It Was Always Alameda

Sam Bankman-Fried is the poster child of everything that finally fell after the excessive absurdities of 2021.

(Sorry for the extended absence. This flu-RSV-Covid-whatever took down the household for the past few weeks.)

As I look back on 2022, it’s clear to me that Bankman-Fried is the poster child of everything that finally fell apart after the excessive absurdities of 2021. Moreover, the writing was on the wall back in 2018 when Bankman-Fried put out an investor pitch deck for his hedge fund Alameda Research. Here’s the key section (with another nod to Epsilon Theory):

There are two huge red flags here. The first and biggest red flag is the all-caps promise of HIGH RETURNS WITH NO RISK. Wow. Sorry folks, but high returns with no risk doesn’t exist and anyone who tells you it does, is a liar with whom you should never do business.

The second big red flag is a little more subtle but still very important. The “investment” offered isn’t actually an investment at all. It’s a loan to Alameda. It’s just debt.

Normally, when a hedge fund raises capital, it does so by offering “limited partnerships.” Limited partners get regular reports from the hedge fund. By offering debt, instead of a limited partnership, Alameda can continue to keep its books closed to any prying eyes.

This is financial fraud 101: promise high returns with no risk, and keep the books closed. It was Bankman-Fried’s strategy from day one in 2018, all the way until things finally began to unravel this past November.

Which brings me to my main point. It was never about FTX. It was always about Alameda.

Everything Bankman-Fried did was about propping up a failing Alameda, while keeping Alameda’s books closed. FTX only existed to give Alameda special privileges – particularly leveraging FTX customer assets to prop up Alameda.

FTX also allowed Bankman-Friend to create the FTT token from nothing and then stuff Alameda’s balance sheet with FTT, while simultaneously having Alameda prop up FTT by buying it on the open market. (I’m really keen to know which VCs benefitted handsomely from FTT.)

What’s most troubling to me about this episode isn’t the behavior of Bankman-Fried, who strikes me as just another “smart” spoiled narcissistic sociopath. Rather, it’s the gullibility and culpability of our so-called best and brightest.

The “smartest” investment minds in the world – like Sequoia Capital and Bain Capital – completely ignored these glaring red flags. Bill Clinton and Tony Blair shared the stage. Maxine Waters blew him kisses. The list goes on and on.

It just confirms for me what I’ve been saying for a long time – the culture behind our financial markets (and much of our digital economy) is corrupt.

When it’s considered “good” that an entrepreneur can be playing League of Legends while asking a major VC fund to “trust me with millions of dollars of other people’s money,” we’ve got a big problem.

There is nothing good about it. It’s not a sign of intelligence. It’s a sign of stupidity and culpability – on the part of both the entrepreneur and the VC fund! It’s a sign of a corrupted culture. It’s actually the sign of no culture at all.

If you took to heart what I wrote back in January of this year, you could have seen this coming a mile away.

Let’s revisit what we learned in 2021 and sought to apply in 2022. It’s framed in terms of digital technology, but I think that you’ll agree it applies equally well to Alameda:

1) Anything you see on a screen is a form of media.

2) The digital media world is built on data, statistics, and algorithms using the same math (and business model) as casinos.

3) The algorithms are optimized to create behaviors that, given the choice, we would not consciously choose for ourselves.

4) The anecdotal evidence suggests that the algorithms are based largely on the techniques and methods of propaganda and behavioral psychology.

5) We don’t get to see the algorithms, and therefore we don’t get to understand the (false) choices that we are being offered.

6) It’s our money and it’s our attention.

7) We can and should withhold our money and our attention from digital services that conceal their intent and have a track record of conscious deception (goodbye, Facebook and Robinhood).

Bankman-Fried was running a fraud algorithm for Alameda of epic proportions. It was all media based, where he controlled the narrative and no one else (except maybe Wang and Ellison) got access to the whole picture. FTX’s algorithms were biased to Alameda. Bankman-Fried weaponized propaganda and behavioral psychology, and he made sure that there was no transparency.

This is getting to be quite an old and over-used playbook in our day and age. I continue to believe (hope?) that more and more people are wising up to it. It could be, however, that this kind of fraud is just a lot harder to pull off when the era of policy-induced free money is finally receding into the history books.

I’ve been hammering on this kind of fraud for years and I haven’t let up, nor am I about to let up now. We should continue to shun enterprises that are promising one thing while knowingly delivering something else and refusing to be transparent.

I’m glad that FTX blew up, not because people who couldn’t afford to lost money, but because we can all finally see the truth. The casino economy is a corrupt economy, and it isn’t serving us individually or collectively.

I’m also hopeful that truly impactful privacy- and transparency-focused solutions will finally have a chance to be recognized once the crypto-gambling industry fades to black.

Which brings me to 2023 and where I’m going to be focusing my efforts and attention. Right now, the most important project I’m working on by far is Finiac.com. It’s the most important because it can have the biggest positive impact.

It’s crystal clear to me that we’re at war with corrupt institutions and leaders. How else does a kid like Bankman-Fried achieve this level of fraud? What we need more than anything are our own weapons – both defensive and offensive.

Our situation is a lot like that of Mark Ruffalo’s character in the movie Dark Waters. It’s a true story about a corrupt corporation (DuPont) knowingly poisoning the drinking water of a local community because, well, it’s cost-efficient. As the movie climaxes, Ruffalo tries to get his wife (Anne Hathaway) to understand how the world works today.

“The system is rigged. They want us to believe that it'll protect us, but that's a lie. We protect us.”

2022 has brought me a better understanding of exactly how the financial system is rigged against the independent investor. I’ll be sharing more of these insights in the coming weeks. Finiac is my answer to how we begin to protect ourselves rather than waiting for the “system” to fix itself.

Fight the noise,
Dr. Richard Smith

P.S. For a limited time, you can sign up to use my new Finiac app for free! We just received our first round of seed funding. It won’t be free for much longer. Don’t miss this opportunity to be in the first group of beta testers.

The best way to spot investment fraud is the promise of safety and very high returns. If someone promises you this, turn 180 degrees and do not walk—run.

William J. Bernstein, Financial Theorist and Neurologist