It doesn’t quite ring true to me that we need an investigation into what top EA figures knew. What we need is an investigation more broadly into how this was allowed to happen. We need to ask:
How did EA ideology play into SBF/FTX’s decisions?
Could we have seen this coming, or at least known to place less trust in SBF/FTX?
Can we do anything to mitigate the large harms that have come about?
How can we remove whatever conditions that allowed this to happen, and that might allow other large-scale harms to occur, if they are not remedied?
It’s not totally unreasonable to ask what EA figures knew, but it’s not likely that they knew about the fraud, based on priors (it’s risky to tell people beyond your inner circle about fraudulent plans), and insider reports. (And for me personally, based on knowledge of their character, although obviously that’s not going to convince a sceptic.)
I strongly agree with this. In particular, it seems that the critiques of EA in relation to these events are much less focused on the recent fraud concern than EAs are in their defenses. I think we are choosing the easiest thing to condemn and distance ourselves from, in a very concerning way. Deliberately or not, our focus on the outrage against recent fraud distracts onlookers and community members from the more serious underlying concerns that weigh more heavily on our behavior given their likelihood.
For what it’s worth, as someone saying in another thread that I do think there were concerns about Sam’s honesty circulating, I don’t know of anyone I have ever talked to who expressed concern about the money being held primarily in FTT, or who would have predicted anything close to the hole in the balance sheet that we now see.
I heard people say that we should assume that Sam’s net-wealth has high-variance, given that crypto is a crazy industry, but I think you are overstating the degree to which people were aware of the incredible leverage in FTX’s net-position (if I understand the situation correctly there was also no way of knowing that before Alameda’s balance sheet leaked a week ago. If you had asked me what Alameda’s portfolio consists of, I would have confidently given you a much more diversified answer than “50% FTT with more than 50% liabilities”).
To clarify, I wasn’t referring to leverage (which I think most would say counts as fraud because of FTX claims to the contrary) in the comment above, just the fragility and illiquidity of the token itself.
My understanding is that some EA leadership knew much of the committed wealth was in FTT (at least, I knew, and I know some others who knew), and I worry that a few knew enough about cryptocurrency to know how fragile and illiquid that situation was (I did not, but I should have looked into it more) but allowed that to go unmentioned or undershared.
The point is just that these are all serious concerns that I think have been belied by the public EA outrage statements, and I think if there is such an independent investigation into knowledge of fraud, these concerns should be investigated too.
Hmm, I do think in the absence of the leverage, having wealth in FTT was kind of reasonable, and the leverage was the primary thing that enabled the whole thing to implode this quickly.
I was still surprised by Alameda not having a more diversified portfolio, but I think it’s basically accurate to model FTT as stock, and it’s not that crazy to have a lot of your wealth in your own stock (and for it to be hard for you to exit that position, since it looks really suspicious if you sell a lot of your own stock).
But I do agree that there was probably still too much reliance on assuming the FTX money would stay real. But like, I do think if you model FTT as stock, as I think it was straightforward to model as at the time, then I don’t think there is really anything going wrong by saying that Sam had that much money, since like, it’s pretty standard to calculate net-worth that way.
Yeah, there seems to be some confusion. Obviously a unicorn founder is going to have a lot of wealth in that company’s stock (or close analogues such as FTT). The problem, rather, is that we think FTT was being transferred between corporate entities and used as collateral at its face value (there may’ve been other problems relating to FTT, such as its tokenomics, as well).
Matt Levine suggests that the key problem is accepting your own stock as collateral:
Now let’s add one more crypto element. If you are a crypto exchange, you might issue your own crypto token. FTX issues a token called FTT. The attributes of this token are, like, it entitles you to some discounts and stuff, but the main attribute is that FTX periodically uses a portion of its profits to buy back FTT tokens. This makes FTT kind of like stock in FTX: The higher FTX’s profits are, the higher the price of FTT will be. 8 It is not actually stock in FTX — in fact FTX is a company and has stock and venture capitalists bought it, etc. — but it is a lot like stock in FTX. FTT is a bet on FTX’s future profits.
But it is also a crypto token, which means that a customer can come to you and post $100 worth of FTT as collateral and borrow $50 worth of Bitcoin, or dollars, or whatever, against that collateral, just as they would with any other token. Or something; you might set the margin requirements higher or lower, letting customers borrow 25% or 50% or 95% of the value of their FTT token collateral.
If you think of the token as “more or less stock,” and you think of a crypto exchange as a securities broker-dealer, this is completely insane. If you go to an investment bank and say “lend me $1 billion, and I will post $2 billion of your stock as collateral,” you are messing with very dark magic and they will say no. 9 The problem with this is that it is wrong-way risk. (It is also, at least sometimes, illegal.) If people start to worry about the investment bank’s financial health, its stock will go down, which means that its collateral will be less valuable, which means that its financial health will get worse, which means that its stock will go down, etc. It is a death spiral. In general it should not be possible to bankrupt an investment bank by shorting its stock. If one of the bank’s main assets is its own stock — is a leveraged bet on its own stock — then it is easy to bankrupt it by shorting its stock.
Well, my understanding now is that it is very structurally different (not just reputationally or culturally different) from publicly traded stock: the tiny trading volume, the guaranteed price floor, probably other things. If it were similar, I think I would probably have much less of that concern. This does imply standard net worth calculations for Sam Bankman-Fried were poor estimates, and I put a decent chance on Forbes/Bloomberg/etc. making public changes to their methodology because of this (maybe 7% chance? very low base rate).
I’ve updated a little toward this being less concerning. Thanks.
I think the above points hold. No question that FTX transfering funds to Alameda is the crux of the moral issue at play here. But financially speaking, and to flush out the liquidity issue… for such significant holdings of FTT, those funds should have only been considered with a massive haircut, maybe even upwards of 90%. Alameda said they had billions worth of FTT (in USD terms), and sure that was the case at market prices prior to all of this this. But as we know from what precipatated everything, sell pressure in that range (as was about to happen from Binance), absolutely nuked the market’s confidence and therefore value in FTT. So how much more so would this have been the case if FTX/Alameda ever had came along and said they needed to liquidate billions in FTT?
There was never going to be a way out. It’s truly sad to see the way moral lines were crossed with the transfer of funds across entities, yet to me it’s just bizarre that a bunch of seemingly brilliant folks would have organized their books in such a financially precarious manner when it came to liquidity… let alone in their own token.
The same theme holds but still fairly different scenarios. Asana/Amazon stock signifies partial ownership of those companies derived from the value of their future cash flows. FTT was just an invented token trading on the confidence of FTX, but with no intrinsic value, hence a greater probability of it nuking to 0/
Overall though, Dustin/Bezos’ holdings in each respective company are likely to warrant significant haircuts on their personal balance sheets. Rule of thumb is the more concentrated ownership, the higher the haircut, and the less liquidity, the higher the haircut. They both have significant ownership, so even though it’s fairly safe to estimate higher liquidity in public markets, their concentration of ownership warrants a significant haircut.
I think what’s so significant about the FTX/Alameda case tho, and why the FTT should have been considered effectively worthless on their balance sheet, even given the high market price, was the massive concentration of self-ownership (not to mention the Binance concentration risk) AND the very low liquidity.
FTT was just an invented token trading on the confidence of FTX, but with no intrinsic value, hence a greater probability of it nuking to 0/
Ah! My understanding was that FTX bought back some amount of FTT with their profits each week, giving it intrinsic value (conditional on FTX continuing to exist) dependent on FTX’s future cash flows, and making it feel fairly analogous to stock to me. Though I’m not aware of the exact mechanism, and can easily imagine eg the amount of money going into the pool being independent of the total amount of FTT issued, and the total amount issued being non transparent, making the actual intrinsic value ~0 (essentially really diluted stock)
Good call and looks like they were fairly trainsparent with most of the info you’re referencing here.
I guess I’m still not sure at what point, even in a best case scenario, the “buy and burn” mechanism actually would drive intrinsic value in the coin though? From a pure supply and demand perspective maybe, since the better FTX does, the more scarce the coin is and the more demand there is for it… but isn’t that just a sort of strategic market manipulation within the exchange?
Albeit that could have worked had FTX reached a point where it was strong enough, but I think they effectively nullified that opportunity by using so much FTT as collateral that needed to be more liquid while treating it as if it was.
This sounds like a sort of EA congressional investigation. An important part for that, which I don’t know how to make happen, is to make sure the investigators are accountable to EA while not being controlled by the “executive branch” which is being investigated. One would think some kind of democratic processes would help.
This seems directionally right to me. My current view is that an investigation should stick to objective questions rather than normative stuff about, for example, whether the EA movement is in principle OK taking funding from the crypto industry (or some other potentially destructive industry). I think my thinking here is that a person who isn’t involved in EA should think about those objective questions, and then folks in the EA movement itself should make arguments for and decide on the future direction in response. I trust a lawyer specialised in independent investigations to do the fact-finding work and the ‘what went wrong’ work, but not to make principled judgements about what EA should think or do more broadly.
It’s definitely true that there are more philosophical questions that a lawyerly investigation wouldn’t be well-positioned to answer. But it seems likely that there were plenty of legal and financial risk-management mistakes that EA orgs made in the pst year that an independent investigator or other outside risk management consultant would be well-positioned to opine on.
A meta level structural problem may be that so much decision making seems to be focused on a relatively small group of people without much oversight. Even with the best people in the world that’s going to lead to group think and blind spots. Other charities and non-profits have extensive oversight systems that may be worth imitating.
Let me kick off on point 4: I don’t think it is accidental that EA’s philanthropic model of social change leads to the concentration of power in the hands of a few people with outsized riches, or control over those riches. Why has the movement never even thought of democratising itself? Recall that JS Mill, being the utilitarian he was, argued for democracy on instrumental grounds—mostly because it led to better epistemic and cultural outcomes.
Wherever there is money, there will be fraud. That’s why we have financial regulations, and why professional charities have accountants and auditors.
This could be a fatal blow for any charity that had become dependent on SBF’s funds… which is exactly why GiveWell already has a rule that limits any single donor from giving more than (I think) 50% of funding for any one cause.
Rationally, the only way in which the EA community should change is in taking a deeper look at whether the key EA figures that have taken SBF’s money could have been his “partners” infraud.
Even if this possibility is small, a professional investigation should happen because there is a non-trivial risk that this had happened
FWIW I don’t know why you’re being disagreement voted, I broadly agree. I think the money amounts at play here are enough to warrant an investigation even with a low possibility of uncovering something significant.
Partly from those who believe that SBF acted out of fanaticism for EA (“Scam To Give”) and think that researching that should be our priority.
Partly from those who feel offended by me suggesting to research whether key EA figures could have been SBF’s “partners” in fraud… which I highly doubt.
It doesn’t quite ring true to me that we need an investigation into what top EA figures knew. What we need is an investigation more broadly into how this was allowed to happen. We need to ask:
How did EA ideology play into SBF/FTX’s decisions?
Could we have seen this coming, or at least known to place less trust in SBF/FTX?
Can we do anything to mitigate the large harms that have come about?
How can we remove whatever conditions that allowed this to happen, and that might allow other large-scale harms to occur, if they are not remedied?
It’s not totally unreasonable to ask what EA figures knew, but it’s not likely that they knew about the fraud, based on priors (it’s risky to tell people beyond your inner circle about fraudulent plans), and insider reports. (And for me personally, based on knowledge of their character, although obviously that’s not going to convince a sceptic.)
I strongly agree with this. In particular, it seems that the critiques of EA in relation to these events are much less focused on the recent fraud concern than EAs are in their defenses. I think we are choosing the easiest thing to condemn and distance ourselves from, in a very concerning way. Deliberately or not, our focus on the outrage against recent fraud distracts onlookers and community members from the more serious underlying concerns that weigh more heavily on our behavior given their likelihood.
The 2 most pressing to me are the possibilities (i) that EAs knew about serious concerns with FTX based on major events in ~2017-2018, as recently described by Kerry Vaughan and others, as well as more recent concerns, and (ii) that EAs acted as if we had tens of billions committed for our projects even though many of us knew that money was held by FTX and FTX-affiliated entities, in particular FTX Token (FTT), a very fragile, illiquid asset that could arguably never be sold at anywhere close to current market value and arguably makes statements of tens of billions based on market value unjustified and misleading .
[Edit: Just to be clear, I’m not referring to leverage or fraud with point (ii); I know this is controversial! Milan now raises these same two concerns in a more amenable way here: https://forum.effectivealtruism.org/posts/WdeiPrwgqW2wHAxgT/a-personal-statement-on-ftx?commentId=3ZNGqJEpQSrDuRpSu]
For what it’s worth, as someone saying in another thread that I do think there were concerns about Sam’s honesty circulating, I don’t know of anyone I have ever talked to who expressed concern about the money being held primarily in FTT, or who would have predicted anything close to the hole in the balance sheet that we now see.
I heard people say that we should assume that Sam’s net-wealth has high-variance, given that crypto is a crazy industry, but I think you are overstating the degree to which people were aware of the incredible leverage in FTX’s net-position (if I understand the situation correctly there was also no way of knowing that before Alameda’s balance sheet leaked a week ago. If you had asked me what Alameda’s portfolio consists of, I would have confidently given you a much more diversified answer than “50% FTT with more than 50% liabilities”).
That makes sense.
To clarify, I wasn’t referring to leverage (which I think most would say counts as fraud because of FTX claims to the contrary) in the comment above, just the fragility and illiquidity of the token itself.
My understanding is that some EA leadership knew much of the committed wealth was in FTT (at least, I knew, and I know some others who knew), and I worry that a few knew enough about cryptocurrency to know how fragile and illiquid that situation was (I did not, but I should have looked into it more) but allowed that to go unmentioned or undershared.
The point is just that these are all serious concerns that I think have been belied by the public EA outrage statements, and I think if there is such an independent investigation into knowledge of fraud, these concerns should be investigated too.
Hmm, I do think in the absence of the leverage, having wealth in FTT was kind of reasonable, and the leverage was the primary thing that enabled the whole thing to implode this quickly.
I was still surprised by Alameda not having a more diversified portfolio, but I think it’s basically accurate to model FTT as stock, and it’s not that crazy to have a lot of your wealth in your own stock (and for it to be hard for you to exit that position, since it looks really suspicious if you sell a lot of your own stock).
But I do agree that there was probably still too much reliance on assuming the FTX money would stay real. But like, I do think if you model FTT as stock, as I think it was straightforward to model as at the time, then I don’t think there is really anything going wrong by saying that Sam had that much money, since like, it’s pretty standard to calculate net-worth that way.
Yeah, there seems to be some confusion. Obviously a unicorn founder is going to have a lot of wealth in that company’s stock (or close analogues such as FTT). The problem, rather, is that we think FTT was being transferred between corporate entities and used as collateral at its face value (there may’ve been other problems relating to FTT, such as its tokenomics, as well).
Matt Levine suggests that the key problem is accepting your own stock as collateral:
Well, my understanding now is that it is very structurally different (not just reputationally or culturally different) from publicly traded stock: the tiny trading volume, the guaranteed price floor, probably other things. If it were similar, I think I would probably have much less of that concern. This does imply standard net worth calculations for Sam Bankman-Fried were poor estimates, and I put a decent chance on Forbes/Bloomberg/etc. making public changes to their methodology because of this (maybe 7% chance? very low base rate).
I’ve updated a little toward this being less concerning. Thanks.
I think the above points hold. No question that FTX transfering funds to Alameda is the crux of the moral issue at play here. But financially speaking, and to flush out the liquidity issue… for such significant holdings of FTT, those funds should have only been considered with a massive haircut, maybe even upwards of 90%. Alameda said they had billions worth of FTT (in USD terms), and sure that was the case at market prices prior to all of this this. But as we know from what precipatated everything, sell pressure in that range (as was about to happen from Binance), absolutely nuked the market’s confidence and therefore value in FTT. So how much more so would this have been the case if FTX/Alameda ever had came along and said they needed to liquidate billions in FTT?
There was never going to be a way out. It’s truly sad to see the way moral lines were crossed with the transfer of funds across entities, yet to me it’s just bizarre that a bunch of seemingly brilliant folks would have organized their books in such a financially precarious manner when it came to liquidity… let alone in their own token.
Would you apply the same reasoning to eg Dustin’s Asana stock? Or Bezos’ Amazon stock? If not, why?
The same theme holds but still fairly different scenarios. Asana/Amazon stock signifies partial ownership of those companies derived from the value of their future cash flows. FTT was just an invented token trading on the confidence of FTX, but with no intrinsic value, hence a greater probability of it nuking to 0/
Overall though, Dustin/Bezos’ holdings in each respective company are likely to warrant significant haircuts on their personal balance sheets. Rule of thumb is the more concentrated ownership, the higher the haircut, and the less liquidity, the higher the haircut. They both have significant ownership, so even though it’s fairly safe to estimate higher liquidity in public markets, their concentration of ownership warrants a significant haircut.
I think what’s so significant about the FTX/Alameda case tho, and why the FTT should have been considered effectively worthless on their balance sheet, even given the high market price, was the massive concentration of self-ownership (not to mention the Binance concentration risk) AND the very low liquidity.
Ah! My understanding was that FTX bought back some amount of FTT with their profits each week, giving it intrinsic value (conditional on FTX continuing to exist) dependent on FTX’s future cash flows, and making it feel fairly analogous to stock to me. Though I’m not aware of the exact mechanism, and can easily imagine eg the amount of money going into the pool being independent of the total amount of FTT issued, and the total amount issued being non transparent, making the actual intrinsic value ~0 (essentially really diluted stock)
Good call and looks like they were fairly trainsparent with most of the info you’re referencing here.
I guess I’m still not sure at what point, even in a best case scenario, the “buy and burn” mechanism actually would drive intrinsic value in the coin though? From a pure supply and demand perspective maybe, since the better FTX does, the more scarce the coin is and the more demand there is for it… but isn’t that just a sort of strategic market manipulation within the exchange?
Albeit that could have worked had FTX reached a point where it was strong enough, but I think they effectively nullified that opportunity by using so much FTT as collateral that needed to be more liquid while treating it as if it was.
This sounds like a sort of EA congressional investigation. An important part for that, which I don’t know how to make happen, is to make sure the investigators are accountable to EA while not being controlled by the “executive branch” which is being investigated. One would think some kind of democratic processes would help.
This seems directionally right to me. My current view is that an investigation should stick to objective questions rather than normative stuff about, for example, whether the EA movement is in principle OK taking funding from the crypto industry (or some other potentially destructive industry). I think my thinking here is that a person who isn’t involved in EA should think about those objective questions, and then folks in the EA movement itself should make arguments for and decide on the future direction in response. I trust a lawyer specialised in independent investigations to do the fact-finding work and the ‘what went wrong’ work, but not to make principled judgements about what EA should think or do more broadly.
It’s definitely true that there are more philosophical questions that a lawyerly investigation wouldn’t be well-positioned to answer. But it seems likely that there were plenty of legal and financial risk-management mistakes that EA orgs made in the pst year that an independent investigator or other outside risk management consultant would be well-positioned to opine on.
A meta level structural problem may be that so much decision making seems to be focused on a relatively small group of people without much oversight. Even with the best people in the world that’s going to lead to group think and blind spots. Other charities and non-profits have extensive oversight systems that may be worth imitating.
Much more sensible.
Let me kick off on point 4: I don’t think it is accidental that EA’s philanthropic model of social change leads to the concentration of power in the hands of a few people with outsized riches, or control over those riches. Why has the movement never even thought of democratising itself? Recall that JS Mill, being the utilitarian he was, argued for democracy on instrumental grounds—mostly because it led to better epistemic and cultural outcomes.
I disagree:
Wherever there is money, there will be fraud. That’s why we have financial regulations, and why professional charities have accountants and auditors.
This could be a fatal blow for any charity that had become dependent on SBF’s funds… which is exactly why GiveWell already has a rule that limits any single donor from giving more than (I think) 50% of funding for any one cause.
Rationally, the only way in which the EA community should change is in taking a deeper look at whether the key EA figures that have taken SBF’s money could have been his “partners” infraud.
Even if this possibility is small, a professional investigation should happen because there is a non-trivial risk that this had happened
FWIW I don’t know why you’re being disagreement voted, I broadly agree. I think the money amounts at play here are enough to warrant an investigation even with a low possibility of uncovering something significant.
Thank you.
I’m certain that the disagreement votes comes:
Partly from those who believe that SBF acted out of fanaticism for EA (“Scam To Give”) and think that researching that should be our priority.
Partly from those who feel offended by me suggesting to research whether key EA figures could have been SBF’s “partners” in fraud… which I highly doubt.