There's Too Much That Doesn't Add Up With FTX

At this point, there's a lot that isn't adding up in the current FTX-Bankman-Fried narrative, even among the more skeptical commentators. Let's just start with John Ray III, the new CEO of FTX who is to supervise its liquidation, whom I quoted yesterday as saying, “From compromised systems integrity and faulty regulatory oversight abroad, to the concentration of control in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals, this situation is unprecedented.”

More succintly, he's saying the Bankman-Fried-Ellison clique who putatively ran the company couldn't organize a two-car funeral. So let's ask a very basic question. The evidence we have is that they suffered from serious cases of ADHD, which simple research shows renders its victims incapable of planning complex tasks, conducting sustained research, or even sitting still for fairly minimal periods. Sixty years ago, I went through five years of the Ivy admissions rat race.

I don't know how much of it has changed, but at least back then, you had to sit for a lot of exams, and the SATs were just a start. I remember another one where I had to sit in a classroom for several hours on a sunny Saturday doing sight translation of Latin. I think there were other SAT-like exams for the National Merit Scholarship. And of course, you had to take advanced placement courses. Based on the minimal research I did via web search, an adolescent with ADHD would not only be incapable of the sustained learning effort required to do well on such exams, but wouldn't even be able to sit still long enough to fill in all the circles with a number 2 pencil.

Now, I was flying coach, I've got to acknowledge. As Jerome Karabel pointed out in The Chosen, the Ivies have different admissions "baskets" for different kinds of candidates, but the airline analogy breaks down. If I get on a Delta flight, I know exactly how many "baskets" there are, first, business, and coach, and their relative sizes. At Harvard, nobody knows just how many "baskets" there are for an entering class, nor how many are in them, and that's in fact a closely guarded secret. I assume I was in a "basket" for white gentile public school kids from Northeastern suburbs, and I had to pay full coach fare, which included high GPA, high SAT scores, prestigious extracurriculars, alumni recommendations, and so forth.

If elite-school admissions are anything like they used to be in my case, there were and probably are additional "baskets" for kids like the Bankman-Fried clique, offspring of influential people who wouldn't remotely qualify for the SAT-plus-GPA "basket". That's the only explanation I can see for Ellison and the Bankman-Frieds, who simply don't come off as the usual kids with enough talent to finish at an Ivy and go on to law school, medical school, business school, engineering school, or a PhD. But that simply leaves us with the question of who got them into the other "basket" -- they didn't make it on their own.

And let's keep in mind Mr Ray III's assessment, they were "a very small group of inexperienced, unsophisticated and potentially compromised individuals". They were doofuses, but he threw in the word "compromised" on top. "Compromised" how? Who owed what to whom? If they weren't capable of running a two-car funeral, who was actually running the show? This was a scam in the $50 billion range. SBF looking cute in the obviously posed shot above snoozing in a beanbag chair is just window dressing. If he wasn't even capable of organizing something on that scale, somebody else was.

The Enron and Madoff swindles, comparable in size to FTX, required a lot of window dressing to convince investors they were legitimate. Enron had a phony trading floor where employees had to sign up for shifts where they looked like they were trading electricity and natural gas for the benefit of visitors. Madoff had two separate floors in his building where employees made up fictitious account statements that purported to show non-existent stock and options trades. Let's face it, FTX had to have an equivalent operation, and it wasn't the one in the posed photo with SBF in the beanbag chair. Someone was running it who could indeed organize a two-car funeral, and we so far know nothing about him.

Next piece that won't fit in this puzzle: just this morning I caught up with some legal developments in the case:

According to Reuters, Sullivan & Cromwell has been named as one of the advising law firms to the disgraced crypto exchange, FTX, in its bankruptcy proceedings. . . . The selection of Sullivan & Cromwell as a bankruptcy advisor to FTX might be problematic for some of its looted investors and customers, given Sullivan & Cromwell’s past work for FTX.

The General Counsel of FTX.US, the FTX exchange serving customers in the U.S., is former Sullivan & Cromwell partner, Ryne Miller, who had co-chaired the law firm’s commodities, futures and derivatives group and worked at the law firm for eight years prior to joining this speculative, upstart crypto exchange. Miller had previously served as legal counsel for the current SEC Chair, Gary Gensler, when Gensler was Chair of the Commodity Futures Trading Commission. FTX.US is also included in the recent bankruptcy filing of FTX, despite Bankman-Fried Tweeting that the firm was fine just days before the bankruptcy filing.

Another Sullivan & Cromwell partner involved with FTX is Ken Li, who represented FTX.US last year in its acquisition of crypto derivatives firm, LedgerX, which provides trading in crypto futures, options and swaps to both retail and institutional clients.

But of greatest significance was Sullivan & Cromwell’s representation of both Alameda Research and FTX in their joint bid to purchase the assets of bankrupt crypto exchange, Voyager Digital Holdings, last year.

Sullivan & Cromwell appears in Wikipedia's entry for "white shoe firms", of which it says,

The term originated in the Ivy League colleges and originally reflected a stereotype of old-line firms populated by White Anglo-Saxon Protestants (WASPs). . . . In the 21st century, the term is sometimes used in a general sense to refer to firms that are perceived as prestigious or high-quality; it is also sometimes used in a derogatory manner to denote stodginess, elitism, or a lack of diversity.

So here we have Sullivan & Cromwell, among the whitest of white-shoe institutions, knee-deep in the non-WASP mud of a $50 billion scandal, not only hired to clean it up, but cleaning up a mess it was at least partly responsible for creating.

It's hard not to think the prior associations of many background figures, for instance the parents of the Bankman-Frieds and Caroline Ellison, weren't just random. Isn't it odd that both sets are married to each other on prestigious faculties, Stanford and MIT, at highly selective schools, Stanford and MIT, that somehow mutually accepted their underperforming kids? Pure concidence. How come all three of those kids then worked together at Jane Street Capital, a quantitiative trading firm, when the ADHD disabilities of all three presumably would have prevented them from doing precisely the same sort of complex mathematical calculations that would normally be required of traders there? Pure coincidence, and I'm sure they did quite well there.

Maybe I just don't understand David Brooks's new meritocratic American upper class. I guess there is in fact much to learn.