Streetwise Professor

October 8, 2023

Michael Lewis Jumps the Shark, Which Is Too Bad, Because In a Just World He’d Fall and Get Eaten

Filed under: Blockchain,Cryptocurrency,Economics,Exchanges — cpirrong @ 6:31 pm

Michael Lewis is out with a book on Sam Bankman-Fried and FTX–just in time for SBF’s trial! What great timing!

I am sure that when Lewis started the project, he did not anticipate that he would have to use the trial of the person whom he had intended to be the hero of his story to turn the FTX lemon into marketing lemonade. But so he has.

Lewis was interviewed by 60 Minutes Last week, where he offered this gem:

This isn’t a Ponzi scheme. In this case, they actually had a great, real business. If no one had ever cast aspersions on the business, if there hadn’t been a run on customer deposits, they’d still be sitting there making tons of money.

Other than that, how was the play, Mrs. Lincoln? Or, if it wasn’t for that damned Russian winter Napoleon’s descendants would still be ruling France!

Where to begin? First, Ponzi schemes are not the only form of financial fraud so by rejecting that FTX was a Ponzi he does not prove it was not a fraud. Second, and more importantly, this begs the question of why there was a run. Did the customers just decide to run on a whim? Or maybe it was sunspots (a la last year’s Nobel winners Diamond and Dybvig)!

Yeah, sunspots, that’s it. Other than that, SBF would be sitting fat and happy. (Though mainly fat–he’s lost weight in the pokey.)

Uhm, no, actually, aberrations in the sunspot cycle didn’t spark a collective frenzy by depositors. The simple fact is that SBF was using customer monies for all sorts of purposes, ranging from funding a lavish lifestyle for himself (and his loathsome parents) to covering losses at the FTX-affiliated hedge fund (the very existence of which should have been the first red flag). The “aspersions” cast upon “the business” were basically factual revelations that “the business” was a financial disaster that used customer monies in violation of laws, duties, customs, and promises.

In other words, there was a run for the reason that there are usually runs: the customers of an entity operating on first-come, first-serve basis learned that said entity was financially suspect. Get your money, and let the devil take the hindmost.

And as for “great real business”–apparently not only did Michael Lewis drink deep from the crypto Kool Aid, he’s still binging on it. There were numerous reasons to be skeptical about crypto since it began (and I expressed skepticism from virtually the time of its emergence about a decade ago), and the dubiousness of the entire endeavor has only deepened. To claim that crypto exchanges were viable businesses that would make “tons of money” on an ongoing basis is utterly delusional.

The simple fact is that Michael Lewis is a deeply, deeply, deeply compromised narrator here. He was “embedded” in FTX for months. He had unparalleled access to the chubby wunderkind. And then the whole thing imploded in scandal.

Meaning that Michael Lewis has to–has to–make his would-be hero SBF a tragic one, wrongly and unjustly brought down by powers beyond his control. For consider the alternatives.

The first is that Michael Lewis had a front row seat to a massive fraud, and that he–the alleged eagle eyed chronicler of the corruption, shenanigans, misdeeds, and absurdities of mainstream finance (investment banks, the stock market, etc.)–missed what was going on in front of his very eyes.

The second is that Lewis knew something was wrong, or at least suspected it, and remained silent.

The first alternative would be a major blow to Lewis’ credibility and reputation. The second would basically make him an accessory to a major crime.

To escape this dilemma, Lewis must insist–and demand that you believe him, and not your lyin’ eyes–that there was nothing wrong at FTX. Indeed, everything was right at FTX, except shit happened. Or something. Given his massive conflict of interest, Lewis’ arguments are utterly untrustworthy, and smacking of special pleading.

I have heard it said that SBF fooled a lot of people, so you need to cut Lewis some slack. Uhm, no. If your whole shtick is your financial gnosticism, your unique ability to perceive and interpret the greedy, grubby, self-interested behavior of financial market denizens, “I wuz fooled just like everybody else” doesn’t cut it when a greedy, grubby, self-interested shlub ran his scheme in front of your very nose.

It is quite clear what has happened here. Lewis’ well-worn–but quite lucrative–MO is to pick out some misfit hero or heroes fighting against the financial Man, and make him/her/them the protagonist of a just so story. Misfit David vs. Goliath.

SBF was to all appearances a gift to Lewis from the literary Gods. Crypto was the vanguard in a supposed revolution against the traditional financial system and institutions that Lewis had inveighed against for years. SBF fit the quirky misfit role to a “T.” He also talked in lofty phrases about his effective altruism, his lack of personal financial motivation, and his desire to use the wealth generated by his genius to make the world a better place.

It had the makings of the Michael Lewis book to top all Michael Lewis books, and SBF to be the hero of all Michael Lewis heroes.

And then it all went horribly, horribly wrong.

So what’s Michael Lewis to do? Since the elites (which includes Michael Lewis) don’t do mea culpas, let alone retire to a monastery, the only thing he could do–spin like a dreidel.

It is immensely amusing to me that Lewis clearly doesn’t understand the fundamental absurdity of his arguments. If you are really a crypto true believer, which Lewis clearly is, it is because you believe that a trust-based financial system is fundamentally flawed, and that trustless crypto is the answer. But Lewis also argues that FTX’s “great real [crypto] business” failed due to an irrational loss of trust. Both of those things cannot be true.

So Lewis has jumped the shark here. But due to his spinning, and his existing reputation, it is quite likely that’s a bad thing–but only because it means that the shark won’t eat him, as would be a just outcome.

I criticized Lewis’ Flash Boys when it came out 9+ years ago, so I have been a skeptic for a long time. But I have nothing on Scott Locklin, who wrote this in the immediate aftermath of the FTX implosion (and who also ridiculed Lewis’ Flash Boys). Locklin makes me look like a milquetoast. Definitely worth a read

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  1. Yeah, I had a similar reaction to Flash Boys. It was an interesting story, but I did by that the guys were heroes. They were just talking up their own book and using Lewis to do it.

    Seems the same thing here, except the con ran out too soon.

    Comment by Hal — October 8, 2023 @ 7:00 pm

  2. A minor historical correction, prof.
    It was Sedan, not Moscow, that put the kibosh on the Buonaparte dynasty.
    Or did it? The Code Napoleon is a major (the major?) foundation stone of European Union legislation.
    The Corsican dwarf casts a long shadow.

    To the point you make. Governments can issue debt because they can tax people to pay the interest when they run out of money. So bond markets generally trust them, until they don’t.
    Where are crypto currencies going to find their backstop? Stanford professors?

    Comment by philip — October 8, 2023 @ 7:49 pm

  3. Lewis is a writer of conventional wisdom and has been since embedding himself at Solomon Bros to research and write Liar’s Poker. I guess, “those that can do, those that can’t write”.

    Comment by The Pilot — October 8, 2023 @ 8:33 pm

  4. “and his loathsome parents”: I say, my dear sir, steady on! His mum is a law professor at Stanford specialising in Ethics.

    Hm; perhaps that supports your case. The probability of her not being loathsome must be less than ten to the minus umpty-um.

    No matter; they’ll all be pardoned by Brandon.

    Comment by dearieme — October 9, 2023 @ 5:29 am

  5. Gee whiz, you didn’t have to be embedded at FTX to worry that customer deposits were being commingled with speculation bets. The pattern of FTX bailing out firms hit by the Luna collapse to defend the trading price of FXX was obvious to any crypto podcaster who bothered to look, though I don’t remember any of them guessing the sheer scale of chutzpah that was eventually found out.
    It seems SBF (and Elizabeth Holmes in a different way) had practiced the art of aping the actions required to conjure a Jobs-style reality distortion field. The dumpy look and communal lifestyle at FTX headquarters gave it the vibe of a software start-up, but implementing trading software is not cutting edge in the least; the founder of Mt Gox whipped up a functioning exchange in 2011 and then quickly got bored with it.
    Isaacson’s biography gives a reasonably fair treatment of Jobs’ failure with NeXT, at least.

    Comment by M. Rad. — October 9, 2023 @ 11:19 am

  6. @dearieme. Yes, that’s exactly why they’re loathsome!

    Comment by cpirrong — October 10, 2023 @ 4:33 pm

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