Most of the commentary on the slow moving train-wreck of Sam Bankman-Fried and FTX is focused on who SBF was working with and who was benefitting from his grift. This is understandable when you realize the guy was an enormous benefactor of the Democrats and some Uniparty GOP types and that a lot of this was accomplished via laundering “aid” money to Ukraine for the benefit of connected politicians here and in Kiev. That is important for a bunch of reasons but my focus in this post is more “big picture”. How did we get to the place where a freakazoid like Sam Bankman-Friend ended up with his grubby paws on billions of dollars, even make-believe “money” like crypto?
SBF is portrayed as a wunderkind, a genius who became a billionaire in his 20s. While he did become quite “wealthy” (assume scare quotes around any further use of words like money or wealth), how he did it is what is most troublesome.
SBF made his initial enormous fortune by means of “arbitrage”. Arbitrage is buying and selling something in different international markets and exploiting the price differences to make a profit.
Almost two years ago this practice was the subject of a glowing piece in New York magazine:
The Mysterious Cryptocurrency Magnate Who Became One of Biden’s Biggest Donors Talking political bets with 28-year-old CEO Sam Bankman-Fried.
From the article:
In January 2018, Sam Bankman-Fried, then a mathy 25-year-old who had recently left Wall Street to try his hand at buying and selling cryptocurrency, spotted a fabulous arbitrage: Because of a faddish surge of interest in Japan, bitcoin was trading for 10 percent more there than in America….
…It was still complex (or “quite annoying,” in his words) to execute at scale, but Bankman-Fried and some friends, with whom he had founded a trading firm in Berkeley called Alameda Research, cobbled together a chain of intermediaries, including obscure banks in rural Japan, to take advantage of the monthlong price discrepancy. They moved up to $25 million a day.
In short, he was taking make-believe money and using it to buy a make-believe asset in one market and then selling it in another market, profiting off the difference. Arbitrage has been around for a long time, one of the most famous financial scammers in the 1980s was arbitrageur Ivan Boesky. See if you can guess what else SBF and Ivan Boesky have in common…
There is nothing illegal as such in what SBF was doing. It was just buying and selling a commodity. In many ways it was quite clever. Sure it doesn’t add anything to society, it simply is a game of shuffling make-believe assets but that doesn’t break any laws, although an awful lot of the people who are the best at it tend to also flaunt the law.
Yet, what does it say about the state of modern capitalism that so many of the very wealthiest individuals are wealthy because of rent-seeking behavior?
Rent-seeking is a sign of end-stage capitalism where capital is no longer used for tangible investments but instead is grown simply via manipulation.
Here is what I mean. Traditionally capital was invested in value added businesses. For example:
Joe goes to the bank and borrows $50,000. He uses those funds to purchase a sawmill and raw lumber straight from the forest. With his funds he builds a business to strip the bark from the logs and saw them into 2×4 boards. He then sells those 2x4s to a local builder that uses them in housing. If he does it right, he earns enough to pay back the initial loan, buy more logs to cut and makes a profit.
Without getting into the weeds, that is how you put capital to use to create actual wealth by adding value to raw materials. What Sam Bankman-Fried and so many others on Wall Street or in front of laptops at home are doing is not creating any actual wealth, it is increasing the balance on a computer screen. He “bought” an asset that only exists in theory and “sold” that asset at a higher price, taking the difference as profit. No value was added, no jobs were created, Bankman-Fried got richer without doing much more than clicking a few keys on a keyboard.
Again, there is nothing illegal about this. The libertarian would praise him for finding a way to get insanely rich without passing any moral judgment on the means. I am not a libertarian and I do find some fault, not just with SBF himself as he is a grotesque caricature of a human being, but with the entire system whereby financial manipulation via arcane and mysterious tactics is seen as an acceptable way to make a living.
As a veteran at the lowest levels of the financial services industry I see most of it as a step removed from a confidence game. It is a very tiny step. The system is rigged and you ain’t in on the hustle. How did Jeffrey Epstein go from a teacher to managing billions seemingly overnight? Because he was connected and you aren’t.
People like SBF, Ivan Boesky, Jeffrey Epstein and so many others are parasites. They latch onto the productive labor of people who actually work for a living, manipulate make-believe assets and become wealthy. They then use that wealth to influence politicians to enable them to suck even more blood from society. Do you think SBF gave all that money to Democrats because he gives a shit about their political platform? Of course not, he was buying influence, pure and simple. Had the whole thing not blown up on him when it did, he might have been able to insulate himself from the collapse of FTX.
You can see why so often in history society has lashed out against financial manipulation, usury and the merchant class. They operate as parasites on a society, becoming wealthy while contributing nothing of real value. In such a system it is inevitable that people like Sam Bankman-Fried will find ways to manipulate “money” to fill their own pockets at the expense of others.