The ABCs of SBF and FTX

If you’re like most people, trying to understand cryptocurrencies, blockchains, bitcoins, and the like is likely to give you a headache.

One of the basic tenets of the entire crypto scam is to make the entire thing as opaque as possible, thereby ensuring that you can snare as many marks — excuse me, “investors” — as you can with important and wise-sounding gobbledygook.

This has been the modus operandi of Sam Bankman-Fried (SBF), the self-styled king of crypto who was so good at dishing important-sounding bullshit that he managed to snare “Smartest Guys In The Room” venture capitalists — Ivy League grads, many of them — into investing gladly and knowingly in his scams.

Fortunately, Professor Jennifer Taub, Esq., has one of the best bullet-pointed explanations I’ve seen of what’s happening with SBF, FTX, Alameda Research, etc. — and what will likely happen to SBFin the future:

  • A Hedge Fund Is Born: In October 2017, SBF, then a 25-year-old MIT grad, and his friend Gary Wang founded a hedge fund called Alameda Research LLC, with SBF owning 90 percent and Wang the remainder. Organized under Delaware law, it operated in the U.S., the Bahamas, and Hong Kong.
  • Hedge Fund Control and Funding: SBF was the CEO of Alameda from its founding until October 2021, when his friends Caroline Ellison and Sam Trabucco became co-CEOs. Then in August 2022, Ellison became Alameda’s sole CEO. Despite the title change, even after October 2021, SBF “remained the ultimate decision maker in Alameda” and “directed investment and operational decisions, frequently communicated with Alameda employees, and had full access to Alameda’s records and databases.”
  • Borrowed Money, Volatile Assets at Alameda: Alameda borrowed to invest in crypto assets. Don’t worry about what the hell a crypto asset is. Just pretend it’s some highly volatile asset you’ve read about before, like Dutch tulips in the 1630s or ostrich feathers in the early 20th century, or toxic mortgage-linked securities in the early 21st century.
  • A Sibling Corporation Is Born: In May 2019, SBF, Wang, and Nishad Singh started a new business with SBF as the majority owner. This business let customers trade crypto assets with each other. Organized in Antigua and Barbuda as a limited corporation, it did business as or FTX.
  • FTX Control and Investors: From the time of FTX’s birth until SBF resigned as its head in November of 2022, SBF was the “ultimate decision-maker” at FTX. To fund this trading platform, SBF raised more than $1.8 billion from investors who purchased an equity stake in the corporation.
  • Risky Business at FTX: Customers of FTX could trade crypto assets (think tulips, ostrich plumes, and crappy investments) for fiat currency (meaning legal tender, such as dollars). They could also engage in still riskier transactions involving lots of borrowed money.
  • Allegations by SEC: The SEC alleges that between 2019 and 2022, SBF defrauded the FTX investors (at the same time, he was defrauding the customers). Specifically, for years, he had been diverting FTX customer funds for his use and to support Alameda. The SEC detailed that SBF used customer assets to purchase luxury real estate, make venture investments, and to fund significant political donations. The SEC said he lied to prospective investors in FTX when he claimed that sophisticated systems protected customer assets and that Alameda was not given any special treatment. The SEC said he “provided Alameda with significant special treatment on the FTX platform, including virtually unlimited ‘line of credit’ funded by the platform’s customers.”
  • More Investor Fraud After the Crypto Crash: In May 2022, when crypto assets began to plummet, Alameda faced repayment demands from lenders. So, on top of the money SBF siphoned from FTX customer accounts, he allegedly “directed FTX to divert billions more in customer assets to Alameda to ensure that Alameda maintained its lending relationships and that money could continue to flow in from lenders and other investors.” It was only in November 2022 that this “brazen, multi-year scheme finally came to an end when FTX, Alameda, and their tangled web of affiliated entities filed for bankruptcy.”

It contains explanations for some things I did not know already.

Jennifer Taub is the author of Big Dirty Money: The Shocking Injustice and Unseen Cost of White Collar Crime (Viking), is a professor at the Western New England University School of Law and the host of the new podcast Booked Up With Jen Taub. Follow Jennifer on Twitter @jentaub

The amateur online sleuth who brings down crypto scammers in his spare time

Charlie Warzel, the guy behind The Atlantic’s column Galaxy Brain, talks to James Block, the amateur online sleuth who helped bring down Sam Bankmam-Fried (styled “SBF”) and his FTX/Alameda empire. Block followed the money and eventually figure out that FTX was likely commingling investor deposits in ways that it should not have been doing.

On Nov. 4 Block did a post titled “Is Alameda Research Insolvent” that helped create a run on FTX by investors after everyone started realizing that it was all a house of cards.

But, then again, much of crypto is one big Ponzi scheme, pumped and dumped by ultra-wealthy investors like Elon Musk while the little guys lose their life savings.

These parts of the James Block interview caught my eye most:

Warzel: There’s this idea that crypto is supposed to be decentralized and deeply transparent, that it’s supposed to be so easy to see where all the money is going at all times. And some of your work speaks to that promise. But it also strikes me that these centralized entities like Alameda or FTX play in the crypto world, and yet their balance sheets are not transparent. FTX is not a decentralized entity.

Block: There’s always stuff going on the blockchain, but these companies also have agreements off of the blockchain, right? Everything they have inside these exchanges is not on the blockchain. It’s using regular old database technology, and it’s not traceable at all. So yeah, a lot of the most important economic activity in crypto has nothing to do with blockchain at all. Huge percentages of people who do this kind of retail crypto trading, they don’t even know how to take what they bought off the exchange and put it in their own wallet.

Warzel: Post-FTX, I’ve heard a lot of chatter from crypto true believers about what needs to happen to the ecosystem. But what’s always struck me as a foundational problem in this space is that decentralized finance seems to have no real utility behind it. So much of what is created is just financial instruments and speculative assets. Can you speak to that part a bit?

Block: The AMC-meme-stock thing is a good example of how this can happen. People buy the stock of a semi-worthless company because they have this idea about short squeezing, or whatever. They are not financial experts and have a loose or maybe even wrong understanding of how finance works, and want to try to move the market. Crypto takes this abstraction a step further, because there’s nothing linked to it at all. There’s no economic activity in this space. There’s nothing produced by these companies. In fact, it’s a negative-sum game because of the cost of running the blockchains alone—the computational cost is tremendous. The amount of time and money people put into just running these things is tremendous. And they produce nothing of value. There’s a reason these massive companies aren’t all using blockchain for their processes: It is incredibly inefficient. And realistically, who actually wants their financial information public and visible to everybody?

The vast majority of people who got involved in this have no interest related to the technology or in the political or ideological aspects of crypto. They just see an opportunity to get rich. And a lot of those people end up absorbing and parroting some of the crypto ideals back to you, but they don’t really care to understand what’s going on. It’s just their excuse for what they’ve already done, which is gamble on something they thought was going to make them wealthy.

Warzel: Do you think most entities in the crypto space are insolvent and know it, and are just pretending right now, post-FTX?

Block: Absolutely. That’s because of what I said earlier about crypto. There’s no value created by any of these companies. It’s all just moving money from Person A to Person B. And look at the economic conditions. You have interest rates rising; people and companies are being squeezed economically and not willing to gamble. The fact is that there are fewer suckers aping into this system, and Ponzi schemes rely on new money to survive. I think most crypto companies are, like FTX, just borrowing from customer deposits to keep things afloat. And even the companies that aren’t doing that—I think Coinbase, for example, isn’t doing anything illicit, but their business model is based on this ecosystem where new money comes in. And that’s stopping.

Warzel: By that logic then, what is the future for crypto? Do you see this ecosystem existing in a few years?

Block: I mean, Beanie Babies still exist. Pogs still exist. Will bitcoin still exist? I think it’ll be like owning a ham radio, with hobbyists doing their niche thing together. I mean, who knows. But you know if they were to really regulate the industry, it couldn’t work the way it does. It would look unrecognizable.

Just another way for the mega-rich to get even wealthier by screwing retail investors. But yet there are still untold people out there who worship Elon Musk and the ground he walks on.

Here! Take my money!

Right-wing banking startup may be close to bankruptcy

My, my, my.

Yet another (alleged) right-wing charlatan manages to sleaze money out of some MAGA leading lights in exchange for a failing project that sounds as if it never really had a coherent business plan to start with:

An A-list group of financial backers including Ken Griffin and Peter Thiel gave Toby Neugebauer tens of millions of dollars to build a new kind of bank—one aimed at people who see Wall Street as too liberal.

The potential customer base was huge, Mr. Neugebauer and his business partner, former Mike Pence chief of staff Nick Ayers, told the investors. Plumbers, electricians and police officers, the pitch went, are fed up with big banks that don’t share their values.

The startup, called GloriFi, initially aimed to launch with bank accounts, credit cards, mortgages and insurance, while touting what it called pro-America values such as capitalism, family, law enforcement and the freedom to “celebrate your love of God and country.”

Within months, the investors’ money was nearly gone, and GloriFi was on the verge of bankruptcy. It missed launch dates, blaming faulty technology and failures by vendors, and laid off dozens of employees. It stumbled with products; for instance, a plan to make a credit card out of the same material used for shell casings failed when the company realized the material could interfere with security chips and potentially be too thick for payment terminals, according to people familiar with the matter.

Some employees alleged that Mr. Neugebauer had a volatile temper and drank on the job, and the company’s unusual workspace—Mr. Neugebauer’s home—added distractions.

After months of disarray, Mr. Ayers, who didn’t have a managerial role, and some top investors unsuccessfully pushed for Mr. Neugebauer’s ouster as chief executive, according to people familiar with the matter.

Mr. Neugebauer said no investors asked him to resign, saying he had “nothing but support.” Of the criticism of his alleged drinking, he said, “The attacks on what I do in my home after 5 p.m. are beneath” The Wall Street Journal.

“Our 84 co-founders and our great partners stick by our accomplishments,” Mr. Neugebauer said.

As the Wall Street Journal article goes on to note, it’s been pretty much a train wreck from start to finish.

My favorite part is the selling point that “the potential customer base was huge.”

I don’t think the MAGA world is all that big to start off with. They’re such loudmouths that they get a lot of attention and they suck up a lot of political oxygen. But I think the hardcore true believers stand at about 33% of the GOP faithful and it seems to be staying around that number.

But then you whittle those numbers down to potential customers who are willing to walk away from their established FDIC-insured brick-and-mortar bank just because the brick-and-mortar bank tries to be responsible in its banking practices?

I don’t think the MAGA world is populated by a bunch of financial geniuses, mind you.

I just don’t think that many of them will be willing to risk their life savings to send a message of Bank of America about investing in fossil fuels.

From the GloriFi home page.

It’s not just loan forgiveness; Biden also re-wrote loan repayment terms for many students

One of the things I try to stress to conservative boomers my age is the fact that, when we were young in the 1960s and ’70s, corporations paid something resembling their fair share of taxes, at least with federal taxes.

The federal corporate rate was graduated, with top rates on corporate income over $25,000 topping out between 48 and 52 percent. (It’s now 21 percent tops.)

And that system in the 1960s and ’70s seemed perfectly normal to everyone, and a lot of corporations just paid their taxes because there weren’t all of the overseas tax havens where corporations could claim a post office box in Malta as their headquarters.

(An aside: Malta had been effectively taxing foreign corporations at a rate of 5% even if their “headquarters” was a single-person office above a laundromat. Malta is being punished, at least for now, because of the way it encouraged these kinds of tax crimes. Great article here.)

The point of all of this is that, when corporations were good civic citizens, cities and towns and states had plenty of money to have people on their payrolls who were paid livable wages. Teachers weren’t paying for school supplies, schools had plenty of books and school nurses and guidance counselors and music/art programs. Public parks and street/bridge repairs were adequate to what was needed.

Public universities and colleges were well-funded by the state and federal governments and, in fact, got much of their operating budgets from public funds. So tuition was also low.

Then the Republican Party started to be taken over by right-wing billionaires who financed candidates and ad campaigns to convince Americans that corporate taxes were too high, that private sector workers were somehow inherently more efficient than government employees (they’re not) and that every dollar spent on government was a dollar that corporations could not spend to improve their profits that those corporations would magically “trickle down” to average workers.

Of course none of that money trickled down and today we know that record corporate profits end up nowhere remotely close to average workers, but instead make fabulously rich people even richer.

I bring all this up because my fellow boomers seems to forget how well government functioned before Ronald Reagan was elected. How much more fair it was– to everyone.

And once you realize how much better you had it than college students today, perhaps you can actually be happy about the things outlined in this CNBC article:

The day the Biden administration unveiled its highly anticipated student loan forgiveness plan was a “celebratory day” for Justin Short.

Short, 34, graduated from the University of Missouri in 2012 with a degree in hospitality management, $47,000 in federal student loans and $5,800 in private student loans. Like many borrowers, his college debt has plagued his personal and financial decisions for years.

So while he found relief in many of the announcements coming from the White House on Aug. 24 — $10,000 in debt forgiveness, another payment pause extension through the end of the year — Short was most interested in the announcement of proposed changes to income-driven repayment plans.

The Department of Education’s new plan would cap monthly payments on undergraduate debt to 5% of discretionary income, down from the usual 10% to 15% on existing plans.

The proposal also raises the amount of money considered non-discretionary income and shielded from being used to calculate student loan payments.

It would cover any accrued unpaid interest so that no borrower’s balance would grow if they made a qualifying payment.

And it would forgive loan balances after 10 years of payments, instead of the usual 20, for those with original loan balances of $12,000 or less

This “sleeper” detail of the loan forgiveness plan could be “a game-changer” for millions of borrowers with remaining balances, says Julie Peller, executive director at Higher Learning Advocates, a bipartisan higher education nonprofit.

“I wish people were talking about this more than the $10,000 piece,” Short says, “because this will put more money into the pockets of everyday, middle-class Americans who need that extra help, especially when student loan payments resume on Jan. 1.”

“This has huge implications,” he adds.

As I said earlier, college was cheap for most boomers who attended public universities. So cheap that student loans tended to be small — if you had one at all — and the terms favored students instead of the banks. Unlike today where even some student loan borrowers who pay regularly on their loans watch in horror as the principal barely goes down. (See this article about student loan borrowers who are now paying on student loans into their retirement years.)

If you had suggested to boomers when we went to college that we would have to borrow $100K or more, on terms that meant we would be paying until after we retire, we would have thought you were crazy.

So loan forgiveness seems like simple fairness to today’s students whose only real mistake is that they were born too late to benefit from the way things used to — and still should — operate.

Because, even those of us boomers who had students loans and paid them off were still recipients of government educational assistance. We just never saw it because it went to the universities and colleges to subsidize our low tuition.

College students in the 1970s.

U.S. takes first step toward making filing your taxes as easy as it is in other countries

The United States is an outlier in its tax filing system in that it requires you to fill out tax forms on paper or online which provide the Internal Revenue Service with information it already has in its system for the vast majority of Americans who do not itemize deductions.

With President Biden’s signature on the Inflation Reduction Act, the U.S. has taken its first step toward finally making it easy and customary to file your taxes for free:

The United States has made a small but significant move toward creating a public system to allow millions of Americans to file their taxes for free.

The sweeping domestic policy bill passed by the House and Senate last week mandates that the IRS study options to provide a free tax filing option for Americans. That study represents a threat to the for-profit tax prep industry dominated by TurboTax, a product of the Silicon Valley company Intuit. President Joe Biden said he plans to sign the bill, the Inflation Reduction Act, today, following the party-line vote in the House to approve it on Friday.

The bill provides $15 million to study how the IRS could implement such a program, how much it might cost and how Americans would view it. The report, which must include the input of an independent third party, is due to Congress within nine months of the bill’s passage.

Unlike many developed countries, the U.S. does not offer free tax filing services for taxpayers, who instead pay billions of dollars every year to highly profitable private tax prep companies.

The industry has tried to block or subvert a government free tax filing system for decades.

Through information forms like W-2s, the IRS already has the info on wages and other forms of income in its systems that it would need to provide such a service. A recent study by researchers from the Treasury Department, Minneapolis Federal Reserve and Dartmouth College found that “between 62 and 73 million returns (41 to 48 percent of all returns) could be accurately pre-populated using only current-year information returns and the prior-year return.”

At a Senate hearing in June, Treasury Secretary Janet Yellen said she supported a new free filing service. “We need to develop a new system,” Yellen said in an exchange with Sen. Elizabeth Warren, D-Mass. “There’s no reason in the world that a modern economy shouldn’t have a system that makes it easy for such a large group of taxpayers to file their returns.”

There are reasons why so many tax preparation companies have storefront offices in poor neighborhoods. Residents in these low-income zip codes are far more likely to fall prey to companies that charge high fees — plus a percentage of any tax refund — on a service that is completely unnecessary for most low-income tax filers.

When you’re poor and only getting $300-$500 back with your tax refund, paying $100-$200 in fees can mean the difference between getting only spending money or getting enough money to catch up on utilities and pay for groceries.

Despite its shortcomings, the Inflation Reduction Act is turning out to be the most consequential legislation in decades. These small things are adding up to a revolution in the way the U.S. government approaches its relationship with average citizens.

You can read the rest of ProPublica’s excellent article at this link.

Equifax sends out erroneous credit reports on applicants for auto loans, mortgages and credit cards

If you were turned down for a loan — or were told your score required you to pay higher interest — from mid-March through early April of this year, you might want to find out if they used Equifax to run your credit report.

Equifax Inc. provided inaccurate credit scores on millions of U.S. consumers seeking loans during a three-week period earlier this year, according to bank executives and others familiar with the errors.

Equifax sent the erroneous scores on people applying for auto loans, mortgages and credit cards to banks and nonbank lenders big and small—including JPMorgan Chase & Co., Wells Fargo & Co. and Ally Financial Inc., the people said. The scores were sometimes off by 20 points or more in either direction, the people said, enough to alter the interest rates consumers were offered or to result in their applications being rejected altogether.

The inaccurate scores were sent from mid March through early April, the people said. The company began disclosing the errors to lenders in May, they said.

Equifax said it has since fixed the error, which the company described as a “technology coding issue.” The glitch didn’t alter the information in consumers’ credit reports, the company said.

“We have determined that there was no shift in the vast majority of scores during the three-week timeframe of the issue,” Sid Singh, president of Equifax’s U.S. Information Solutions, said in a statement. “For those consumers that did experience a score shift, initial analysis indicates that only a small number of them may have received a different credit decision.”

Yeah, I don’t think I’d take any credit-reporting agency’s word for it, but especially not Equifax.

You can read the rest of the Wall Street Journal article here.