Lewis picks a hill.
Going Infinite. Lewis, SBF, FTX and sins of authors. A book review.
tl;dr; “He didn’t buy a yacht.”
Disclosure
Let’s start with full disclosures.
a) I was an FTX customer. b) I am a Michael Lewis fan, circa 1998. c) I am neither a disbeliever nor a card carrying member of crypto community. d) After 11 years I graduated from a denier to a promoter of crypto use cases. Closer to right side of agnostic or practical than being an actual chest thumper. e) How do I know who I am? I have friends who are all over the spectrum. f) Also 30 years building back and front office systems for financial services industry.
I ended up with an FTX account because we thought it would be cool to have crypto as a payment option for a product we sold. Luckily, the crypto receivables for which we opened my FTX account, were never realized. Unfortunately the FTX recommender was a friend who did have a healthy balance with the firm and lost a part of his shirt when the exchange blew up.
Lewis writes a book.
Towards the end of ’22 as SBF and FTX imploded, rumors that Lewis was writing a book on SBF / FTX / Crypto started surfacing.
For Lewis fans this was great news. Premonition, his last book was an educational and engaging read on the world’s Covid-19 response and the development of the Covid-19 vaccine. If there was one story teller we could trust to tell this tale, it would be Lewis.
The verdict.
Liars Poker. The new new thing. Next. Money Ball. The Blind Side. The Big Short. Boomerang. Flash boys. Premonition. 9 books. The reason why I am a Lewis Fan.
Going Infinite unfortunately doesn’t do justice to the Lewis brand. If you haven’t read Lewis before you will be disappointed. If you have, its a Lewis book.
Lewis books? Flash boys told the IEX story around the time the exchange was planning on going public. The backdrop was an ex Goldman employee trial, flash crashes on US exchanges and allegations of front running against high frequency trading firms. Against a deadline but shipped fully baked.
Premonition, like Flash boys told the Covid-19 story while it was a living nightmare for most of the world. Great story. Greater story telling. A package with a powerful punch that destroyed the public persona and goodwill of CDC. The world dodged a bullet and here are the people who helped us dodge it and the CDC is clearly not one of them.
Going Infinite though is not like its two predecessors. There are many dissimilarities. You see gaps where the book ignores elephants in the room, while the reader can clearly see them and can’t move past them. Unlike other Lewis works where he builds bridges between different sections of the book and the book reads like a well flowing stage play or film, here the bridges are missing. You have to make the same leap of faith Lewis makes, which I certainly couldn’t. Lewis books generally don’t have filler materials. B-rolls in the film industry language. Here there are two chapters filled with love letters written by two central characters to each other. Lewis thinks they add context but the world doesn’t need that context.
With Flash boys, Lewis took the contrarian view on High Frequency Trading and IEX and won. The book sold 350,000 copies in 3 weeks and pissed off 95% of the securities trading related players in the financial services world. Coming on top of Big Short and Boomerang, the book cemented Lewis’s image as an author who could take exotic financial concepts and explain them to your grand mother in an easy to read fashion. It helped that this group also felt that Lewis was right and his detractors were wrong because Lewis backed his claims with data.
With Going Infinite, Lewis tries once again to take the contrarian view. FTX was a solid business. There was no intent to commit willful fraud. SBF is a misunderstood genius. Without malicious intent and intervention on behalf of one (unnamed but strongly hinted) individual both FTX and SBF would still be around. The world needs to know the true story behind SBF’s genius.
The elephant in the room?
Lewis came from the world of trading. SBF and his team came from Jane Street Capital. You don’t build or write trading systems without checks and balances in these worlds. And when you do, you do it with a clear understanding of what you are doing and why you are doing it. Willful circumvention of laws, best practices and guiding principles of financial, securities and custodial services industry.
The books is not about three kids from Timbuktu who unexpectedly run into 23 billion dollars and don’t know what to do. It’s about three whiz kids. Two from MIT, one from Stanford. With prior trading and work experience at Jane Street Capital and Google. Kids from Timbuktu don’t get to do even one of the above, let alone all three.
Traders hate risk managers, risk limits and risk systems. This is a universal truth. Yet most traders worth their salt given the choice will not kill, disable or maim risk systems. Risk limits and risk systems exist with the consent and active participation of trading desks. Because risk adjusted return is the differentiator between a well run profitable desk and a team with a death wish that gets lucky.
The issue with risk systems is not risk systems. It is who controls the self destruct button on a trade. If you give that button and control to a trader, traders stop having issues with risk systems. The conflict of interest and control is a different debate but the essence is clear. Risk done right is the fly by wire system that keeps the desk flying, afloat and in the air. Traders understand this. They fight it but respect the rules and use them to stay safe and out of trouble.
Being a contrarian had served Lewis well so far as an author. What could possibly go wrong?
Framing SBF and FTX.
Plenty, it seems.
I think part of the problem is timing of when Lewis started work on the book. By August 2022, Lewis had already done his first set of SBF interviews. The story and the context was set and framed. Boy genius. Misunderstood. Means well. Out to do good in the world. Can’t do wrong. Came through a referral. The opposite of CZ. It didn’t matter if the myth around effective altruism, SBF, or FTX came undone during the story, the framing was set. To his credit Lewis doesn’t pass judgement early on. He highlights issues, sometimes significant issues, but doesn’t comment. In his words he wants the reader to make the judgement call.
But then to be fair, Lewis frames the debate and discussion around SBF in a non-neutral fashion. Binary on a first pass, but non-binary on a deeper read. As an author you can take your readers in any direction. And the direction that Lewis take is anything but negative. His promotional interviews for the book two days before before its release confirm his bias. Lewis just thinks SBF got unlucky. With a different set of cards, this would be a book with a dramatically opposite ending. This is a letter to the jury because someone has to write it.
He didn’t buy a yacht.
In August ’22, post Luna, Terra and Celsius collapse, there were two pillars left standing in the crypto arena. SBF (FTX) and CZ (Binance). As per Lewis’s framing via SBF eye’s CZ is an ass and SBF is a saint.
In the first week of November ’22 the world changed. But Lewis’s original framing didn’t. CZ remains an ass and is left standing but SBF is no longer considered a saint.
Did Lewis really misread the room? Surprising but not unthinkable. We are all capable of a misstep. Also capable of doubling down on the misstep when called out for it. But the ultimate sin with Going Infinite is something Lewis hasn’t been accused of before. How can someone associated with the securities industry, who was able to dissect and explain the complex world of mortgage derivatives and high frequency trading, ignore or forget the basic rule of custody business.
Thou shall not commingle funds.
You can, if you have committed the other sin. The one we are warned about as aspiring authors. Don’t fall in love with your characters. Be ready to kill your darlings. Despite the evidence Lewis himself digs up and points too, he is clearly in love with the idea of FTX and SBF.
And that in essence summarizes everything wrong with the book. Here lies a billion dollar business that was run by a boy genius with a shot at becoming the world’s first trillionaire.
“There is a tide in the affairs of men. Which, taken at the flood, leads on to fortune; Omitted, all the voyage of their life is bound in shallows and in miseries.”
Julius Caesar, Act 4, Scene 3. William Shakespeare.
You realize why quoting Shakespeare is ironic in a review about a book on SBF, when you read the book on SBF.
Please don’t get me wrong. Michael Lewis is one hundred million, nine hundred and eighty thousand times the author I will ever be. Because that is the number of copies he has sold as an author compared to the ones I have sold in my life. I would love to write and bring stories and characters to life like he does. If I could even write a chapter similar to one of his nine books on my list, I would be golden. But this one time, Lewis gets it wrong. It took him two days after the book hit stores, also the first two days of court testimony in State versus SBF trial to find out that he was wrong, all along.
Having said that it is still a Michael Lewis book. Despite it’s many flaws for a Lewis fan, it is what it is. A Lewis book. If you are a Lewis fan, like I am, grab a copy and read it.
The bits that make the book worth reading.
As a Lewis book there are interesting nuggets in here that you should look out for.
The FTX Balance Sheet.
Towards the end (Chapter 10, Manfred) Lewis does a back of the envelope accounting of the FTX balance sheet. He qualifies it as a non-accountant’s account. To me it remains the most important contribution of the book. Also the smoking gun that Lewis manages to ignore despite holding it in his own hands.
FTX brought in 23.3 billion dollars of cash during its short life under six primary heads. How that money was used clearly shows the flaws in FTX governance and business model.
Lewis accounting for it while missing key qualifications is also an indication of the lens he used to review SBF’s actions.
Including trading profits FTX made 4.5 billion in revenues. It had access to another 2.3 billion in venture funds. Of this it spend 1.54 billion in salaries to SBF and Nishad (proxied as loans), 0.5 billion in endorsement and marketing and 1.6 billion in corporate expenses including buying and burning FTT tokens. That adds up to 3.64 billion. Then it paid 1.4 to CZ (Binance) for buying out their stake. Including venture investments, at this point FTX has already used 5.05 billion of the 6.8 billion available to it. Any amount spent beyond the 6.8 has to come from customer deposits or custodial (supposedly) funds. And this is the smoking gun Lewis highlights (without really pointing to it) and ignores. 4.4 billion in SBF’s private investments. Three fourth of SBF’s private investments came from customer custodial funds. You don’t need to read beyond this point to agree that if this is what FTX did, it gave up all claims on being a legit business in the securities, exchange and trading world.
Why is this an important contribution? There were multiple versions of the FTX balance sheet prepared by the FTX team that been all denounced as fraudulent and misrepresentative in recent court testimony by Caroline Ellison. Then there is the bankruptcy lawyer balance sheet, contested by SBF and other members of the FTX team. The Lewis balance sheet is the closest we come to a pseudo neutral tint. It is rose colored but less rose colored than others. Not really black and white. Somewhere between grey and pink, if there is such a shade.
FTX Bankruptcy.
Lewis’s account of FTX bankruptcy and the selection of the FTX legal team also provides a fascinating insight into the world of bankruptcy law. The role connections, influence and networks play. It also explains the rush to move SBF from the Bahamas to US jurisdiction and inclusion of FTX US and other territories in the bankruptcy filing despite the fact that some of them were solvent entities.
As is the case with every other character in the book, other than SBF, Lewis paints an unflattering picture of bankruptcy lawyers and their firm. I am sure it is well deserved. But it is also here that he crosses into the room of suspension of belief and decides to die on a hill of his own choice. It is one thing to paint a flattering picture of SBF. It is a different thing to suggest that no wrong was really done (the contrarian view) and if it wasn’t for external malicious intent, FTX as a business and SBF the billionaire would still be around. Because the money was there all along. It just had to be found, the markets just had to rebound and all the wrongs would have been put right. Lewis doesn’t really come out and say this in so many words, but we can read between the lines just as well as Lewis can misread a room.
Accounting, governance, systems.
The hardest part of the story to believe was the absence of systems, governance, compliance and accounting at FTX. Harder was Lewis absence of commentary on what that implied.
Here is a firm that is thinking of applying for a US exchange trading license. With aspirations and ambitions to raise additional funding. A firm that has already raised significant funding from a who’s who list of venture investors. A key assumptions would be that there was a semblance of due diligence done for these large and substantial checks. But it appears that no one bothered to pop the hood and check the plumbing. Much more than FTX it is indictment of the venture investing world and the venture investing process.
Ignoring due diligence red flags, how come a firm staffed with Jane Street traders, MIT and Stanford alums, well paid corporate lawyers, security industry regulators, not have basic accounting systems in place. How could they pass even rudimentary audits required for regulatory review and approval even in jurisdictions like the Bahamas. Lewis establishes the fact that FTX had presence in multiple countries, markets and economies. Securities trading is a restricted, heavily regulated space. It doesn’t matter how progressive a country is, the regulatory frameworks have common benchmarks. One of them is annual audited accounts initialed by accounting firms with some level of credibility and oversight.
Alameda research has a trading book. It has trading systems to calculate its trading P&L. So the business is not run by luddites. There is also no shortage of capital. Yet governance is a challenge and so is tracking cash, crypto balances and trading exposure. And we have systems for that. The things we don’t have systems for; risk; compliance; custodial funds, customer funds; limits, counterparty exposure, simple trade reconciliation, financial reporting, asset liability management, liquidity and solvency tracking, capital allocation.
If there is one thing we have learnt from four hundred year history of accounting and trading professions it is this: Fraudster and embezzlers keep a second books of accounts. The real book. The real book shows how much has been misplaced and how much more can still be misplaced without getting caught, given the chance and the opportunity. With real money at play you have to keep track of how much you can steal.
Somewhere out there, there is an Excel sheet that shows what really happened at FTX. Given enough time and testimony, it will surface.
CZ and Binance.
Lewis says it without saying it. SBF flew through Dubai and told Dubai regulators as long as CZ and Binance are resident in this town, no one will take you seriously. Two weeks later the Alameda balance sheet shows up out of the blue and FTX self destructs. You can connect the dots without Lewis getting sued for defamation.
That is not the only mention of CZ or Binance in the book. But they are all in similar tones. CZ and Binance are clueless when bots created to generate artificial flow of trades on their platform, get exploited by SBF and FTX team. CZ and Binance try and replicate the exchange idea and fail. CZ first says no, then says yes to investing in FTX. CZ agrees to a buyout price for his stake then changes his mind at the last minute. CZ offers to step in to help save FTX and then kills any hope of resuscitation with his final tweet.
Lewis doesn’t mention if he made any efforts to reach out and speak to CZ given the role he played in rise and fall of FTX. I am not sure why. Rather than reading the love letters of Ellison and SBF to each other I would preferred to read a profile of CZ and Lewis’s take on him. More so now that he is the deeply flawed pillar left standing in the crypto world.
Effective Altruism.
Anything but altruism. Consider yourself warned. Like CZ Lewis doesn’t have to say much. He paints the picture as is and we get the drift. Self serving over grown children, lying, cheating, stealing and fighting between themselves for their share of the spoils because they think the underlying cause that they will ultimately donate to, is well worth it. And just because of that, the rules of the world, of social engagement, interaction and responsibility do not apply to them.
Ellison and SBF are the flag bearer of this movement. This is Lewis’s second most important contribution in the book. By first framing SBF and then Ellison as a poster child, Lewis indicts the movement and with it the schools and professors behind it.
A mind and a book are such a terrible thing to waste.
Should you, or shouldn’t you.
I saw the coverage and the reactions to Lewis’ 60 minute segment first. That is how I knew the book was hitting stores the next day. I have already confessed to being a Lewis fan. It was an ok read.
Actually a list of “nots”. Not great, not of acceptable quality, more of a miss than ok. Like an MVP or a wire frame prototype. Had potential, could have been better. Not as good as Premonition or Flash boys. Not his best work and certainly rushed to print.
Less disappointed in the book. More disappointed by Lewis.
The love letters were painful to read. Lewis’s missteps were even harder. In my humble opinion both were a waste of space. Between Lewis and his editor someone should have taken a stand on these two elements. It would have been a much better book without them and with a CZ profile in it. (To be fair to Lewis, he did try but the Binance and CZ team didn’t want to play.)
But I digress. If you are a Lewis fan, you should. If you are not a Lewis fan, you shouldn’t. There are enough reviews out there that cover the key points highlighted in the book. You can read them and you won’t miss much.
Alternatively if you have any doubts, watch the court testimony of the trial. It will be a while before the crypto world recovers from this mess.
If you don’t have time for either, wait till the film based on the book comes out. Lewis began shopping rights for the book before he started writing it. Doesn’t matter which direction the court case or book reviews go, a film is a certainty with SBF cast as Luke Skywalker and CZ playing a roll up of Darth Vader and Darth Sidious. I have just started thinking about casting choices. Apple apparently paid $5 million for the TV rights without seeing a word of the manuscript.
Parting words
Lewis once wrote a book about a yacht. It was how someone built two multi billion dollar businesses because he wanted to build / buy one.
Going Infinite is also about a yacht. Or the decision to not buy one. That one decision is the yardstick Lewis measures SBF on. He didn’t buy a yacht. He doesn’t feel anything. Incapable of emotions. He is ok with misrepresentation. He has exploited and scalped his own loyal employees. He is the holding the smoking gun. He has violated custodial trust, but he didn’t buy a yacht. And he did it all because he meant well?
There are powerful symbols at work here for Lewis fans. The first yacht established Lewis as a commentator on the technology industry. The second one may be the most expensive sea worthy vehicle Lewis encountered in his writing career.
