighting 00:11:22.539 --> 00:11:25.379 for the future, which allowed him to rationalize 00:11:25.379 --> 00:11:28.000 the crimes of the present. So with that mindset 00:11:28.000 --> 00:11:30.559 that he is basically the protagonist of reality. 00:11:31.259 --> 00:11:34.559 He builds FTX and he builds it incredibly fast. 00:11:34.740 --> 00:11:38.259 Unbelievably fast. Founded in 2019. And by September 00:11:38.259 --> 00:11:41.440 2021, he's moving the whole operation from Hong 00:11:41.440 --> 00:11:43.840 Kong to the Bahamas. And it wasn't just one company. 00:11:43.960 --> 00:11:46.740 No, it was over 130 affiliated companies by the 00:11:46.740 --> 00:11:49.200 end. A complete labyrinth designed to be confusing. 00:11:49.360 --> 00:11:51.419 And he needed to sell this labyrinth to investors. 00:11:51.720 --> 00:11:54.509 Which brings us to the image. The cargo shorts, 00:11:54.649 --> 00:11:56.909 the wild, unkempt hair. For a long time, people 00:11:56.909 --> 00:11:58.809 just thought, oh, he's just too busy and brilliant 00:11:58.809 --> 00:12:01.210 to care about his appearance. But that wasn't 00:12:01.210 --> 00:12:03.970 true, was it? No, not at all. Caroline Ellison, 00:12:04.070 --> 00:12:07.409 his ex -girlfriend and the CEO of Alameda, testified 00:12:07.409 --> 00:12:10.090 in court that the look was completely calculated. 00:12:11.929 --> 00:12:14.330 SBF realized early on back at James Street that 00:12:14.330 --> 00:12:16.429 if he looked a little crazy, people thought he 00:12:16.429 --> 00:12:18.919 was smarter. So it's a costume. It was absolutely 00:12:18.919 --> 00:12:20.980 a costume. He believed he got better bonuses 00:12:20.980 --> 00:12:23.879 at Jane Street when his hair was at its messiest. 00:12:24.159 --> 00:12:26.440 It's the Einstein effect, right? If you look 00:12:26.440 --> 00:12:28.120 like you don't know how to use a comb, you must 00:12:28.120 --> 00:12:30.919 be too busy contemplating the unified field theory 00:12:30.919 --> 00:12:33.519 to be bothered. And Silicon Valley eats that 00:12:33.519 --> 00:12:35.480 up. They don't want a guy in a Brooks Brothers 00:12:35.480 --> 00:12:37.740 suit. That looks like old finance. They want 00:12:37.740 --> 00:12:40.580 a disruptor. The most famous example, of course, 00:12:40.659 --> 00:12:43.779 is the pitch to Sequoia Capital. Oh, God, the 00:12:43.779 --> 00:12:45.899 League of Legends pitch is legendary. He is on 00:12:45.899 --> 00:12:48.879 a Zoom call. pitching one of the most prestigious, 00:12:48.980 --> 00:12:51.080 powerful venture capital firms on the planet 00:12:51.080 --> 00:12:54.399 for hundreds of millions of dollars. And during 00:12:54.399 --> 00:12:58.379 the call, he is audibly playing the video game 00:12:58.379 --> 00:13:01.039 League of Legends. You can hear the mouse clicking. 00:13:01.240 --> 00:13:03.279 And the craziest part is not that he did it, 00:13:03.299 --> 00:13:06.059 but that it worked. It worked like a charm. Sequoia 00:13:06.059 --> 00:13:08.679 wrote this glowing profile on him, which they 00:13:08.679 --> 00:13:10.620 have since scrubbed from the Internet, where 00:13:10.620 --> 00:13:12.399 they gushed about it. They said things like, 00:13:12.419 --> 00:13:15.279 we're talking to a future trillionaire. It was 00:13:15.279 --> 00:13:18.279 a power move. Yeah. It signaled, I don't need 00:13:18.279 --> 00:13:20.580 your money. I'm barely paying attention to you. 00:13:20.620 --> 00:13:22.440 And you're still going to write me a $200 million 00:13:22.440 --> 00:13:26.460 check. It establishes dominance. And it allowed 00:13:26.460 --> 00:13:29.139 him to expand his web of influence so aggressively. 00:13:29.500 --> 00:13:32.139 They weren't just buying up crypto assets. They 00:13:32.139 --> 00:13:34.740 were trying to buy legitimacy. That's the perfect 00:13:34.740 --> 00:13:38.440 word for it. They bought a 7 .6 % stake in Robinhood. 00:13:38.559 --> 00:13:42.080 Why Robinhood? That was strategic. Robinhood 00:13:42.080 --> 00:13:44.679 is the bridge to the mainstream retail stock 00:13:44.679 --> 00:13:48.500 trading world. If FTX could merge with or acquire 00:13:48.500 --> 00:13:51.259 Robinhood, they become this all -in -one financial 00:13:51.259 --> 00:13:53.399 super app. And then there was the whole episode 00:13:53.399 --> 00:13:56.240 with Elon Musk and the Twitter purchase. Yeah, 00:13:56.279 --> 00:13:59.100 SBS advisor texted Musk's team saying Sam was 00:13:59.100 --> 00:14:01.480 good for up to $5 billion to help take Twitter 00:14:01.480 --> 00:14:05.019 private. Musk, to his credit, seemed pretty skeptical. 00:14:05.220 --> 00:14:08.440 He asked his advisor, does he actually have $5 00:14:08.440 --> 00:14:12.139 billion in liquid cash? And the answer, as we 00:14:12.139 --> 00:14:14.899 now know, was a definitive no. Not even close. 00:14:15.120 --> 00:14:18.980 And then the wildest one of all, the island of 00:14:18.980 --> 00:14:21.799 Nauru. This brings us right back to that survivalist, 00:14:21.820 --> 00:14:24.740 long -termist paranoia. This was a real project. 00:14:24.799 --> 00:14:27.419 They actually looked into buying Nauru, a sovereign 00:14:27.419 --> 00:14:29.679 island nation in Micronesia. To do what with 00:14:29.679 --> 00:14:32.570 it? The plan was to build a bunker. sort of doomsday 00:14:32.570 --> 00:14:35.669 shelter for the effect of altruists to survive 00:14:35.669 --> 00:14:38.850 a global catastrophe and repopulate the earth 00:14:38.850 --> 00:14:41.750 with rational utilitarian thinkers. It sounds 00:14:41.750 --> 00:14:44.450 like a James Bond villain plot. I will buy a 00:14:44.450 --> 00:14:46.809 sovereign nation to restart civilization in my 00:14:46.809 --> 00:14:49.289 own image. It just shows how detached from reality 00:14:49.289 --> 00:14:51.009 they had all become. Well, you have billions 00:14:51.009 --> 00:14:52.690 of dollars, even if it's just monopoly money 00:14:52.690 --> 00:14:54.730 on a spreadsheet. And absolutely no one in your 00:14:54.730 --> 00:14:57.269 life is telling you no. Your wildest fantasies 00:14:57.269 --> 00:14:59.110 start to look like legitimate business plans. 00:14:59.529 --> 00:15:02.190 Okay, so we have the motive, the image, and the 00:15:02.190 --> 00:15:05.090 sprawling empire. Now we need to look under the 00:15:05.090 --> 00:15:06.769 hood. We need to talk about the fraud itself, 00:15:06.950 --> 00:15:09.370 because this wasn't just, oops, we lost some 00:15:09.370 --> 00:15:12.370 money in a bad trade. This was structural theft 00:15:12.370 --> 00:15:15.789 from day one. This is section three, the mechanics 00:15:15.789 --> 00:15:19.049 of the fraud, and it all centers on the relationship 00:15:19.049 --> 00:15:22.539 between FTX, the exchange, And Alameda Research, 00:15:22.820 --> 00:15:24.259 the hedge fund. And just to be clear for the 00:15:24.259 --> 00:15:27.080 listener, normally an exchange and a trading 00:15:27.080 --> 00:15:29.100 firm are supposed to be like church and state. 00:15:29.220 --> 00:15:31.220 They should be completely separate. Absolutely. 00:15:31.399 --> 00:15:34.399 100 % separate. If you deposit money into an 00:15:34.399 --> 00:15:37.100 exchange like Coinbase or Kraken, that money 00:15:37.100 --> 00:15:39.419 is supposed to sit there. It's your money. The 00:15:39.419 --> 00:15:41.600 exchange makes its profit on transaction fees. 00:15:41.820 --> 00:15:44.019 They should never, ever be gambling with your 00:15:44.019 --> 00:15:46.879 deposits. But Alameda was gambling. And they 00:15:46.879 --> 00:15:49.779 were gambling with FTX customer money. On a massive 00:15:49.779 --> 00:15:52.159 scale. So how did they physically get the money 00:15:52.159 --> 00:15:54.460 from point A to point B? Because as I understand 00:15:54.460 --> 00:15:56.960 it, there were two main ways, two big buckets 00:15:56.960 --> 00:15:59.379 of fraud. Two main buckets is right. The first 00:15:59.379 --> 00:16:02.019 was what you could call the fiat processing loophole. 00:16:02.679 --> 00:16:05.799 In the early days of FTX, traditional banks were 00:16:05.799 --> 00:16:08.299 still very wary of crypto. They wouldn't give 00:16:08.299 --> 00:16:10.679 FTX a corporate bank account. Right. It would 00:16:10.679 --> 00:16:13.340 seem it's too risky. But Alameda Research, being 00:16:13.340 --> 00:16:15.809 a trading firm. already had established bank 00:16:15.809 --> 00:16:19.029 accounts. So SBF came up with a solution. He 00:16:19.029 --> 00:16:21.330 told customers, if you want to fund your account 00:16:21.330 --> 00:16:24.470 on the FTX exchange, just wire your US dollars 00:16:24.470 --> 00:16:26.509 to this bank account here. And that bank account 00:16:26.509 --> 00:16:29.269 was owned by Alameda Research. Exactly. So you, 00:16:29.370 --> 00:16:31.590 the customer, think you're funding your FTX trading 00:16:31.590 --> 00:16:34.169 account, but you're actually wiring your life 00:16:34.169 --> 00:16:37.129 savings directly to a completely separate high 00:16:37.129 --> 00:16:40.710 -risk hedge fund. Wow. And for years, SBF claimed 00:16:40.710 --> 00:16:42.850 in public that that money was just sitting there. 00:16:43.210 --> 00:16:46.350 segregated and safe. But in reality, Alameda 00:16:46.350 --> 00:16:48.950 was spending it on risky trades, venture investments, 00:16:49.149 --> 00:16:52.230 political donations, everything. We are talking 00:16:52.230 --> 00:16:55.169 about $8 billion of customer deposits that never 00:16:55.169 --> 00:16:57.450 even touched FTX's own corporate structure. It 00:16:57.450 --> 00:16:59.490 went straight to the casino. That's the first 00:16:59.490 --> 00:17:02.009 bucket. But the second mechanism is even more 00:17:02.009 --> 00:17:05.329 damning because it involved deliberately tampering 00:17:05.329 --> 00:17:08.609 with the platform's software itself. The code 00:17:08.609 --> 00:17:11.400 tweak. This is the smoking gun. This is what 00:17:11.400 --> 00:17:14.039 you can't explain away as an accident. Gary Wang, 00:17:14.359 --> 00:17:17.799 the CTO and co -founder of Guy SBF, had known 00:17:17.799 --> 00:17:21.099 since MathCamp testified under oath that SBF 00:17:21.099 --> 00:17:24.019 ordered him to add a special feature to FTX's 00:17:24.019 --> 00:17:27.019 code just for Alameda. OK, now you've looked 00:17:27.019 --> 00:17:28.920 at the technical details of this. What exactly 00:17:28.920 --> 00:17:31.539 did this line of code do? So every crypto exchange 00:17:31.539 --> 00:17:33.299 has something called the liquidation engine, 00:17:33.460 --> 00:17:36.380 an automated piece of software. If you borrow 00:17:36.380 --> 00:17:39.200 money to make a trade leverage and your position 00:17:39.200 --> 00:17:42.039 drops below a certain value, the engine automatically 00:17:42.039 --> 00:17:44.579 sells your assets to pay back the loan. It's 00:17:44.579 --> 00:17:46.579 a safety feature. It protects the exchange from 00:17:46.579 --> 00:17:49.039 going bankrupt if traders lose too much. It's 00:17:49.039 --> 00:17:51.299 a critical safety feature. It's ruthless and 00:17:51.299 --> 00:17:53.240 it happens in milliseconds. It protects the entire 00:17:53.240 --> 00:17:55.480 system. Unless you're Alameda. Unless you're 00:17:55.480 --> 00:17:58.839 Alameda. Gary Wang added a flag in the database. 00:17:59.440 --> 00:18:02.640 Literally a single line of code. A Boolean setting. 00:18:03.259 --> 00:18:07.200 Allow negative. For Alameda and only for Alameda, 00:18:07.259 --> 00:18:10.680 this setting was switched to true. The liquidation 00:18:10.680 --> 00:18:12.559 engine was turned off for them. So they could 00:18:12.559 --> 00:18:15.099 borrow infinite money, lose it all, go billions 00:18:15.099 --> 00:18:17.099 and billions of dollars into debt to the exchange, 00:18:17.180 --> 00:18:20.559 and the system would just never stop them. Exactly. 00:18:20.559 --> 00:18:22.779 It was an essentially unlimited line of credit, 00:18:22.900 --> 00:18:25.599 backed by their own customers' funds. At one 00:18:25.599 --> 00:18:28.339 point, Alameda had a negative balance of $65 00:18:28.339 --> 00:18:33.000 billion on the FTX exchange. The code was hardwired 00:18:33.000 --> 00:18:34.740 to look the other way. That's not negligence. 00:18:34.799 --> 00:18:36.660 That's not I lost track of the spreadsheets, 00:18:36.660 --> 00:18:38.420 which was his defense. That is a deliberate, 00:18:38.559 --> 00:18:41.640 premeditated engineering decision to bypass the 00:18:41.640 --> 00:18:43.740 most fundamental safety protocol on the entire 00:18:43.740 --> 00:18:45.900 platform. And that's why the I didn't know defense 00:18:45.900 --> 00:18:48.839 completely fell apart at trial. You don't accidentally 00:18:48.839 --> 00:18:50.900 write a specific code exemption for your own 00:18:50.900 --> 00:18:53.500 personal hedge fund. It's impossible. But they 00:18:53.500 --> 00:18:57.920 had to hide this massive $65 billion hole. And 00:18:57.920 --> 00:19:00.279 to do that, they needed to buy protection. They 00:19:00.279 --> 00:19:02.859 needed friends in high places. Which brings us 00:19:02.859 --> 00:19:05.960 to the political machine they built. SBF wasn't 00:19:05.960 --> 00:19:07.799 just donating out of the kindness of his heart. 00:19:08.000 --> 00:19:10.599 Not even slightly. He was trying to buy the referee. 00:19:11.160 --> 00:19:13.920 He was pushing very hard for a specific bill 00:19:13.920 --> 00:19:16.420 in Congress, the Digital Commodities Consumer 00:19:16.420 --> 00:19:18.359 Protection Act. And what would that have done? 00:19:18.720 --> 00:19:21.509 It would have given the CFTC the Commodity Futures 00:19:21.509 --> 00:19:24.069 Trading Commission, primary oversight over the 00:19:24.069 --> 00:19:26.329 crypto industry. And why did he want the CFTC 00:19:26.329 --> 00:19:30.049 instead of, say, the SEC? Because the CFTC is 00:19:30.049 --> 00:19:32.589 generally seen as a smaller agency, perhaps a 00:19:32.589 --> 00:19:35.329 little more manageable than the much larger and 00:19:35.329 --> 00:19:38.230 more aggressive SEC. He was trying to handpick 00:19:38.230 --> 00:19:40.309 his own regulator. And to do that, he needed 00:19:40.309 --> 00:19:42.150 to buy influence on both sides of the aisle. 00:19:42.380 --> 00:19:44.240 The numbers here are just staggering. In the 00:19:44.240 --> 00:19:46.900 2022 midterm elections, he was the second largest 00:19:46.900 --> 00:19:49.160 individual donor to the Democrats, dropping nearly 00:19:49.160 --> 00:19:52.160 $40 million. And that's just what the public 00:19:52.160 --> 00:19:55.259 saw. That was the on -the -book stuff. But later, 00:19:55.400 --> 00:19:58.680 after the collapse, SBS admitted in an interview 00:19:58.680 --> 00:20:01.759 that he gave just as much, if not more, to Republicans. 00:20:01.940 --> 00:20:04.259 But he did it through dark money channels. Exactly. 00:20:04.380 --> 00:20:07.240 He used 501c4 organizations and other political 00:20:07.240 --> 00:20:09.900 vehicles where donor names aren't disclosed to 00:20:09.900 --> 00:20:13.009 the public. He explicitly told a reporter that 00:20:13.009 --> 00:20:15.250 he did this because he knew the media is super 00:20:15.250 --> 00:20:18.490 liberal and he didn't want the bad PR that would 00:20:18.490 --> 00:20:21.000 come from being a Republican mega donor. So he 00:20:21.000 --> 00:20:22.940 was hedging his political bets just like it was 00:20:22.940 --> 00:20:25.359 a financial trade. A perfect hedge. If Democrats 00:20:25.359 --> 00:20:27.980 win, he has a seat at the table. If Republicans 00:20:27.980 --> 00:20:30.960 win, he calls in the dark money favors he's owed. 00:20:31.140 --> 00:20:33.599 It's cynical perfection. And then you have the 00:20:33.599 --> 00:20:36.660 raw nepotism, his brother, Gabriel Bankman Freed. 00:20:36.680 --> 00:20:39.000 Gabriel ran a lobbying group called Guarding 00:20:39.000 --> 00:20:41.660 Against Pandemics, a very noble sounding cause. 00:20:41.799 --> 00:20:44.519 Sounds great. They received $35 million from 00:20:44.519 --> 00:20:47.640 SBF and Alameda. And look, maybe they had some 00:20:47.640 --> 00:20:50.539 good intentions, but a lawsuit filed by the bankruptcy 00:20:50.539 --> 00:20:53.900 estate later alleged they did nothing to prevent 00:20:53.900 --> 00:20:56.819 pandemics. It looked for all the world like a 00:20:56.819 --> 00:20:59.640 slush fund to employ family and buy influence 00:20:59.640 --> 00:21:02.599 in D .C. under the guise of altruism. And the 00:21:02.599 --> 00:21:04.819 parents. This is where it gets really uncomfortable. 00:21:04.980 --> 00:21:08.400 The bankruptcy estate sued them. to recover $32 00:21:08.400 --> 00:21:11.140 million in cash and real estate that was given 00:21:11.140 --> 00:21:14.420 to them by FTX. They were gifted a $16 million 00:21:14.420 --> 00:21:17.720 home in the Bahamas. Wait, a $16 million vacation 00:21:17.720 --> 00:21:21.000 home for two law professors? Not bad work if 00:21:21.000 --> 00:21:22.880 you can get it. They denied knowing about the 00:21:22.880 --> 00:21:24.480 fraud, of course. Right. It just shows how the 00:21:24.480 --> 00:21:26.140 customer money was leaking out of the company 00:21:26.140 --> 00:21:28.339 in every conceivable direction. Real estate, 00:21:28.500 --> 00:21:31.119 politics, family handouts, you name it. Speaking 00:21:31.119 --> 00:21:33.140 of real estate, we have to talk about the penthouse. 00:21:33.690 --> 00:21:36.990 The now infamous Orchid Penthouse. The $40 million 00:21:36.990 --> 00:21:40.190 dorm room. This was the headquarters. SBF, Caroline 00:21:40.190 --> 00:21:42.910 Ellison, Gary Wang, Nishad Singh, the whole inner 00:21:42.910 --> 00:21:45.829 circle lived there together in this massive five 00:21:45.829 --> 00:21:48.170 -bedroom luxury apartment. This goes right back 00:21:48.170 --> 00:21:50.690 to the Epsilon Theta days at MIT. It's exactly 00:21:50.690 --> 00:21:52.990 that. They were running a multi -billion dollar 00:21:52.990 --> 00:21:55.490 global conglomerate, but they were living like 00:21:55.490 --> 00:21:58.349 college students in a group house, sleeping with 00:21:58.349 --> 00:22:00.750 each other, breaking up, having intense drama, 00:22:01.029 --> 00:22:03.970 all while eating vegan food delivered by private 00:22:03.970 --> 00:22:07.789 chefs and, according to testimony, popping stimulant 00:22:07.789 --> 00:22:10.269 medication to stay awake for days on end. It 00:22:10.269 --> 00:22:13.200 creates a complete echo chamber. If everyone 00:22:13.200 --> 00:22:15.960 you work with is also your roommate and in some 00:22:15.960 --> 00:22:18.559 cases your romantic partner, there is no outside 00:22:18.559 --> 00:22:21.319 voice. There is no one to say, hey, maybe we 00:22:21.319 --> 00:22:23.319 shouldn't steal $8 billion from our customer. 00:22:23.480 --> 00:22:25.700 It was a hermetically sealed bubble of delusion 00:22:25.700 --> 00:22:28.299 floating on an ocean of stolen money. Until the 00:22:28.299 --> 00:22:31.240 bubble popped. Yeah. Section 5. The Collapse. 00:22:31.579 --> 00:22:35.519 November 2022. It is hard to overstate how fast 00:22:35.519 --> 00:22:37.299 this happened. It felt like watching the Soviet 00:22:37.299 --> 00:22:40.039 Union collapse in a single weekend. It all started 00:22:40.039 --> 00:22:42.940 with a leak. CoinDesk, a crypto news site, got 00:22:42.940 --> 00:22:45.059 its hands on a copy of Alameda's balance sheet. 00:22:45.220 --> 00:22:47.279 When people who understood finance actually looked 00:22:47.279 --> 00:22:49.799 at it, they gasped. Why? What was so shocking 00:22:49.799 --> 00:22:52.519 on it? Well, it was full of FTT. FTT was the 00:22:52.519 --> 00:22:54.700 digital token that FTX had just invented themselves. 00:22:54.940 --> 00:22:58.599 They literally printed it out of thin air. Alameda's 00:22:58.599 --> 00:23:00.240 balance sheet was showing billions of dollars 00:23:00.240 --> 00:23:02.980 in assets, but most of it was this magical internet 00:23:02.980 --> 00:23:05.940 money that only had value because FTX and SBF 00:23:05.940 --> 00:23:07.799 said it did. It's completely circular logic. 00:23:07.960 --> 00:23:10.140 I am rich because I own a billion dollars of 00:23:10.140 --> 00:23:12.220 bankman bucks, which are valuable because I, 00:23:12.240 --> 00:23:15.079 a rich person, say they are. Exactly. And the 00:23:15.079 --> 00:23:18.019 market realized in an instant that if FTX ever 00:23:18.019 --> 00:23:20.680 got into trouble, those FTT tokens would be worth 00:23:20.680 --> 00:23:23.440 zero. The emperor had no clothes. And then came 00:23:23.440 --> 00:23:26.140 the tweet. The tweet that killed an empire from 00:23:26.140 --> 00:23:29.480 Changpeng Zhao, CZ, the CEO of Binance. SPF's 00:23:29.480 --> 00:23:32.480 arch rival. Yeah. CZ saw the Coindesk report 00:23:32.480 --> 00:23:35.640 and tweeted that Binance, which held a lot of 00:23:35.640 --> 00:23:38.160 FTT from an earlier deal, was going to sell all 00:23:38.160 --> 00:23:40.440 of his holdings due to recent revelations. And 00:23:40.440 --> 00:23:42.339 that was the signal. That was the fire alarm 00:23:42.339 --> 00:23:44.799 in a crowded theater. Everyone ran for the exits 00:23:44.799 --> 00:23:47.460 at once. A classic bank run. Numbers were insane. 00:23:47.859 --> 00:23:50.400 Six billion dollars in withdrawal requests in 00:23:50.400 --> 00:23:53.099 just 72 hours. And because Alameda had stolen 00:23:53.099 --> 00:23:56.130 all the liquid. cash, FTX couldn't pay. The vault 00:23:56.130 --> 00:23:58.789 was empty. SBF tried to bluff his way through 00:23:58.789 --> 00:24:02.829 it. He sent out that tweet. FTX is fine. Assets 00:24:02.829 --> 00:24:05.130 are fine. That tweet is going to go down in history 00:24:05.130 --> 00:24:07.390 as one of the most expensive and blatant lies 00:24:07.390 --> 00:24:10.329 ever told. He knew they weren't fine. Behind 00:24:10.329 --> 00:24:12.210 the scenes, he was frantically calling investors, 00:24:12.470 --> 00:24:15.109 calling the Saudis, calling anyone he could think 00:24:15.109 --> 00:24:18.569 of for a bailout. But the hole was just too deep 00:24:18.569 --> 00:24:22.549 to fill. November 11th, 2022. He files for Chapter 00:24:22.549 --> 00:24:26.690 11 bankruptcy. SBF resigns. And the handcuffs 00:24:26.690 --> 00:24:29.309 come out. And the trial was a complete spectacle. 00:24:29.589 --> 00:24:32.329 United States v. Bankman freed. The defense strategy 00:24:32.329 --> 00:24:34.369 from the start was to paint him as this sort 00:24:34.369 --> 00:24:37.089 of unlucky math nerd. I'm just a physicist. I 00:24:37.089 --> 00:24:38.450 don't understand accounting. I got overwhelmed. 00:24:38.809 --> 00:24:40.630 Right. I was trying to save the world. The market 00:24:40.630 --> 00:24:42.630 crashed. Mistakes were made. But there was no 00:24:42.630 --> 00:24:45.559 intent to defraud anyone. But the prosecution 00:24:45.559 --> 00:24:47.640 didn't just have documents and spreadsheets. 00:24:47.640 --> 00:24:49.500 They had the roommates. This must have been just 00:24:49.500 --> 00:24:51.859 surreal for him, watching his ex -girlfriend, 00:24:51.920 --> 00:24:54.480 Caroline Ellison, walk to the witness stand to 00:24:54.480 --> 00:24:57.460 testify against him. Her testimony was the absolute 00:24:57.460 --> 00:25:00.720 nail in the coffin. She was composed. She was 00:25:00.720 --> 00:25:03.420 credible. She was incredibly detailed. She told 00:25:03.420 --> 00:25:05.960 the jury about the seven spreadsheets. The seven 00:25:05.960 --> 00:25:08.599 spreadsheets? What was that? When Alameda's lenders 00:25:08.599 --> 00:25:11.180 started getting nervous and asked to see their 00:25:11.180 --> 00:25:13.559 balance sheet, the real one looked terrible. 00:25:14.029 --> 00:25:17.710 It showed the massive hole. So SBF directed her 00:25:17.710 --> 00:25:20.750 and the team to prepare seven different alternative 00:25:20.750 --> 00:25:23.349 versions of the balance sheet, each one hiding 00:25:23.349 --> 00:25:25.549 the loans and the risk in a different way. Oh, 00:25:25.549 --> 00:25:27.910 my God. And then he looked at all seven options 00:25:27.910 --> 00:25:31.029 and personally picked alternative seven to send 00:25:31.029 --> 00:25:34.509 to the lenders. That one act completely destroys 00:25:34.509 --> 00:25:37.410 the argument of I made a mistake. You don't accidentally 00:25:37.410 --> 00:25:40.289 create seven different fake balance sheets. SBF 00:25:40.289 --> 00:25:42.759 ended up taking the stand himself. Which is something 00:25:42.759 --> 00:25:44.819 defense lawyers almost always tell their clients 00:25:44.819 --> 00:25:47.579 never to do. It was a Hail Mary pass, and he 00:25:47.579 --> 00:25:50.079 fumbled it spectacularly. He thought he could 00:25:50.079 --> 00:25:51.980 outsmart the prosecutor. He thought he could 00:25:51.980 --> 00:25:53.920 talk his way out of it with philosophical arguments, 00:25:54.140 --> 00:25:56.220 just like he talked his way into Sequoia's wallet. 00:25:56.440 --> 00:25:59.160 But a courtroom is not a VC pitch meeting. No. 00:25:59.619 --> 00:26:03.200 In a court, facts matter. He said, I don't recall. 00:26:03.690 --> 00:26:07.269 or some version of that, over 140 times. He came 00:26:07.269 --> 00:26:11.430 across as evasive, slippery, and arrogant. The 00:26:11.430 --> 00:26:14.069 jury absolutely hated him. And the verdict came 00:26:14.069 --> 00:26:17.089 back, guilty on all seven counts. Swiftly and 00:26:17.089 --> 00:26:19.730 unanimously. So now we enter the final chapter 00:26:19.730 --> 00:26:22.640 of this saga, the aftermath. The boy king who 00:26:22.640 --> 00:26:25.559 wanted to buy the island of Nauru is now an inmate 00:26:25.559 --> 00:26:28.500 in a federal prison. And the details of his life 00:26:28.500 --> 00:26:31.359 behind bars are, well, they are a deep dive in 00:26:31.359 --> 00:26:33.980 and of themselves. It's a fascinating study and 00:26:33.980 --> 00:26:36.710 adaptation. First, he was held at MDC Brooklyn, 00:26:36.970 --> 00:26:39.609 the Metropolitan Detention Center. It's a notoriously 00:26:39.609 --> 00:26:41.849 rough place. Ghislaine Maxwell was held there, 00:26:41.890 --> 00:26:43.690 for instance. And he had the immediate dietary 00:26:43.690 --> 00:26:45.970 issues. Right. He's a committed vegan. His lawyers 00:26:45.970 --> 00:26:47.730 were in court almost immediately, complaining 00:26:47.730 --> 00:26:49.609 that he was being forced to survive on bread, 00:26:49.730 --> 00:26:51.829 water, and peanut butter because the prison wasn't 00:26:51.829 --> 00:26:54.390 providing him with adequate vegan meals. They 00:26:54.390 --> 00:26:56.250 argued he couldn't prepare for his trial because 00:26:56.250 --> 00:26:58.609 he was wasting away. But then he adapted to the 00:26:58.609 --> 00:27:01.950 internal prison economy. The mackerel. The mack. 00:27:02.349 --> 00:27:04.130 This is my favorite detail of the whole story 00:27:04.130 --> 00:27:06.750 because it connects so perfectly back to the 00:27:06.750 --> 00:27:09.690 kimchi premium arbitrage. How so? In federal 00:27:09.690 --> 00:27:12.089 prison, you can't use cash. The currency used 00:27:12.089 --> 00:27:14.200 to be cigarettes. But now those are banned in 00:27:14.200 --> 00:27:16.740 most facilities. So the stable currency, the 00:27:16.740 --> 00:27:19.359 accepted medium of exchange, is the pouch of 00:27:19.359 --> 00:27:21.660 mackerel fish fillets from the commissary. It 00:27:21.660 --> 00:27:24.619 has utility. It's non -perishable. It has a standard 00:27:24.619 --> 00:27:27.240 agreed upon value. It's a commodity currency. 00:27:27.579 --> 00:27:30.819 Exactly. And so SBF, the vegan who doesn't even 00:27:30.819 --> 00:27:33.660 eat fish, started acquiring and trading macks. 00:27:33.859 --> 00:27:36.079 There's a credible report that he paid a fellow 00:27:36.079 --> 00:27:38.559 inmate four packets of mackerel to give him a 00:27:38.559 --> 00:27:40.819 haircut before his trial. It's the same skill 00:27:40.819 --> 00:27:43.859 set. It's arbitrage. identifying a market inefficiency. 00:27:44.119 --> 00:27:46.200 I have a surplus of fish. You have a surplus 00:27:46.200 --> 00:27:48.859 of barbering skill. And he's executing the trade. 00:27:49.000 --> 00:27:51.640 He's running a localized version of Alameda research 00:27:51.640 --> 00:27:54.420 inside the cell block. It proves that his brain 00:27:54.420 --> 00:27:56.900 is just hardwired this way. It doesn't turn off. 00:27:57.019 --> 00:27:59.400 He is a transactional creature, whether it's 00:27:59.400 --> 00:28:02.000 a global crypto markets or prison barter. He 00:28:02.000 --> 00:28:04.940 is always, always calculating the expected value. 00:28:05.279 --> 00:28:07.420 And his cellmates. I mean, the writers of this 00:28:07.420 --> 00:28:10.019 reality show are just working overtime. As of 00:28:10.019 --> 00:28:13.079 late 2024, reports came out that he was being 00:28:13.079 --> 00:28:16.140 housed in a dormitory -style unit with none other 00:28:16.140 --> 00:28:18.779 than Sean Combs. Diddy. You can't be serious. 00:28:19.079 --> 00:28:21.640 Diddy and SBF. Just picture that conversation. 00:28:22.410 --> 00:28:24.970 The crypto nerd who thinks in probabilities and 00:28:24.970 --> 00:28:27.109 the hip hop mogul who built an empire on image 00:28:27.109 --> 00:28:29.670 sitting there on their bunks trading Macs for 00:28:29.670 --> 00:28:31.970 commissary snacks. Both of them having fallen 00:28:31.970 --> 00:28:34.789 from these massive heights, both facing serious 00:28:34.789 --> 00:28:37.970 federal time. It's a bizarre and powerful leveling 00:28:37.970 --> 00:28:40.450 mechanism. There really is. But SBF couldn't 00:28:40.450 --> 00:28:42.829 just stay quiet and do his time. He tried one 00:28:42.829 --> 00:28:45.329 more leverage play. The Tyker Carlson interview. 00:28:45.509 --> 00:28:47.849 This was in March of 2025. It was completely 00:28:47.849 --> 00:28:50.509 unsanctioned. He somehow got a message out or 00:28:50.509 --> 00:28:52.269 arranged a phone call. The details are still 00:28:52.269 --> 00:28:54.670 murky. But he did an interview with Tucker Carlson, 00:28:54.730 --> 00:28:57.789 basically making a pitch for a pardon from Donald 00:28:57.789 --> 00:29:00.049 Trump. What was his argument? He went right back 00:29:00.049 --> 00:29:02.650 to the dark money argument he made before. He 00:29:02.650 --> 00:29:05.690 basically said, hey, remember, I secretly donated 00:29:05.690 --> 00:29:08.130 to Republicans, too. I'm not who you think I 00:29:08.130 --> 00:29:10.349 am. I'm a victim of the liberal media and the 00:29:10.349 --> 00:29:13.190 woke mob. Let me out. And how did that work out 00:29:13.190 --> 00:29:15.710 for him? It worked in the sense that he got a 00:29:15.710 --> 00:29:19.529 lot of attention. But. The prison warden didn't 00:29:19.529 --> 00:29:21.910 appreciate it. He got thrown in solitary confinement 00:29:21.910 --> 00:29:24.190 for a while and then transferred clear across 00:29:24.190 --> 00:29:27.569 the country to FCI Terminal Island in Los Angeles. 00:29:27.869 --> 00:29:31.150 So he's in L .A. now. But here is the final and 00:29:31.150 --> 00:29:33.349 maybe the most confusing twist for the listener. 00:29:33.490 --> 00:29:36.349 The money. We spent this whole hour talking about 00:29:36.349 --> 00:29:39.390 how we lost $8 billion of customer money. But 00:29:39.390 --> 00:29:41.589 recent reports from the bankruptcy estate say 00:29:41.589 --> 00:29:43.529 the customers might get all their money back. 00:29:43.650 --> 00:29:45.670 How is that even possible? This is what some 00:29:45.670 --> 00:29:48.630 people are calling the anthropic miracle. Back 00:29:48.630 --> 00:29:51.670 during the wild spending street days, SBF invested 00:29:51.670 --> 00:29:54.490 about $500 million of customer money into an 00:29:54.490 --> 00:29:57.150 AI startup called Mpropic. The company that makes 00:29:57.150 --> 00:30:00.650 the Claude AI model. Yes. And as we all know, 00:30:00.750 --> 00:30:04.190 AI completely exploded in value after FTX collapsed. 00:30:04.789 --> 00:30:07.869 That $500 million stake became worth billions 00:30:07.869 --> 00:30:10.690 and billions of dollars. The bankruptcy estate, 00:30:10.930 --> 00:30:13.980 which is being led by John J. Ray III, the same 00:30:13.980 --> 00:30:16.819 guy who cleaned up the Enron disaster, sold that 00:30:16.819 --> 00:30:20.240 stake at a huge profit. Wow. And that, combined 00:30:20.240 --> 00:30:22.420 with clawing back political donations and other 00:30:22.420 --> 00:30:25.700 assets, means they now have enough cash to potentially 00:30:25.700 --> 00:30:28.599 pay customers back over 100 % of their claim 00:30:28.599 --> 00:30:31.430 value. in dollar terms. So does that mean no 00:30:31.430 --> 00:30:33.430 crime was committed? Is the defense no harm, 00:30:33.450 --> 00:30:36.170 no foul? Absolutely not. And this is a very dangerous 00:30:36.170 --> 00:30:39.150 misconception. If I steal your car, drive it 00:30:39.150 --> 00:30:41.130 to Las Vegas, put your entire life savings on 00:30:41.130 --> 00:30:42.769 red at the roulette wheel and happen to win, 00:30:42.970 --> 00:30:45.569 I still stole your car and I still illegally 00:30:45.569 --> 00:30:47.750 gambled with your money. Right. The fact that 00:30:47.750 --> 00:30:50.109 the gamble paid off after I was arrested doesn't 00:30:50.109 --> 00:30:52.250 retroactively authorize the initial theft. The 00:30:52.250 --> 00:30:54.670 crime was the risk. The crime was taking the 00:30:54.670 --> 00:30:56.569 choice away from the customer without their consent. 00:30:57.069 --> 00:30:59.569 Precisely. The customers didn't sign up to be 00:30:59.569 --> 00:31:01.930 angel investors in a speculative AI startup. 00:31:02.210 --> 00:31:04.089 They thought their money was sitting in a digital 00:31:04.089 --> 00:31:07.549 vault, safe and sound. SBF gambled it. He just 00:31:07.549 --> 00:31:09.390 happened to get very, very lucky on one of his 00:31:09.390 --> 00:31:11.630 bets after he was already in handcuffs. It's 00:31:11.630 --> 00:31:14.170 a hell of a story. From a physics lab at MIT 00:31:14.170 --> 00:31:16.950 to a penthouse in the Bahamas to a prison yard 00:31:16.950 --> 00:31:20.390 in L .A., when you look at this entire arc, What 00:31:20.390 --> 00:31:22.589 is the one thing that sticks with you the most? 00:31:22.710 --> 00:31:25.750 What is the core lesson here? For me, it goes 00:31:25.750 --> 00:31:27.609 right back to that expected value philosophy 00:31:27.609 --> 00:31:29.650 we talked about at the beginning. We live in 00:31:29.650 --> 00:31:31.789 a world, especially in tech and finance, that 00:31:31.789 --> 00:31:34.569 worships disruption. We love the people who break 00:31:34.569 --> 00:31:37.470 the rules. The mantra is move fast and break 00:31:37.470 --> 00:31:39.970 things. But sometimes the things you break are 00:31:39.970 --> 00:31:42.569 federal laws and people's entire life savings. 00:31:43.309 --> 00:31:46.269 SBF is the ultimate logical product of a system 00:31:46.269 --> 00:31:48.920 that says, if you are smart enough. and your 00:31:48.920 --> 00:31:51.799 stated goal is big and noble enough, you don't 00:31:51.799 --> 00:31:53.460 have to follow the same speed limit as everyone 00:31:53.460 --> 00:31:56.140 else. He truly thought he was the protagonist 00:31:56.140 --> 00:31:58.599 of the universe. He thought ethics were, and 00:31:58.599 --> 00:32:00.640 this is a direct quote from him, a dumb game 00:32:00.640 --> 00:32:03.319 we woke Westerners play. That quote just haunts 00:32:03.319 --> 00:32:06.220 me. It should. Because he wasn't alone in that 00:32:06.220 --> 00:32:09.240 thinking. There are plenty of other founders 00:32:09.240 --> 00:32:11.480 and visionaries out there right now who believe 00:32:11.480 --> 00:32:14.500 the same thing. They think they are saving the 00:32:14.500 --> 00:32:17.859 world so they can cut a few corners today. SPF 00:32:17.859 --> 00:32:20.700 just took that logic to its absolute catastrophic 00:32:20.700 --> 00:32:23.680 limit. It's a powerful reminder that if someone 00:32:23.680 --> 00:32:25.700 tells you they are going to save humanity, you 00:32:25.700 --> 00:32:27.559 should probably check to see if they are holding 00:32:27.559 --> 00:32:29.779 onto your wallet while they say it. And check 00:32:29.779 --> 00:32:31.680 if they have a backdoor written into the code. 00:32:31.819 --> 00:32:34.480 Always check the code. And maybe check the market 00:32:34.480 --> 00:32:36.539 price of mackerel while you're at it. Always 00:32:36.539 --> 00:32:39.660 check the fish arbitrage. That is going to do 00:32:39.660 --> 00:32:43.160 it for this deep dive. A tragedy, a farce, and 00:32:43.160 --> 00:32:45.220 a very potent warning all wrapped up in one. 00:32:45.500 --> 00:32:47.420 We'll catch you on the next one. Stay curious. 00:32:47.599 --> 00:32:48.980 And stay skeptical. See ya.