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naraburns  nihil supernum  1yr ago (text post)   34983 thread views

Culture War Roundup for the week of November 28, 2022

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I have a lot of sympathy (or maybe pity) for SBF. "Stole client funds" appears to have solidified as a meme much the same way "crossed state lines" had in the Rittenhouse case.

I think it's hard for people, including technologists who haven't worked as quants, to appreciate the level of technology risk that's present in quant trading. In most of tech your biggest risk is having all of your data destroyed, and you can address that with well worn improvements in backups. You also risk being hacked but those breaches tend to be embarrassing rather than company ending. Even Sony, which was pwned as hard as you could possibly be pwned, ultimately recovered. But an additional risk in quant trading is accidentally and irrecoverably giving all of your assets away in a few seconds.

Even companies that are following all of the rules and have the right number of members of the professional management class in their ranks can destroy themselves in a matter of minutes. Knight Capital Group destroyed itself in 30 minutes by (with some creative license) failing to follow heroic practices around retiring old flags in protobufs.

Alameda/FTX had a culture that resembled "move fast and break things". They grew extremely quickly. I'm highly skeptical they were able to stand up robust accounting and practices to mitigate technology risks in so short a time.

When SBF says he didn't realize they were leveraged due to accounting error, I believe him. It's not like you can just install the QuickBooks Enterprise Crypto Derivatives Exchange plugin. All of this stuff was bespoke, and in a hurry.

When you thought you had $30b in assets and minimal liabilities, you can spend a billion or two on indulgences, charitable giving and campaign contributions. Your can say confidently you're not investing client funds. If those assets are suddenly marked down 90% you look like a fraud and you're in deep shit.

That's the nature of the business and he knew the risks. But probably in hindsight I'm sure he wishes he had been even more careful.

This isn't to say that I believe he definitely didn't commit fraud. Rather this is me saying that as someone who has pushed code that I thought accidentally gave away $10 million of my employer's money (the gigantic exhale of relief came when we learned I failed to scale by 1000x in the reporting and not the ordering), I am defaulting to blaming it on stupidity before malice.

They failed to do the basic tasks of their entire purpose.

I hate to be dumping on EA like this and I've always thought the quokka meme was unkind and annoying, but it really does come down to 'everyone trusted Sam' and they did that because they were all EA and so of course they were all pure, high-minded individuals in this to do good for the world, right? Sam is one of us so we don't need red tape and regulations, his word is good enough, and he knows about iterated prisoner's dilemma, so he's gonna do right by us all:

Can Sun, FTX’s in-house legal counsel, tells me that his main job is to cement the many deals SBF makes on a handshake. Ninety-nine times out of a hundred, Sun says, the terms favor the other side. It’s another corporate policy derived from a rigorous logical argument: In an iterated prisoner’s dilemma, the best first move is always to cooperate. And, if the counterparty defects, “it’s better that I know this guy will screw me over now,” Sun says, “rather than later.”

Also the entire mindset around non-conventional morality/standards of behaviour. Whereas a dinosaur like me would be grimly insisting "yeah well these are the rules, so I am going to need more than a 'personalised emoji' to keep track of who's asking for money and for what, and who is granting it, so fill out these expenses claims forms IN TRIPLICATE" (I've worked/work in civil and public service, so the reason for all the red tape is to prevent shenanigans like this, and they do happen: boss guy waves through big lump of funding for personal friend/business crony and over-rides rules around it. Not when you have to fill out the forms IN TRIPLICATE, sir, I'm very sorry but them's the regulations).

I hate to be dumping on EA like this and I've always thought the quokka meme was unkind and annoying, but it really does come down to 'everyone trusted Sam' and they did that because they were all EA and so of course they were all pure, high-minded individuals in this to do good for the world, right? Sam is one of us so we don't need red tape and regulations, his word is good enough, and he knows about iterated prisoner's dilemma, so he's gonna do right by us all:

This but I'll raise you. Even if the reputation was well deserved and SBF didn't have a malicious bone in his body, it's still a bad idea to trust any one person so much. It wasn't just the EA community. VCs and other investors trusted him too. Nobody demanded a board seat? Nobody wanted independently audited financial statements? Everyone was smitten.

This is bad. Even if you're a genius and even if you're a saint, you cannot be perfect all of the time. You can still make catastrophic mistakes. Being challenged, having a process where you need to justify your request, out loud, to another human, is healthy. At the very least it's a sanity check.

Any company that scales past a certain size quickly learns that one person shouldn't have the admin password for every single system in the company -- even if they're qualified to do all of the things. Part of the reason is security, but it's also because by being the admin it's possible there's nothing in place to ever force them to go through the gatekeepers that the company has stood up for good reasons. They might not even know there are gatekeepers now!

Absolute trust is bad. I expect if Elon ever flames out spectacularly for technological reasons it'll be over something similar.

VCs and other investors trusted him too. Nobody demanded a board seat? Nobody wanted independently audited financial statements? Everyone was smitten.

That is the part I don't understand. Whatever about the EA community, where it seems his brother was part of it and brought him in that way (and hence people did trust him as "he's Gabe's brother"), these were allegedly hard-headed business people and he bowled them over with charm, though what charm he has I have no idea. He must be one hell of a persuader. Again, I have to quote the Sequoia article, because these were the people who after one flippin' Zoom call just threw money at him, and the writer of this article seemed to have contracted a massive man-crush as well:

As Covid-19 descended, Michelle Bailhe, a young gun at Sequoia Capital, and veteran partner Alfred Lin were starting to closely examine the crypto space. Lin, a no-nonsense workaholic if there ever was one, had little patience for the kind of utopianism that motivated the first wave of cryptopians. Lin’s intellect was tempered in graduate school at Stanford, where he studied statistics and price options, swaps, and derivatives. And when he thought about crypto, the question he asked himself was: What is it good for?

…Bailhe spent months researching the space full time, focusing her energies on the exchanges. She met with every founder and every company that would have her. And she built a map—a landscape, as such a document is called at Sequoia—of the entire market.

…FTX did need money, after all. And it needed that money from credible sources so it could continue to distinguish itself from the bottom-feeders who came to crypto to fleece the suckers. So, in the summer of 2021, when FTX started to raise its Series B from a who’s who of Silicon Valley VCs, Bailhe and Lin hit the “Don’t Panic” button. “Embarrassingly, we had never tried to reach out to Sam, because we figured he didn’t need us,” Bailhe admits. “I thought they were just minting money and had absolutely no need for investors.” Learning otherwise, they quickly contacted SBF and organized a last-minute Zoom call between him and the partners at Sequoia—at four California time on a hot July Friday afternoon. Bailhe was adamant, putting her reputation with the other partners on the line: “I’m like, ‘No, it’s worth it. Cancel your afternoon.’”

The Zoom went well for all concerned. SBF looked relaxed as he answered questions, talking, as he usually does, in complete paragraphs about topics of extreme complexity. Ramnik Arora, FTX’s head of product and another ex-Facebook engineer, remembers the meeting clearly: “We’re getting all these questions from Sequoia toward the end. He’s absolutely fantastic.” Arora locks eyes with me, and I am mesmerized. Arora is intense—calling to mind a Bollywood version of Adrian Brody. “Unbelievably fantastic,” he says, shaking his head.

Bailhe remembers it the same way: “We had a great meeting with Sam, but the last question, which I remember Alfred asking, was, ‘So, everything you’re building is great, but what is your long-term vision for FTX?’”

That’s when SBF told Sequoia about the so-called super-app: “I want FTX to be a place where you can do anything you want with your next dollar. You can buy bitcoin. You can send money in whatever currency to any friend anywhere in the world. You can buy a banana. You can do anything you want with your money from inside FTX.”

Suddenly, the chat window on Sequoia’s side of the Zoom lights up with partners freaking out.

“I LOVE THIS FOUNDER,” typed one partner.

“I am a 10 out of 10,” pinged another.

“YES!!!” exclaimed a third.

…“We were incredibly impressed,” Bailhe says. “It was one of those your-hair-is-blown-back type of meetings.”

…The B round raised a billion dollars. Soon afterward came the “meme round”: $420.69 million from 69 investors.

After my interview with SBF, I was convinced: I was talking to a future trillionaire. Whatever mojo he worked on the partners at Sequoia—who fell for him after one Zoom—had worked on me, too. For me, it was simply a gut feeling. I’ve been talking to founders and doing deep dives into technology companies for decades. It’s been my entire professional life as a writer. And because of that experience, there must be a pattern-matching algorithm churning away somewhere in my subconscious. I don’t know how I know, I just do. SBF is a winner.

But that wasn’t even the main thing. There was something else I felt: something in my heart, not just my gut. After sitting ten feet from him for most of the week, studying him in the human musk of the startup grind and chatting in between beanbag naps, I couldn’t shake the feeling that this guy is actually as selfless as he claims to be.

So I find myself convinced that, if SBF can keep his wits about him in the years ahead, he’s going to slay—that, just as Alameda was a stepping stone to FTX, FTX will be to the super-app. Banking will be disrupted and transformed by crypto, just as media was transformed and disrupted by the web. Something of the sort must happen eventually, as the current system, with its layers upon layers of intermediaries, is antiquated and prone to crashing—the global financial crisis of 2008 was just the latest in a long line of failures that occurred because banks didn’t actually know what was on their balance sheets. Crypto is money that can audit itself, no accountant or bookkeeper needed, and thus a financial system with the blockchain built in can, in theory, cut out most of the financial middlemen, to the advantage of all. Of course, that’s the pitch of every crypto company out there. The FTX competitive advantage? Ethical behavior. SBF is a Peter Singer–inspired utilitarian in a sea of Robert Nozick–inspired libertarians. He’s an ethical maximalist in an industry that’s overwhelmingly populated with ethical minimalists. I’m a Nozick man myself, but I know who I’d rather trust my money with: SBF, hands-down. And if he does end up saving the world as a side effect of being my banker, all the better.

Forget crypto, if someone can just figure out what Bankman-Fried has to reduce people like this to squeeing fanboys and then bottle it, that's a sure-fire fortune!

Also, I have to wonder what Michelle Bailhe is doing now; she's the one 'staked her reputation' and persuaded them to give Bankman-Fried a hearing, ouch!

Also, I have to wonder what Michelle Bailhe is doing now;

Still at Sequoia as a Partner in their Growth section. Privated Twitter around when things started falling apart. @Sequoia has been rather quiet for the last couple of weeks. They did post an update regarding their exposure to the whole mess.

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