Author Michael Lewis Delves Into What Went Wrong at FTX

Michael Lewis knows how to tell a story. He's given color to the characters behind baseball and the finance industry. Now, he paints a portrait of Sam-Bankman Fried, the infamous face of crypto who went from billionaire to bankrupt overnight.

Motley Fool CEO and co-founder Tom Gardner caught up with Lewis recently and they discussed:

• The downfall of crypto exchange FTX.
• The hold that FOMO has over Silicon Valley.
• Why organizations can't thrive without "keen emotional intelligence."

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on Oct. 28, 2023.

Michael Lewis: If you're a venture capitalist, your biggest fear is not that Sam Bankman-Fried, takes your money and you lose $30 million, it's that FTX is the next trillion dollar company and you weren't there. That's the calculation they're all making is that this thing looks like a rocket ship. It actually, has gone in revenues from 20, to 100, to 950, to a billion, and the revenues are going to be a byproduct of how many people want to gamble in this casino.

Mary Long: I'm Mary Long, and that's Michael Lewis, the author and financial journalist behind best-sellers like Money Ball and The Big Short. Earlier this week, Motley Fool CEO and co-founder Tom Gardner caught up with Lewis at a special event for Motley Fool One members. Tom talked to Lewis about his latest book, Going Infinite, which follows the meteoric rise and fall of Crypto's one Golden Boy, Sam Bankman-Fried.

Tom Gardner: In a way, I may have one question for you and that's it, or I may have 712 other questions, so there's no real in-between. So here's the first question. Could you tell the story of FTX? Two versions. Version Number 1 is the version where Sam Bankman-Fried is overwhelmed, doesn't have good operating capabilities in the organization, and is genuinely making an effort to advance his ideals and to do something he believes in and his intentions are good. That's Version 1. Version 2 is he's a fraud and he was a fraud from the very beginning. Please tell the two versions if you can.

Michael Lewis: [laughs] Tom, you've gotten lazier as an interviewer.

Tom Gardner: Thank you. I said I have 714 other questions.

Michael Lewis: The fraud from the very beginning gets complicated because I don't actually know how to do what you just described, so you have 712 questions. Because I think the story that reveals itself in the book is one leading to the other. It starts with catastrophically bad management controls all the rest and then tilts into something else. For example, it doesn't start with him creating an exchange so he can take customer deposits. We know that because he doesn't even want to create an exchange, that he's got this trading firm and it's modeled on the Jane streets of the world, it's a high frequency crypto trading firm, and it's found the existing crypto exchange infrastructure inadequate and they build something they want to trade on and they try to get all the other crypto exchanges to just buy it from them, or maybe get a licensing fee from him. Sam and has a little collection of effective altruists they don't think they actually can deal with ordinary people. They would have no idea what a customer is and don't want to know. It's only after everybody turns them down that they even start the exchange.

The idea is like it was set up to like steal people's money, that doesn't ring true. The idea that it's a simple Ponzi scheme. His definition of a Ponzi scheme, and I don't think this really exactly fits it, it's two businesses. The exchange ends up being, there's walkie stuff that goes on it, but the business itself was very lucrative, it was a simple business. By the end, they were trading $250 billion of crypto a month on it, and they'd take out a little fee. The revenues are somewhere between $900 million and a billion dollars a year. One of the mysteries of the story, if you start thinking about it in any detail or with any nuance, is that virtually everybody inside FTX went down with it.

That all the employees had not only their life savings, but like family members and all the rest. It's because they only saw the FTX part of it. FTX looks to the people who are inside of it like it's a money machine. What could go wrong here? The problem is there's this other business, and it's the legacy business. It's the business he started when he leaves Wall Street, Alameda Research, which starts as we're going to be Jane Street for crypto. We're going to exploit little inefficiencies in the crypto markets. It's a good idea, but it would be a much better idea if you had Jane Street Management doing it because it's 20 effective altruist and Sam. Sam doesn't care and none of the rest really know how to build one of these firms.

In the end it's simple, but there was a complicated mechanism by which it ended up putting FTX in total peril. The trial is going on now. I'm going to the trial on Thursday and Friday and Monday to watch. I think Sam Bankman-Fried testified. If he does that, I'm going to go for it. I had expected the trial to answer a couple of questions that I was left mystified by. I finished this book in August and one of them was, and you would think this would have been resolved, but I don't think it has been. But where the money went. The hand wavy thing is Sam Bankman-Fried, took customer money and he spent it on condos in the Bahamas, and political donations and irresponsible venture capital investment. But if you actually look at the details of the money they actually spent, it's a fraction of what they've lost. I expected the prosecution to figure out through the other principles, where that money went. I assume they were like some big crypto trades that we just didn't know about.

Tom Gardner: Some hacks.

Michael Lewis: It's some hacks but it's clear from the trial, the trial has made this even murkier, that even the people who are testifying for the prosecution like Gary Wang thought were against closing down Alameda as recently as last September because they think it's profitable. They think it's making $400, $500 million in trading profits. That lined up with my reporting that the rank and file in Alameda thought that this day to day trading was profitable. The other odd thing is, and nobody's talking about this.

Tom Gardner: Anthropic?

Michael Lewis: Well, not just anthropic, it's interesting, it's not admissible in court. But the bankruptcy people, had the last report they filed, they gave us some numbers. I've been using their numbers, but there were $8.6 billion in customer deposits missing and that they had located $7.3 billion already. This is before selling some very value like maybe a $3 billion stake in anthropic and the location, John Ray who was running the bankruptcy said, it's crazy man every day we're finding money. It's like lost keys. It's not like they're going and getting the money back from some politician that Sum Bank Murphree gave it to. Though there was a little bit of that. They are actually accounts that are at crypto firms, at banks where the money is. This lines up with one of the first people who in the room when it all starts to fall apart, is struck by how the principals didn't seem to even know where like they were looking for the money. A call comes from a bank saying, hey, we got $300 million of your money, you want it back? I would love to be a fly on the wall of this process because it is entirely possible that we are going to be sitting here in a year and Sum Bank Murphree is going to be sentenced to 50 years in jail and the depositors are going to get their money back.

Tom Gardner: Well, I would say it's almost certain they're going to get their money back at this point, I think Bernie Madoff, the 27,000 victims of Bernie Madoff are at 88% repayment at this point 13 years later. But go ahead.

Michael Lewis: Well, but it's different because in the case of Madoff, the way they got their money back was people who Madoff had paid it out too, had it clawed back from them. In this case, the money appears to be there, like it's different. This isn't claw backs. There may be a whole other round of, well, John Ray and the bankruptcy people actually go and succeed in clawing back money. The Sam Bankman-Fried gave away or invested a year ago. But that's not what's happened so far, that's the next step. What's interesting is in order to claw money back, the rule of that game is you have to show that when the money was a couple of things. But one of the things you need to show is that when the money was given or paid or whatever by Sam, that FTX was bankrupt and they haven't actually been willing to say when FTX was actually bankrupt. And the prosecutors aren't really willing to argue that there's a hole there until last June, so that would mean that everything before June is unclaw backable. The Madoff thing is different, Madoff thing is like, it was a very classic Ponzi scheme. This is just different. I'm not saying it's good, I'm just saying that we have a new story in the history of financial scandals. It rhymes with some other stories, but it's not exactly the same thing.

Tom Gardner: Have you ever read the book Famous Financial Fiascoes by John Train?

Michael Lewis: God Age is that's an old book.

Tom Gardner: That's an old book, but it's a great collection of somewhere between incompetence and fraud, but usually tilting more toward fraud. I only want to follow up with this question one more time. What percentage of this do you think is incompetence and what percentage of this do you think is opportunistic, intentional, and criminal?

Michael Lewis: It's obviously criminal in that he's going to go to jail. Even the facts that were agreed upon going into the trial by both sides, it was hard to see how you were going to tell a story that kept you out of jail if you were Sam, because nobody was disputing that the money was in the wrong place and that had been in the wrong place from the very beginning that when they started the exchange, the exchange couldn't get bank accounts, so they used Alameda bank accounts and so if you Tom sent in dollars to FTX, you were actually wiring it to Alameda and you'd have gotten a statement that said it's going to Alameda. That in itself is probably like game over. The intention, let me get myself in a little trouble and I've already gotten myself in so much trouble, let me keep doing. Because it's interesting, because we live in a world right now. This is [inaudible] and Tversky land where after the fact people go back and tell a story. It makes it all seem much simpler than it was.

Tom Gardner: You published the book in August, so it's much more of a real time journalistic expression then.

Michael Lewis: Yes.

Tom Gardner: Now that I have gathered these documents over the last 12 years, let me explain exactly what happened and where we should be judging and where we should be just simply evaluating.

Michael Lewis: But everybody and their brother Sam Bankman-Fried has no friends like everybody thinks he is a criminal, everything's going to jail and everybody thinks in some way obvious. It was obvious to zero people until it all fell apart. It was obvious that you could say about any crypto firm. There's likely something going on there that you don't want to know about or you do want to know about. That was true across crypto, but no one said the thing that would have brought it down immediately which was the customer's money is in the wrong place. Sam Bankman-Fried, part of the fun of this story is the mirror he holds up to the culture. It's like when things were going well, there was no one who had a bad word to say about it. He could get into any political office he wanted to, have dinner with any celebrity he wanted to. Part of120 Venture Capital firms invested in him. If it's all so obvious, why wasn't it obvious then? The intent thing is where it gets messy. No one wants to believe this, but this is why it makes it such a fun, an interesting story to me to tell. There's no question in my mind that he and his group like we're all in on the effective altruism idea.

Tom Gardner: Can you explain what effective altruism for somebody hasn't encountered it?

Michael Lewis: You're probably going to start laughing at some point, so it's a philosophical movement that began in Oxford in 2008, grew out of utilitarianism. And it was these Oxford professors arguing that not only do you have a duty to philanthropy, but that you should start thinking about how you spend your dollars and your time in a more rigorous way to maximize the benefit to other human beings.

A philosopher named Ord Toby would writes a famous paper showing that if he just gives half of his salary away for the rest of his career, he could, for example, prevent blindness in 80,000 African children if he gives it away in the right way. It begins as an argument about being rigorous, about doing good for others, but being really hard nosed about it, rather than just losing about it. But it pretty quickly morphs into this rationalist, almost cult like thing. The first step is that if you are a person who can go make a lot of money on Wall Street, much better that you use your time to go make a lot of money and give it away. Then you go do good things so that you don't go be a doctor in Africa and you go make money and pay for 50 doctors go to Africa.

This idea infects Sam and his crowd. That's why they think it's earned to give is the idea. But then when it gets really jumps to shark is they start arguing about like what is the most efficient way to save, maximize the number of lives you save and they turn their attention to existential risk, AI, pandemics, climate on asteroids. What can you do to reduce the likelihood of any of these existential risk to humanity coming about? Of course, estimating the likelihood of the risk is itself a very dubious enterprise. But once you're there, you're in a place where you're talking about hundreds of billions of dollars are needed to address the problem. They're government size problems. Whatever you think of this, these people lived and breathed this stuff and Sam Bankman-Fried status in his sense of self was he wanted to be the most important person in effective all through, that was his thing. When you start looking at motives, it doesn't excuse anything and everybody thinks I'm trying to make an excuse for, it's just the facts of the case. It's interesting how people crawfish their way into certain behaviors with odd things in their mind.

Tom Gardner: I remember the Rigas family of Adelphia Communications, if you remember that story in cower sport PA, I think it is in Pennsylvania. They had become such big charitable donors in the local community that when people began to identify that there was some fraudulent behavior at Adelphia Communications, no one locally believed it or wanted to believe it. I'm not going to move my belief system beyond the capital I've been given by this individual or this organization. That town would have been almost 100% supportive of the decision making outcomes, everything at Adelphia Communications. But once you got out of that zip code, once you weren't part of the recipient group, you saw that there was something outrageous going on and obviously that company in stock got crushed.

Michael Lewis: Yes. It is completely true that part of the charm of Sam Bankman-Fried and why he had the social power he had, which in itself is extraordinary. He goes 0-22 billion in 18 months and the whole world without really knowing who he is, puts him in a position of unbelievable authority. You think about the history of like generating wealth. FTX was valued at $40 billion by venture capitalists. We live in an age where this thing happens. But it didn't use to happen like this. You used to have to like dig for oil and build a railroad. The speed of wealth creation is in itself, I think warping and distortive but his charm, it was something like this. I think a lot of people wanted there to be a Sam, that it's a byproduct of frustration with institutions and governments. That they wanted there to be this rich person who wanted to address problems that need to be addressed. That governments for one reason or another are paralyzed in the face of. I think this was part of the reason why he's able to move as fast as he is socially. If he was just another rich guy, I think it would have been a different story.

Tom Gardner: Let's put you in a new role in life. You're the Chief Compliance and Risk Management Officer for Silicon Valley. Actually, I'll expand that role if you'd like to have an even broader set of responsibilities. That is for all of our investors at the Motley Fool, all of us as investors, you're now our Chief Compliance and Risk officer because you've spent the time to study the most recent, most significant collapse.

Michael Lewis: What are the holes that allow this train wreck to happen? What are the mixing metaphors? One of them is that the big accounting firms wouldn't audit crypto. You already had not that the big accounting firms aren't capable of presiding over a disaster. But you already had a situation as a Silicon Valley investor where you're looking at firms that are not conventionally audited. They might have some little auditor you've never heard of if they have one, or they might just sketch out their balance sheets like a third grader on a piece of paper and fax it to you. In retrospect wasn't obvious. It wasn't obvious in the moment. Because 120 people invested in it. But if you go back and say, what should have we have flagged it is just like we're not going there. Well, I would say no board of directors is a pretty good sign, is a problem that if there's absolutely no one else who knows what's going on inside the business. Added to CFO, added to no organization chart, like you can't actually know who worked.

Tom Gardner: That was a pretty telling moment in go infinite when SBF simply asked why would I have a CFO?

Michael Lewis: Why would I have a CFO and actively hostile to organization charts and list of employees. The fact that you have the book there. If you take the jacket off the book and just hold it up. Look on the inside of the jacket. Sam because there are so many emotional problems and psychological problems in the company. The inside of the jacket. That is the only organization chart known to exist for FDX. It was created by the company's psychiatrist. It was and Caroline's personal psychiatrist who they moved to the Bahamas to deal with all the unhappiness in the company. The shrink can't get his mind around the problems people have unless he knows where they are in the organization. In therapy, he starts to tease that out. He creates the only organization chart, sticks it on a thumb drive and gives it to me and he vanishes, but Sam didn't know. You're asking for compliance. Those three things are tells you know what else is to tell. It's this fear. I don't know what to say about this exactly. If you're a venture capitalist, your biggest fear is not that Sam Bankman-Fried takes your money and you lose $30,000,000. It's that FDX is the next trillion dollar company and you weren't there. That's the calculation they're all making, is that this thing looks like a rocket ship. It actually has gone in revenues from 20 to 100 to 950 to a billion. The revenues are going to be a byproduct of like how many people want to gamble in this casino. It's the VC's I talked to and I interviewed them before everything went bad and after. Before it went bad, they said they thought Sam might be the world's first trillionaire. They're thinking like that. Now whether that's right or not, they're thinking that's scale. What I would say is Compliance Officer, whenever you come to me with a fear of missing out story and it's just like we got to do this because it's going to be that's where you got to be them.

Tom Gardner: Let's see if they have a board.

Michael Lewis: Yes, let's see. [LAUGHTER]

Tom Gardner: Let's just see if they have a board. It is funny. We had meetings with AdVenture Capitalist in San Francisco when we took our learning and development group at The Motley Fool to meet a bunch of companies in San Francisco when they graduated the program. One of them presented the challenge that they had faced at the firm, which is that they had decided to take the next incoming group of analysts and teach them about the mistakes that had been made in terms of the losers. They went through a whole process and they're like, it would be great just to remove a few of these and that analyst group ended up having the worst performance because they did remove the most losers. They removed the one Tesla or the one AirBnb. The math crushes you if you do that. They went back and said, we are now training our analysts to make mistakes to keep going as boldly as possible. That does open the door on investing in something, a business that doesn't have a board or a CFO and ends up being a total collapse.

Michael Lewis: It was also, this is also a story of the lure of crypto. That got me interested in this in the first place was not like Bitcoin, I was like assaulted by crypto people for ten years to try to write a book about him, and I never could get that interested. But when all of a sudden the market cap of cryptocurrency is at $2 trillion you're looking and you're thinking this is getting to the size where this is going to have social consequences. It isn't just like, a funny little gambling side show. The VC's are looking like how do we get into this? Because it got so big and you can't really blame them. Although you can ask them like why you didn't insist on some insight into the business, but if you had insisted you would have been left out. I mean it but. You're saying I'm the compliance officer. I would just say those are the moments where you were actually at the biggest risk doing something dumb. It's that, I got to be there, I got to be at that part.

Tom Gardner: We had a wonderful conversation with a professor at NYU, a business school named Dr. Melissa Schilling. She was talking about a book quirky that she's written. Really assessing the patterns of the great founder leaders of Companies, I think not entirely companies, innovators and the changes that they drove. She was identifying that they often wouldn't probably be high on the list of EQ. They might have been very high IQ, but they didn't do a good job of collaborative work, efforts in building consensus because they were separate from the group and they were thinking differently. They didn't have a filter to understand how they were being perceived by others. I'd like to hear from you a little bit of the SBF balance of IQ, EQ and how you think about that. How we evaluate leaders and what we should be looking for, knowing that you know, neither one or an emphasis on either one is going to automatically give you one winner after the other. But how should we, in evaluating leaders of private or public companies that we invest in evaluate somebody along the continuum of EQ and IQ.

Michael Lewis: Well, in the case of Sam Bankman-Fried, he defines one end of the continuum. That is, this is a totally socially isolated kid who knows he doesn't feel empathy or pleasure. He is unable to make facial expressions when, until he's 20 years old and does not feel your pain and knows like born with these qualities and people around him are always compensating for the fallout from his lack of interest in your emotional state and lack of sense of emotional intelligence. Nashard Singh who finished testifying against him said to me once back when things were good, he said, my job here has been to be Sam's emotional intelligence because he doesn't have any. But I watched him, he was patting him on the back, saying in the last six months he's subcontracted some of his IQ to use it as EQ and he's gotten a little better. But I think that to answer the second part of the question is like how you take that into account when you're evaluating someone who's doing something, creating a business. I mean, you can't create an organization of people without keen emotional intelligence. It is going to survive. It may be the person who creates the organization doesn't supply that, but the absence of it should be something that puts you on red alert. I think one of the ways I saw this story right from the beginning was this is what happens when you exalt a certain intelligence and pay no attention to other intelligence. They're constantly talking about they're only interested in really high IQ people. They're really only interested in people that are in math science. Sam at age seven begins to think anything in the humanities is all makes arguments. How Shakespeare is an idiot. It's that thing, that this isn't smart. This is a blind spot. It's a blind spot that you need to compensate.

Tom Gardner: It probably ends up being ultimately, more about evaluating the full team. If everyone starts anchoring at one end of that continuum or any particular skill becomes so emphasized in an organization that the other side isn't represented, you start to get imbalance and things blind spots emerge a potentially all over the place. Michael, if you were to testify, Judge, if you were to testify, do you think you would be helpful to the Prosecution or the Defense?

Michael Lewis: Probably the Prosecution because the fact what gets into a court room is pretty sterile. You're not allowed to introduce context, emotion, feeling, all that stuff, really. The facts that, the facts of the book that would find their way into the court all would just be damning. I mean, I could list them, but at this point, I don't think the prosecution needs a lot of help. Also at this point, it's funny lawyers, they don't like uncertainty. I think what I'd really be is a little ball of uncertainty that I would create a odd climate. I don't expect you to ask to testify.

Mary Long: As always, people in the program may have interest in the stocks they talk about and the Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Mary Long. Thanks for listening. Tomorrow we're playing another interview from our New York event. We'll see you then fools.