Episode Transcript
Speaker 0 00:00:00 This is Morals and Markets for January, 2023 with Richard Salzman, our senior scholar. He is going to be discussing the FTX scam, effective altruism in action. Richard, we'll start with you and then we'll, uh, open it up to questions.
Speaker 1 00:00:19 Scott. Great. Thank you, Abby. Thank you. I can't think of a better topic for my series here. My series called Morals and Markets. I'm always looking for something on the intersection of ethics. Uh, sometimes politics and markets, meaning generally economic activity, economic stories, uh, the scam at ftx, the scam fraud at, uh, this company called ftx, run by a guy named S B F with a lot of acronyms there. Sam Bankman Freed, I'll say his name once, but he goes by S B F. So I'll make it easier by saying that, uh, this guy is a total fraud at a total scammer. And I'm going to show and argue that he's even worse than Ponzi himself, Charles Ponzi from 1912, I think, up in Boston and Bernie Madoff, uh, a scamster also in 2008. But this is a particular heinous kind of fraud, a financial fraud, one of the biggest in US history, because so many people were duped by a goofy sham ethic.
Speaker 1 00:01:28 And the goofy sham ethic is altruism. So I'll talk about that more. Uh, usually as you know, if you look at the history of, uh, financial crimes and other things, it's usually chalked up to greed. It's usually chalked up to, you know, unchecked, unregulated, unvarnished greed on the part of, uh, the scamster. And, uh, of course, it, if you know capitalism and you know, ethics, you know, that is no way to make a fortune in finance. The way you make a fortune in finance is the way Andrew Mellon did it, and the way JP Morgan did it. And frankly, the way Mike Milken did it until they arrested him for no good reason. You create value, you create something productive, you create something innovative. You are in the finance sector and the brains of the system, the brains of capitalism. So now some of these, uh, bugs and some of these viruses get in called S B F and F T X.
Speaker 1 00:02:20 So I wanna explain a little bit what the fraud was, but the, the, the reason it makes it interesting, I think, to viewers and listeners of the Atlas Society, is there's deep philosophical stuff in here, and there's deep philosophical stuff on the ethics side that actually is whitewashing criminal behavior in a way that is totally bedazzled and fooled. Millions, not only Mil, mil, well, I would say thousands of people, but also very famous people, very rich and famous people who allied with this guy. Um, you know, Larry David, who produced, uh, the Seinfeld show in his own show, uh, Tom Brady, the quarterback of the Patriots, uh, David Ortiz, the great slugger for the Red Sox. So Stefan Curry, the Warriors, by the way, notice all very different, uh, sports. So the Scamster at ftx, that's the name of the company that went under, were various astute about using second hander types stuff.
Speaker 1 00:03:13 Uh, look at all these famous people that endorse us that run, uh, a Super Bowl commercials for us. Uh, look at Bill Clinton on stage, and Tony Blair. Look, we have, we have presidents and prime ministers. We have of all people. Leary, um, what's his name from Shark Tank, right? Uh, was, uh, pushing for them a Kevin Leary, if you know, uh, the guy on Shark Tank. Uh, totally a huckster for this. And since the bankruptcy, November 11th, I think the filing was, um, has been excusing his behavior and all this. So how can this happen? How can a major financial scam, which by the way, seems to have dissipated roughly? It's hard to estimate when you have a scam, eight to 10 billion, even in today's inflationary environment. That's big money. That's a lot of money. <laugh>, poof, poof. But it didn't really go poof. It went in some pockets and out to other pockets.
Speaker 1 00:04:09 I'll tell you about that so far as we can tell. Uh, s b f the man, the 30 year old, the, the alleged JP Morgan of crypto, that's what they called him on cn b c, that's what they called him on Fox Business Network. That's what they called him on Bloomberg. So all these allegedly sophisticated financial media organs, uh, same thing. They were totally taken in by this guy, but in a very interesting, kind of corrupt, philosophical way. By the way, one of the worst dastardly players in this is Andrew Ross Sorkin. Andrew Ross Sorkin is a, is, uh, one of the co-hosts of the C N B C show in the morning Squawk Box. But worse than that, even after this scam was discovered, he on the ha on behalf of the New York Times, interviewed the guy. This was before he was arrested and treated him with quid gloves on stage, and they had a whole bunch of people in the audience clapping for the guy.
Speaker 1 00:05:05 Now, can you imagine we've deteriorated quite a bit since, uh, 2008, the last, uh, 15 years or so, Bernie Madoff would've been skinned alive if he had been and properly saw me. Had he been found, you know, on stage boasting or, or crying in his beer about what happened all the time. Now, SPF f saying, I, I really didn't know. I didn't know it was happening. Uh, you know, it wasn't my intent. I didn't intend to do any of this. You know why his lawyers are telling him to say that cuz with intent comes criminality. It's a total criminal enterprise. Wait, where do you see how it worked? It's only like three or four years old. This was not the kind of thing where this was in business for 20 years, like Madoff or Anne Ron. And, you know, then they lost some money. Then they tried to make it up by cooking the books.
Speaker 1 00:05:50 Now, this was a scam from the outset, uh, from what, from our, from what I can tell. And, uh, the ethics of Altruism totally explains, uh, how this could happen. So let me, let me give you a little background. SPF F Sandbank and Free started something called ftx, which is a cryptocurrency exchange. That's what it was. It was not a cryptocurrency itself. Like Bitcoin. Bitcoin was, is actually a very reputable digital currency, which he trashes all the time. It was, it was modeled as a kind of stock exchange. And the New York Stock Exchange is a legitimate thing, you know, and the commodity exchange is in Chicago are legitimate things. Uh, so, so the idea of an exchange in this new medium called crypto, that alone is not the problem. The problem is this was a scam. This was a way to take in billions of money and send it off to what, we'll, what I'll describe is left wing political media and other causes that was the sole recipient of his embezzlement.
Speaker 1 00:06:51 He sent the money to Democrats, many of whom told the regulators to stay away and to media outlets, which were left-leaning and to philanthropic organizations, which were left-leaning. And so part of this scam is no one wanted to expose this because he was in their camp. In other words, no, none of the left wing. And I don't know, I don't know where the right wing was, but they didn't know. They couldn't figure out crypto maybe, uh, although coin, uh, the people at Coinbase, uh, really the ones who uncovered this and started reporting on it. So, um, kudos to them at Coinbase for starting to uncover this, uh, back in October and November. Uh, but that's where the money went. This was not a kind of Ponzi scheme where in typical Ponzi scheme fashion, you take in money from early contributors and pay it out to subsequent contributors, which itself is a kind of fraud.
Speaker 1 00:07:43 But as long as you get an increase in contributors, you can keep it going, right? That's not what happened here. He took in money and diverted it into left wing causes. Now, why and how did he get away with this? Sam Bankman Freed was raised in, uh, San Francisco by two Stanford professors. One, a law professor, actually, they were both law professors, left-leaning law professors, and they introduced him to the movement and the cause known as effective altruism. Now, I've run, uh, have had seminars before, webinars and clubhouses on this topic, effective altruism. I'm not making up the name, it's in the literature, it's in academia, it's in all over the internet. If you just look up effective altruism.org, you'll get a whole website devoted to it. But here's the idea. Altruism in their view, is serving others other than yourself. Serving interest beyond your own narrow, selfish, egoistic interest.
Speaker 1 00:08:42 It's an anti egoistic, fundamentally actually anti-capitalist ethic. And in severe form by the one who coined the word a August from the 1850s. The true altruist actually doesn't just help others or help others that are valuable to them, cuz that has still a smidgen of self-interest in it. It can't be helping or giving money to others like family, friends and acquaintances. It has to be total strangers or maybe even your enemies. And so here's what the effect of altruism movement became. And it was instigated, by the way, two intellectuals, mainly. Peter Singer, if you wanna look this up. S i n g e r, an old long-term utilitarian ethicist who's been in academia forever. Uh, he came up with the idea, but his protege is Will McCaskill. Will McCaskill at Oxford University. These are the two project progenitors of this movement. And the books are the most good by Singer.
Speaker 1 00:09:39 The book is the most Good You can Do. Subtitle, how Effective Altruism Is Changing Ideas About Living Ethically. And the One by McCaskill McCaskill's even worse than Singer is doing Good, better. That has a subtitle, but I'm not gonna, uh, go into it. The second one is a 2015 book. Now, effective altruism brings up the issue. Well, what would be ineffective altruism? Well, here, their, their argument comes down to something like this. Mother Teresa is ineffective as an altruist. She, uh, is a selfless servant of Jesus. And she's serving others and washing, you know, the feet of lepers in Calcutta. But she's ineffective because she's poor. She's ineffective cuz she's not accomplished, right? So, so pretty much anyone could do what Mother Teresa did, right? Their view is effective altruism is the following. You, you advise someone who's an altru, who's a would be Altru, go out and make as much money as you can go out.
Speaker 1 00:10:44 Now, make is a, is the operative word here. Ultimately, Sam Bankman Friedman said to himself, uh, or take, take or make as much money as you can in a profession you maybe even hate, like finance or crypto, and give it away. That's more effective because your recipients are getting a large yes that they wouldn't otherwise get. You see how this works? Uh, so it's all left-leaning. I haven't found any effective altruism philanthropies that's too nice a word for them. Or groups that are giving to capitalist causes. I'm sure the Atlas Society could check to see whether they got any money from Sam Bankman Freed. I'm guarantee they didn't cuz he wasn't interested in financing that 96% of his monies went to left-wing Democrats, uh, over the last few years. And he also funded left-wing media like Vox and others, uh, to the tune of millions and millions and millions of dollars.
Speaker 1 00:11:43 It's purported and estimated that he gave something like 50 million to the Democrats prior to just the midterm elections. And so, and there's also letters on file where those same Democrats are writing to the cftc, that's the Commodity Futures Trading Commission, which oversees some of this stuff. And the s e c saying, don't look into what FTX is doing. Fdx also set up a relationship with Ukraine. Fdx helped Ukraine get funding. And so there's a daisy chain of money going between the US Congress and Ukraine and back into F D X. It is a complete utter corrupt daisy chain that went on. But you can see what this method is. It's, it's, it proposes to be a reformation of philanthropy on the grounds that philanthropy isn't rational enough or calculating enough that they're going to, that's what their pitch was. We're gonna transform philanthropy instead of people just like giving money emotionally or out of the heart.
Speaker 1 00:12:43 This is gonna be a cold calculating thing. We're gonna use capitalism. This is what they're really gleeful about. We're gonna use and suck out the marrow of these capitalists, you know, and get paid by Goldman Sachs and get paid by Citibank. And, and now this is, they're just relishing this in a, in a way that, uh, you know, mother Teresa never could, we're gonna have the man finance his own demise and that there's a certain relish in that. So Sam Bankman Fried in the beginning had no financial experience whatsoever. None. Uh, when he got outta college, he was at m i t I don't know if he graduated or not. He joined in an effective altruism philanthropy in San Francisco. So, I mean, this guy was basically just a social worker. And the fact that he could garner millions and millions of dollars from famous people was largely on this pitch that yes, crypto was the wave of the future.
Speaker 1 00:13:34 I'm gonna create a crypto exchange. By the way, he wasn't the only one. There were three or four other crypto exchanges, one of the most famous being bi Binance. It's called Binance. A perfectly legitimate operation. This doesn't have to be a Ponzi scheme. That's not what he was doing. What he was doing was setting up something that would lure money in so he could divert it to these causes. That's what I, that's what I see in the evidence. Mont, I've studied this since the, this came to light in early November. I certainly hope this comes out at trial, but he's gonna try to pitch it as I didn't know, I really didn't know. This is a matter of maybe of negligence, but not of intent. Um, at any rate, um, not to go into the weeds about the manipulation of money and money flows and borrowing.
Speaker 1 00:14:19 At one point, FTX was issuing, get this now, fiat currency tokens. Now this sounds like the central banks, right? It sounds like the, the Federal Reserve. But F t t was the name of the digital currency that it just started issuing. And nobody asked like, what is this backed by? Are you just creating this, uh, digitally with the stroke of a, of a key? And the the answer basically is yes. And then they use that to go get funding. I really would like to learn who lent the guy money on Fiat token digital coins that he was creating out of whole cloth. Really an amazing, amazing thing. Now, any of those banks, if any of those banks were on Wall Street backed by depositor and deposit insurance, I'd like to know that as well. Another interesting thing about this case, after he filed bankruptcy and this, uh, November 11, two days later, it was found that 300 million left the company.
Speaker 1 00:15:15 Now that alone is a crime. If you go to the government and basically say, I'm filing a legal claim, chapter 11, not a legal claim. What you're doing is holding off creditors. Everything is supposed to freeze in place. You're supposed to all show up in court later and ferret out where the assets are and who was owed what the idea. And by the way, Bankman Fried admitted this in an interview. That 300 million had gone out the door after the chapter 11 filing. Unbelievable, especially unbelievable when you realized that when he was arrested and when bail was set at, guess what, 250 million bail someone paid, someone called up the court and said, here's 250 million. Let the kid go home to his basement in San Francisco. So he's free, he's living in his parents, these Stanford law professors in San Francisco to this day by a 250 million contribution from who nobody knows.
Speaker 1 00:16:19 Nobody knows who paid bail to get Sam Friedman outta jail. Um, what, two weeks ago? I'm not sure when the trial will be, but I just wanna emphasize in the, the minutes I have left, to me, the five or 10 minutes, you see how this could not have happened if people were scrutinizing this from the standpoint of self-interest. I mean, yes, people sent money, yes, people used the exchange, but the key was that this was a one-man show on the media, working the media, working the finance, uh, conferences. And his entire pitch was, yes, I'm doing this as an a commercial ma angle to it, but I'm giving all my money away. I am a selfless servant of the recipients of my money. And even if they're not poor little wretches in Calcutta, like Moth Mother Teresa might serve, um, I can assure you I'm sending it to the right politicians, the left wing ones.
Speaker 1 00:17:14 I can assure you, everyone in the audience that I'm sending it to, left wing media outlets, which otherwise couldn't, uh, sustain themselves on their own subscribers. This is what he was doing. I'm sure you'll be okay cuz you'll see I'm, I'm supporting Ukraine and everyone in the world supports Ukraine now. So we're morally pristine in that regard too. It was a way to put a patina, uh, respectability on top of, uh, crimes, uh, which bedazzle people. And, uh, and, and by the way, this is, uh, this is not unlike, I'm trying to draw some integrations here, here, which might help you. Do you remember when a O c got very popular promoting democratic socialism? This is not as popular now, but I mean all the rage, right? All the young kids, they loved it. She, she was amazing democratic socialism. Now if you just take away the Democratic and say, why would you bring back socialism?
Speaker 1 00:18:09 Socialism has killed a hundred million people in the last hundred years. Uh, yeah, but if you put the patina of democracy on it, if people vote for this stuff, you see it, it's a kind of a white, what I called once the whitewashing of evil. Socialism may be evil, but certainly if it's voted for, if it has this patina of consent from a majority, then it's okay. It's all just fine. Uh, by the way, the same thing was done when the fraud of Fannie and Freddy was perpetrated in the two thousands. What was that fraud? That everyone should be able to own a home even if they can't actually own a home. And why are we doing this? Because Clinton and Bush, those both administration said it's so unjust and unfair that there's a disproportionate share of home ownership in America. Whites own more homes relatively than blacks and Latinos and others.
Speaker 1 00:19:01 So we're gonna have a government program which lowers lending standards, which uses Freddie and Fanny, which means taxpayer backing and we're going to push out loans. They called them subprime loans. They were labeled subprime lo meaning loans that couldn't be repaid easily <laugh> knowingly. And why did everyone clap and applaud? Cuz it had this patina of altruism in it. It had this patina of social justice behind it. If you said to people that is an unsustainable pyramid about to collapse and wreck the entire financial system, the answer would've been, so what? We're helping home ownership equity. You see how this works? And, and so that's a broader case of the micro case that FTX is, FTX is just a microversion of various other macro policies that have been adopted, which are totally financially unsustainable, which wreck the financial system when they come to surface. But when you look at it in retrospect are implemented because people think they're moral.
Speaker 1 00:20:05 People think these are moral programs and moral schemes. And so they will look the other way when they actually see that there's about, as it's a catastrophe about to happen. By the way, the social security system in the US is the same thing. It is an unsustainable Ponzi scheme. It's people are putting in money as youthful workers. The money goes right out the door that same day to unemployed elderly people in retirement. That is not an insurance, uh, system. It's not a pension system. It's not the normal private pension system where you put monies away that are yours, that are identified as your property that are repaid to you when you retire. The whole thing is a Ponzi scheme. But again, that's known to actuaries if you press them on this and ask, isn't this social security system a big scam? Isn't it unsustainable? Doesn't it require ever higher taxes every decade to support the thing they all will say yes.
Speaker 1 00:21:04 And they all say that if any private company had set up a pension system that way the guys would've been put in jail because it's literally a Ponzi scheme, right? Why is it supported? Why is the social security system one of the most popular schemes in the welfare state? Cuz it has this patina of altruism where people are saying, we're serving granny, we're we're, the name of it is Social security. What are you against security? What are you against providing security and retirement? What are you, uh, uh, uh, heartless, egoistic, you know, wall Streeter trying to rob granny of her benefit checks? I would so go so far as to say even the Federal Reserve. Now, this is a harder thing for people to absorb the Federal Reserve. What is it doing? It's issuing incon convertible fiat tokens. They're not convertible into anything. They're, uh, unlike when they were on the gold standard, gold being real money, when any money was issued convertible into gold, that was real money.
Speaker 1 00:22:04 And as long as you didn't default on the conversion, you were issuing claims to real money. Well, ever since the Federal Reserve has been off the gold standard, which is a form of default, which they did in 1971, they just like Sam Bankman Fried, have been issuing invertible tokens out into the world, which are becoming worth less every year. That's what inflation is, the purchasing power of money going down and nobody objects to it. And by the way, why does that pyramid scheme not collapse? Because there are legal tender laws. The government mandates that you use these Federal Reserve notes. So in one way, one way of interpreting what, uh, Sam Brinkman fried faced is he didn't have the legal tender laws where the government was mandating that you use his stupid tokens. But it does mandate and is true in every country with central banks and fiat invertible tokens being issued, um, justified by what if the government doesn't run the monetary system? It'll be wrecked by these greedy JP Morgan type bankers, the private bankers. We can't have private banking anymore. We have to have public banking. We have to have a special pet bank that finances a deficit spending government. And true that they're issuing these things without limit, pretty much without limit and invertible. And that's kind of sketchy to put it mildly, but it's okay. Why? Cuz it's supporting the welfare state and the welfare state's moral and the redistribution of wealth is moral cuz capitalism sucks and capitalism is immoral.
Speaker 1 00:23:35 Uh, I've tried tonight not to go into the weeds of S B F, not because, uh, it isn't important. You can get this stuff elsewhere. I just wanted to make a broader point that this is an example of something that is all over the place actually in the mixed economy welfare state, which we have in America at Western Europe and elsewhere today, where you have unsustainable, fundamentally fraudulent financial setups, if you will. Which pretty much if you asked an honest accountant or actuary or an economist would admit it. But it goes on anyway. It goes on anyway. And they don't care really. They don't care because they think the whole thing is moral. It's almost like a Robinhood thing. You say to them, you know what, this is basically Robinhood. This thing is set up to rob the rich and give to the poor. But that's considered a moral, uh, sublime thing to do, a noble thing to do.
Speaker 1 00:24:30 So they look the other way. So I'm gonna have mixed emotions about this a bit. On the one hand, I feel like, uh, anger, uh, at this scam, on the other hand, I'm bemused by the whole thing. I hope that anyone who gave that guy money lost their shirts. I hope that Tom Brady and Larry David and Stefan Curry and all these other goofers, uh, including Kevin Leary at Shark Tank, Kevin Leary should be fired from Shark Tank immediately for being involved as a booster and a huckster for this scam. We'll see if that happens or not. I doubt it will, but in many ways you can look at it as you asked for it. Brothers, you're the ones who promoted this. I, there is a lawyer out there trying to sue all these, uh, famous people for basically promoting and enabling the scam. I'm not sure that will work or not, but I sure, uh, hope it'll work.
Speaker 1 00:25:24 Another theme I just want to finish with here is, you've heard this expression before, there's just lipstick on a pig. Uh, don't fool me with putting lipstick on a pig. Why? Why is that funny? Why is that a joke? Because the underlying thing is a pig. It's like, it's like a disgusting fraud or, and no amount of cosmetic lipstick will change my perception of that thing being a pig. Well, we have this in the form of effective altruism. Effective altruism is the lipstick that's put on scams like s p F. So people think this pig I is a beautiful, uh, Hollywood star. And the same thing is done with democratic socialism. The Democrat part is the lipstick. Everyone loves democracy. The pig, the disgusting pig is socialism. And same thing with the Federal Reserve, and the same thing with the Social security. And same thing with these other scams.
Speaker 1 00:26:15 People should be more sophisticated than they have been. They need to see this stuff for what it is. But the key here is as Objectiveism and Iran have been saying for decades, altruism is not an ethic. It is not a proper ethic to guide human life. The idea that you should serve others selflessly and especially those who mean nothing to you is a false, uh, ethic. And the proper ethic is rational egoism. And what these scams are engaged in is not rational egoism. It's not even greed. Uh, the difference, interestingly between Ponzi 110 years ago, Madoff 15 years ago, and S B F is Ponzi and Madoff were actually originally in legitimate businesses and then literally got in over their heads and started losing money. And here was the key. They should have shut it down right then the minute they started losing money, they should have shut it down.
Speaker 1 00:27:14 But Madoff almost, that was definitely true of Ponzi. He had a legitimate business in the beginning and it got away from him. Kind of like the Enron story. It doesn't justify what they did, but you can see that going in the intent was not to defraud. It ended up defrauding. Madoff is a middle term case because he started taking money and had no intention of investing it. He started almost from the beginning doing a daisy chain, doing a pyramid scheme. But I think Bankman freed his worst of all because his advertisement was Give me money because I'm gonna turn around and give it to the causes you adore. You left wing wacko Democrats and media types and others, and they loved it and they didn't think it would ever end, but it did end, of course, uh, whether this money will ever be found. I can imagine where it went.
Speaker 1 00:28:02 I just told you where it went, including ea philanthropies, ea meaning effective autism. In other words, going to people with foundations and philanthropies that do this kind of stuff. They got a lot of this money. They're sitting on this money now. They're using this money to fund all sorts of anti-capitalist causes and they must be laughing their heads off because nobody can track where all the money went. I think it should be easy to track where the money went, but uh, for now they're just enjoying this large ass. They're just enlo enjoying this embezzlement. And, uh, it's such a scandal in my mind to see him being handled with kid gloves in a way that Madoff and all the other scamster, like Ponzi in the past were not treated. So I'll leave it there. There's much more to say about the Philosoph and the market aspects of this.
Speaker 1 00:28:53 On the bright side, I wanna say something about crypto exchanges. There's nothing inherently wrong. I said earlier, I wanna emphasize this, there's nothing inherently wrong with the crypto exchange, uh, cryptocurrency, digital currency, the idea of exchanging them because buy Binance is doing it and two or three other companies are doing it. And the other thing I wanna stress is this is not an indictment of digital currencies in the private sector either. Uh, they seem to be, have been caught up in all this like Bitcoin. By the way, one of the more legitimate digital currencies, and the way you know that this is true is Bitcoin's price originally fell during the, uh, revelation of this scandal and has bounced back enormously and strongly since. So the more the markets look at this, the more they realize that the scam at FTX is not an indictment of Bitcoin.
Speaker 1 00:29:45 In fact, it's a buying opportunity. I said that a week after the chapter four, uh, chapter 11 finance, you could tell this was not an issue of Bitcoin. It was an issue of Sam Bankman freed. And same thing with these other exchanges. As long as there will be digital currencies like Bitcoin, they'll be need to efficiently exchange them. Just as when the New York Stock Exchange said, you know, as long as companies are gonna be issuing shares to shareholders, there's a legitimate business here in helping them exchange those shares. But of course, the New York Stock Exchange had a sterling reputation. It always has. It never scammed people working on and trading on the New York Stock Exchange in the way that Sandbank and Freed did. So, um, I that's worth stressing and it's worth observing in the marketplace today because people confuse that a lot. They see sandbank and freed and they think the whole space is questionable in some way. No, it isn't. And this will be a good shakeout in that regard. So I'll stop there. Take comments.
