Motley Fool Hidden Gems Investing - Michael Lewis Interviewed by Tom Gardner

Episode Date: October 28, 2023

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 at a Motley Fool member event in New York. They discuss: The downfall of crypto exchange FTX and potential outcomes for Bankman-Fried’s ongoing criminal trial The hold that FOMO has over Silicon Valley Why organizations can’t thrive without “keen emotional intelligence” Host: Tom Gardner Guest: Michael Lewis Producers: Mac Greer, Mary Long Engineers: Tim Sparks, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

Stop wasting your nights on a mattress that doesn't get you. Experience the most comfortable mattress in the world. The Sleep Number Smart Bed. At the touch of a button, you can personalize your comfort. Choose firmer or softer. Adjust cooler to warmer. And right now, save up to $2,500 during our massive Labor Day event. Hurry into your local Sleep Number store today.

Because we have your number. If you're a venture capitalist, your biggest fear is not that Sam Bankman Freed 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 $9.50 to $1 billion. And the revenues are going to be a byproduct of how many people want to gamble in this casino. I'm Mary Long, and that's Michael Lewis, the author and financial journalist behind bestsellers like Moneyball 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 once golden boy, Sam Bankman-Fried. 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 one is the version where sam bankman freed 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 one and version two is he's a fraud and he was a fraud from the very beginning please tell the two versions if you can Tom, you've gotten lazier as an interviewer. I said I have 714 other questions. So, so, um, all right, let's, the, the, the fraud from the very beginning gets complicated, uh, because I don't actually know how to do what you just described. So you have 712 questions, Because I think the story that kind of reveals itself in the book is one leading to the other. I mean, it starts with catastrophically bad management controls, all the rest, and then tilts into something else.

Like it doesn't start, for example, it doesn't start with him creating an exchange so he can take customer deposits. And we know that because he doesn't even want to create an exchange. He's got this trading firm, and it's a kind of like model 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 so 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 it, because they don't think.

Sam and his 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. And so it's only after everybody turns them down that they even start the exchange. And so the idea is like it was set up to steal people's money. That doesn't ring true. The idea that it's like a simple Ponzi scheme, I mean, it's the definition of a Ponzi scheme. I mean, I don't think this really exactly fits it.

It's two businesses. He had the exchange ends up being, I think, I mean, there's wonky stuff that goes on it. But the business itself was very lucrative. I mean, it was a simple business. They had, by the end, they were trading $250 billion of crypto a month on it. And they take out a little fee. And the revenues are somewhere between $900 million and $1 billion a year. And one of the reasons, one of the mysteries of the story, if you start thinking about

it in any kind of detail or with any kind of nuance, is that virtually everybody inside FTX went down with it, that all the employees had all, not only their life savings, but like family members and all the rest. And it's because they only saw the FTX part of it. So 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. And really, it's a good idea, but it would be a much better idea if you had Yank Street management doing it, because it's 20 effective altruists and Sam, and none of them, Sam doesn't care, and none of the rest really know how to build one of these firms. And that firm got itself in complicated way. Well, in the end, it's simple, but there was a complicated mechanism by which it ended up putting FTX in total peril. There are all kinds of things like the trial is going on now. Right. I'm going I'm going to the trial on Thursday and Friday and Monday to watch.

I think Sam Backman Freed testified a little. If he does that, I'm going to go for it. And I had expected the trial to to answer a couple of questions that I was left mystified by. even, you know, 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, like where the money went. You know, the hand wavy thing is Sam Bankman took customer money and he spent it on condos in the Bahamas and political donations and irresponsible venture capital investing. But if you actually look at the details of the money they actually spent it's it's a it's a fraction of what they've lost and i i expected the prosecution to figure out through the other principles where that money

went like where where i assume there were like some big crypto trades that we just didn't know about and some hacks and some acts but it's clear from the trial the trials made this even murkier That even the people who are testifying for the prosecution thought, like Gary Wang, thought that we're against closing down Alameda as recently as last September because they think it's profitable. They think it's made $400 or $500 million in trading profits. And that lined up with my reporting that all the rank and file in Alameda thought that this day-to-day trading was profitable. And so the other odd thing is, and nobody's talking about this now. Anthropic? Well, not just anthropic.

this is it's not it's interesting it's not admissible in court but the bankruptcy people have the last report they filed they gave us some numbers and so i'm using their numbers but that there were 8.6 billion dollars in customer deposits missing and that they had located 7.3 billion dollars already and then this is this is before selling some very valuable like a 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 Sam Beckman Free gave it to, though there's a little bit of that. There are actually accounts that are at crypto firms, at banks, where the

money is. And this lines up with one of the first people who was 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 and and a call comes from a bank saying hey we got 300 million dollars of your money you went back and i would love to be a fly on the wall this process because you know it is entirely possible that we're going to be sitting here in a year and sam bankman freed is going to be sentenced to 50 years in jail and the depositors are going to get their money back well i die i mean it's it's i would say it's almost certain they're going to get their money back at this point. I mean, I think like Bernie Madoff, the 27,000 victims of Bernie Madoff are at 88 percent

repayment at this point, 13 years later. But go ahead. No, 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 to had it clawed back from them. In this case, the money appears to be there. Like it's different. This isn't clawbacks. There may be a whole other round of, well, John Ray and the bankruptcy people actually go and succeed in clawing back money that Sam Bankman-Fried gave away or invested a year ago. But that's not what's happened so far. That's the next step. And what's interesting is, in order to claw money back, I mean, it's just by 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 unclawbackable. So the Madoff thing is different. Madoff thing is like, yeah, it was a, it was a very classic Ponzi scheme. This is just, just different. I'm not saying it's good. I'm just saying that like, we have a new story in the history of financial scandals. It's, it rhymes with some other stories, but it's not exactly the same thing. Have you ever read the book, Famous Financial Fiascos by John Train?

God, ages. That's an old book. That is an old book, but it's a great, it's a great collection of, of, of, you know, somewhere between incompetence and fraud but usually tilting more towards fraud so 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 uh opportunistic intentional and criminal so it's obviously criminal uh in that he's gonna go to jail i mean he's broke they broke they obviously i mean even the facts that were agreed upon going into the into the trial uh 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 it 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 um so so that in itself is probably like end game over the intention you know though let's let me get let me get myself in a little trouble I've already gotten myself in so much trouble let me keep doing it because it's interesting because we live in a world right now this is Kahneman Tversky land where after the fact people go back and tell a story that

makes it all seem much simpler than it was you published the book in August so it's much more of a real-time journalistic expression than, 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 simply evaluating.

But everybody and their brother, Sam Beckenfried has no friends. Everybody thinks he's a criminal. Everybody thinks he's going to jail. And everybody thinks it's obvious, kind of, in some way, obvious. It was obvious to zero people until it all fell apart. I mean, 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. And Sam Begbie Free, 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. I mean, he could get into any political office he wanted to, have dinner with any celebrity he wanted to. 120 venture capital firms invested in him. So if it's all so obvious, why? Why? Why wasn't it obvious then? And so the intent thing is where it gets messy. No one wants to believe this, but this is why it

makes it such a fun and interesting story to me to tell. There's no question in my mind that he was he and his group like were all in on the effective altruism idea whatever you think can you explain what effective altruism altruism somebody hasn't encountered it you're probably going to start laughing at some point because you but but it was so it's a it's a philosophical movement that began in oxford in 2008 grew out of utilitarianism and it 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. And a philosopher named Hotobi 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 the right way. And so it begins as an argument about being rigorous about doing good for others, like being really hard-nosed about it, rather than just kind of loosing 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, you go make money and pay for 50 doctors to 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 kind of jumps the 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 risks, AI, pandemics, climate, so on, asteroids. And what can you do to reduce the likelihood of any of these existential risks to humanity coming about? And, of course, estimating the likelihood of these risks 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 needed to address the problem. they're government-sized problems and this they they whatever you think of this these people lived ate and breathed this stuff and sam beckman freed status in his sense of self was he wanted to be

the most important person in effective altruism that was his thing and uh and so the so when you start looking at motives it doesn't excuse anything and everybody thinks i'm trying to make an excuse for him that's not what but it just this is the it's just the facts of the case And it's interesting how people crawfish their way into certain behaviors with with odd things in their minds. Well, I remember the Regas family of Adelphia Communications. If you remember that story in Coudersport, PA, I think is it Pennsylvania? And they 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.

So that town would have been almost 100% supportive of the decision-making, outcomes, everything at Adelphia Communication. 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. It's, yes. I mean, it is completely true that part of the charm of Sam Bateman Freed and why he had the kind of social power he had, which in itself is extraordinary, right? I mean, he goes from zero to 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 generating wealth.

I mean, FTX was valued at $40 billion by venture capitalists. And we live in an age where this sort of thing happens, but it didn't used to happen like this. It used to have to kind of like dig for oil or build a railroad. The speed of wealth creation is in itself, I think, kind of warping and distortive. But his charm, it was something like this. I think a lot of people wanted there to be a Sam and that they wanted there to be that it's a kind of a byproduct of frustration with institutions and governments that they wanted there to be this, this rich person who had, who wanted to address problems that need to be addressed, that governments for one reason or another are paralyzed in the face of. And 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.

Let's put you in a new role in life. You're the chief compliance and risk management officer for Silicon Valley. And actually, I'll expand that role if you'd like to have an even broader set of responsibilities. And 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. So what are the holes that allow this train wreck to happen? That's mixing metaphors. But one of them is that the big accounting firms wouldn't audit crypto.

So 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. Uh, so, um, she, so if, what, what, what would I, what would, in retrospect, wasn't obvious in, it wasn't obvious in the moment, right? Because 120 people invested in it. Uh, and, but, but if you go back and say, what should have flagged, we have flagged is just like, we're not, we're not going there. Well, I would say no board of directors is a pretty good sign that there's a problem.

Uh, that it is absolutely no one else who knows what's going on inside the business added to, uh, no CFO, um, added to no organization chart. Like you can't actually know who works. That was a pretty telling moment in, in, in go infinite. When, uh, uh, SBF simply asked, why would I have a CFO? Why would I have a CFO and, or, and, and actively hostile to organization charts and lists of employees? The fact that there's, you know, you have your, you have the book there, right? If you take the jacket off, take the jacket off the book. If you take this, if you take the jacket off the book and just hold it up, the, the look

on the inside of the jacket. And so Sam, because there's so many emotional problems and psychological problems in the company. So, so the inside of the jacket, right? So that is the only organization chart known to exist for FTX. and it was created by the company's psychiatrist. And it was Sam's and Caroline's personal psychiatrist who they moved to the Bahamas

to deal with all the unhappiness in the company. And the shrink can't get his mind around the problems people have unless he knows where they are in the organization. So in therapy, he starts to tease that out and 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 that existed. So you're asking for compliance. So those three things are kind of tells. You know what else is a tell? It's this fear. And I don't know what to say about this exactly. So 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 $9.50 to $1 billion, and the revenues are going to be a byproduct of how many people want to gamble in this casino. And the VCs 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. So they're thinking like that. Now, whether that's right or not, they're thinking that scale and it's, it's, so 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 the most. Let's see if they have a board. Yes. Let's see this. Let's just see if they have a board. You know, it is funny. It is funny.

We had meetings with a venture 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. And one of them presented the challenge 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 were 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 and they removed the one Tesla or the one airbnb and that and the math crushes you if you if you do that so they went back and said

we are now training our analysts to make mistakes to to keep going as boldly as possible and 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 yeah and it was also this is also um a story of the lure of crypto right that that what got me interested in this in the first place was not was not like bitcoin i was kind of like assaulted by crypto people for 10 years to try to write a book about them. 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 like, this is starting to have, this is getting to the size where this is going to have social consequences. It isn't just like, oh, a funny

little gambling sideshow and and uh and and and so the the the vcs are looking like how do we get into this because it got so big and you can't really blame them although you can sort of 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 uh you know i mean it's that that but so you say i'm the compliance officer, I would just say it's, those are the moments where you were actually at the biggest risk of doing something dumb. It's that, it's that, Oh, I got to be there. I got to be at that part. We had a wonderful, um, uh, conversation with a professor at NYU business school named Dr. Melissa Schilling. And she was talking about a book quirky that she's written and really

assessing the patterns of the great founder leaders of companies. I think not entirely companies uh innovators and the changes that they drove and she was identifying that they often wouldn't probably be uh high on the list of eq they might have been very high iq but they but they didn't they didn't do a good job of of collaborative work efforts and building consensus because they were separate from the from the group and they were thinking differently and they didn't have a filter to understand how they were being perceived by others and that so 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 um knowing that uh you know uh neither one or an

emphasis on neither one is going to automatically give you one winner after the other but how how should we in evaluating leaders of private or public companies that we invest in evaluate somebody along the continuum of eq and iq well in the case of sam batman freeze he defines one end of the continuum right he's one that he is this is a totally socially isolated kid who knows he doesn't feel empathy or pleasure or and is unable to make facial expressions uh when until he's 20 years old and does not does not feel your pain uh and 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. Nishad, who just finished testifying, Nishad Singh, who just finished testifying against him, said to me once, back when things were good, he said, you know, my job here has been to be Sam's emotional intelligence because he doesn't have any.

But I've watched him. He was kind of patting him on the back saying in the last six months, he subcontracted some of his IQ to use it as EQ and he's gotten a little better. But I think I think that to answer the second part of the question is like how you 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's 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. And I thought one of the ways I saw this story right from the beginning was this is what happens when you exalt a certain kind of intelligence and pay no attention to other kinds of intelligence. And they're constantly talking about they're only interested in really high IQ people. They're really only interested in people who are kind of mathy, sciencey.

They don't really. Sam, like from at age seven, begins to think anything in the humanities is all bull. Makes arguments how Shakespeare is an idiot. You know, it's you know, it's it's that kind of thing that it's this isn't smart. This is a blind spot. It's a blind spot that you need to compensate. It probably ends up being ultimately more about evaluating the full team. And 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 imbalanced and things, blind spots emerge all potentially all over the place.

Michael, if you were to testify, if you were to testify, do you think you would be helpful to the prosecution or the defense? Um, probably the prosecution. uh the because the fact what gets into a courtroom is pretty sterile like you're not allowed to introduce context emotion feeling all that stuff really and the facts that i that the the the sort of the facts of the book that would find their way into the court all would just be damaged uh i think i mean i mean i could list them but i but so i think but but at this point i don't the prosecution needs a lot of help and uh and also at this point you know it's funny lawyers

they don't like uncertainty and i think what i'd really be is a little ball of uncertainty that i create a kind of odd climate in the courtroom and i don't expect to be asked to testify 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.