The Infinite Fall: Unpacking Michael Lewis's Take on FTX's Collapse
Michael Lewis's latest, much-anticipated book "Going Infinite" came out last week. Chronicling both the life of FTX's founder Sam Bankman-Fried (SBF) and the events leading up to its collapse, the book has already generated a lot of controversy. The book's release date coincided with the start of SBF's trial, and plenty has been written about it in the past week.
Michael Lewis is the world's best-known financial journalist and author, responsible for many classic books including "Liar's Poker," "Moneyball," and "The Big Short." During the FTX collapse last November, it emerged that Michael Lewis had been shadowing SBF for months, as he was the subject of his next book. He ended up with a ringside seat in the events leading up to and post-collapse of FTX. There is no other writer you would want to have on board given the events that unfolded.
What's been interesting following the book's release is how much criticism has been levied against it by both the mainstream and crypto press. The flavour of the criticism is that Michael Lewis got too close to SBF and painted a picture of him as a flawed character, rather than being a fraud and the orchestrator of one of the world's largest Ponzi schemes, as is being reported. I came away from the book with useful new perspectives on the FTX debacle. I did not believe that Lewis was overly sympathetic to SBF. He painted a story of someone who got so far out of their depth with FTX that it all imploded in a spectacular fashion.
An entrepreneur's perspective
As an entrepreneur, I can relate to this idea of getting out of your depth. There is always far more in your head that you need to do for your business than you have time to do. However, it is your responsibility as a business owner to prioritize those items that are of critical importance over those that can wait.
The difference between being a business owner versus an employee is significant here. Employees will have someone chasing them for urgent items; business owners often don't. They're aware something needs doing, but it's down to them to externalize them if they're important and find a way to complete them.
A litany of errors
SBF failed massively in this regard. Due to challenges that FTX faced with respect to establishing banking relationships, he relied on his existing entity, the hedge fund Alameda Research, to provide deposit accounts for customers.
What this meant was that throughout the life of FTX, all customer funds were held with Alameda rather than FTX, where they should have been. In addition, in the early days of FTX, Alameda Research had been the primary market maker for FTX. The risk controls that applied to all other participants on FTX hadn't been applied to Alameda and never were.
Finally, you had FTX's exchange token, FTT, which was controlled and majority-owned by SBF and his businesses and was used for collateral left, right, and centre.
This combination of factors meant that customer deposits were flowing between FTX and Alameda, without good risk controls in place. However, none of this was an issue while the FTT token price remained strong, and more could always be generated to magic funds out of thin air.
It all came to an end when Coindesk published a report suggesting that the majority of Alameda Research's balance sheet was made up of FTT tokens.
Binance's founder CZ then subsequently started a run on FTT by announcing they were going to unwind their remaining FTT position. This created a run on FTX, and it stopped being able to honour customer withdrawals due to not having those deposits on hand, which it should have (FTX was an exchange, not a bank). Everything collapsed from here.
Lewis does not attempt to hide any of these facts about FTX; instead, he paints a picture of SBF being incredibly naive and someone who simply didn't pay enough attention to critical operational details.
I don't find it hard to imagine how a young man in his twenties can end up behaving in such an irresponsible manner. From the description in "Going Infinite," SBF is different in his outlook on the world.
He sees life as a series of trades, with the goal of being able to provide the greatest impact to humanitarian causes via the effective altruism movement. The behaviour of others involved in this movement doesn't appear to be as selfless as one would expect.
Many of the effective altruists associated with Alameda Research give considerable weight to things such as job titles—more than the other employees who are just motivated by financial reward, which doesn't paint a great picture of the movement. SBF claims that his goal was to have the largest possible impact on society, but I consider his actions influenced more by his worldview, as opposed to putting altruistic motivations first.
Michael Lewis chose to release the book before the SBF trial had started. It would have been better to wait a few months until his trial had finished to round off the conclusion.
This would have likely reduced much of the criticism about the book being too favourable towards SBF. I don't think this is the case; Lewis simply reported what he saw. The biggest difference between what the critics are saying versus Lewis is that they say SBF cannot have been this naive, but Lewis indicates SBF could have been this naive.
He was a twenty-something-year-old who was incredibly lucky with his timing of entering the crypto market. Sure, he was clever, but based on the early history of Alameda Research, it doesn't sound like what he achieved was that different from what a successful trading firm could achieve in its early years.
FTT to the moon!
It was the FTT token that facilitated much of Alameda and FTX's growth. And SBF didn't prioritize creating a clear separation between its entities. This is something he should have done and will likely be his downfall, as it was his responsibility.
The problem was that the money started flowing, and it's amazing how few people care about the details when they're being paid astronomical funds left, right, and centre.
Venture capitalists, celebrities, and politicians all appeared willing to embrace SBF and FTX during the good times. Their willingness to do this without asking hard questions along the way makes them partly responsible for the whole debacle. The customers of FTX were sold a lie and have paid a heavy price for their belief in SBF.
The inevitability of it all
It’s hard to imagine SBF wasn’t aware he was sitting atop such a fragile structure, however, many young businesses have an Achilles heel. If reporting from Coindesk or tweets from CZ hadn't caused the run on FTX, there likely would have been another event that did due to its over-reliance on FTT.
"Going Infinite" unpacks events well, and while it would have benefited from being published after the SBF trial to round off the story, it's worth reading to form your own opinions of SBF and FTX's collapse. For Lewis' perspective on the book, I encourage you to read the Guardian's recent article on him.