White Boy. (Any views expressed in the below are… | by Arthur Hayes | Nov, 2022

(Any views expressed in the below are the personal views of the author and should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions.)

I suggested in my last piece that you had to at least give kudos to Sam Bankman-Fried (SBF) for being a “once-in-a-generation trading talent.” Well, I got played too. I thought Alameda’s team were good traders, but it turns out they were just another crypto punting bull market shop — and when the bear market came along, they got carried out just like all the other overleveraged Zhu-per cycle believers. We now know Sam was a terrible risk manager, with regards to both crypto and the financial markets in general. However, I still believe there was still a unique element to his trading game that was nearly unmatched in the industry. SBF played the game on the meta level, and traded social currency — hoodwinking the Western financial establishment and the crypto industry alike in the process.

SBF offered a sweet siren song to two cohorts: the Satoshi faithful, who believe Bitcoin will be one of the most transformative movements in recorded human history, and the TradFi cartels of trust, who view crypto as an existential threat to the status quo that made them fat and rich. To the Satoshi faithful, he preached the gospel as if he was one of us and could successfully navigate the TradFi corridors of power on our behalf, and to the TradFi fat cats, he promised a means to reap the benefits of this new font of wealth without relinquishing their throne atop the financial system. That is his evil genius. The FTX / Alamada ecosystem, which I will refer to henceforth as the Death Star, played us both.

This scandal, tragedy, and most likely blatant fraud, touches on so many geopolitical and race issues of the American empire (Pax Americana) that I shall dedicate the next several essays to my learnings from this saga.

Now, for today’s segment — a two-part essay covering how SBF used his born advantages and uber social intellect to bamboozle everyone into thinking he was a crypto wunderkind and the future of the Western-led financial establishment.

I have been itching to write this essay for some time, but lacked a foil and context to make it relevant to my readers. So please follow closely as I give you a quick tour of the founding of the United States of America and the formative influence it has had on its racially-delineated social caste system, which I will argue powered SBF’s rise and FTX’s ultimate collapse. It will take me a bit to get to that second part, so bear with me as I walk you through a brief history lesson.

Before we continue, a few table setting items:

• As I’ve argued in past essays, remember that every nation state or society has a culture predicated on different social stratas; there is always an “other”. The “others” are different because of their skin colour, ethnicity, religion, and/or accent. But there are always those at the top who economically exploit those “others” at the bottom and justify their cruel inhumane actions due to said shortcomings. If you are interested in exploring a more in-depth discussion of the long history of this line of thinking, I recommend reading Howard Zinn’s “A People’s History of the United States”.
• Note that I will be using the term “white” to refer to people of European descent, and the term “black” to describe people of African descent. But, what do you call a person whose lineage has a bit of both? Are they “white”, “black”, or something different? Why does one drop of “blackness” destroy “whiteness”? I could write a whole essay deconstructing the linguistic lineage of these American terms for race, but that’s a topic for another day. For now, let’s be clear that I hate using them, but for the sake of brevity and ease of understanding I shall continue to use these misguided — and frankly, insidious — labels.
• In Pax Americana, it is verboten to suggest that the caste system is alive and well. If you are approaching this essay with that mentality and you aren’t interested in opening your mind, please stop reading here. If you’d prefer to continue believing in the fairytale of American exceptionalism, you can subscribe to the establishment’s whitewashed narrative of the implosion of the Death Star by just picking up a copy of the New York Times. Their recent puff piece on SBF’s demise, which frames his seemingly massive fraud as “well-meaning wunderkind tried to do too much good at once”, is downright inexplicable unless you dig deeper to understand the societal factors at play here.

Now, onto the good stuff.

As a youngster in the state-sponsored education system, you learn a very romanticised version of the founding of America. I have gone to both public and private schools, and they all peddle the same story regarding early American history: a group of “patriots”, fed up with excessive taxation without representation, rebelled and established the United States, where all men are created equal and have a say in how they are governed.

That’s a great story. I have another one.

A group of wealthy male property holders who didn’t want to pay taxes engaged in acts that by today’s standards would probably be considered domestic terrorism (e.g., the Boston Tea Party). They then convinced a bunch of poor, landless, fellow white settlers to fight with them to break away from King George. Once independence was secured, the vast majority of Americans were not allowed to vote (including all women, and all men without property), the State legally considered blacks to be ⅗’s of a man and property of their masters, and Native Americans were removed from their ancestral lands, either by force or via dishonest treaties. That’s a hell of a way to start a nation.

Drilling down a bit further, here is how the concept of the right to vote — which I would argue is a good proxy for equality, given that it is the most sacred and basic right of free and equal citizens under a democracy — evolved over time in the “land of the free”. All white men — including non-land owners — were first granted the right to vote under the 15th amendment in 1870, nearly 100 years after America’s founding. Women were finally guaranteed the right to vote under the 19th amendment in 1919, 50 years later. And finally, because Jim Crow laws and other methods of intimidation enabled the establishment to prevent blacks from voting, their right to vote had to be officially codified under the 24th Amendment & Voting Rights Act in 1964 — nearly 45 years later, and almost 200 years after the country’s founding.

The staggered, lengthy timeline on which these different groups received the right to vote mirrored the timeline on which they (technically) began to be accepted as “equals” in American society — and the many, many years of systemic discrimination gave rise to an inherently unequal system. But even over the course of centuries, those groups never rose up to conduct the same “taxation without representation”- inspired domestic terrorism against their newly formed country — begging the question, why not? How did the establishment get poor white men, all white women, all black African slaves, and all Native Americans to stay in their lane?

Their lack of resistance is particularly remarkable given that early pre-industrial America was not a cornucopia of abundance. Pre-industrial America was a shitty place to live, and folks should have been chomping at the bit to improve their standing. It was very cold in the winter, very hot in the summer, there wasn’t enough to eat, and you were far, far away from home (at least for everyone except the Native Americans). And don’t forget that the British were itching to take back what they lost, the Spanish were lurking to the South, and the French were allies of convenience that could have turned their muskets and formidable navies in America’s direction at a moment’s notice.

The majority of the population were poor white men and white women (going forward, I’ll refer to this combined group as the “poor whites”). Ergo, in order to launch a successful uprising and make things more equal, you would have just needed to convince the poor whites that a revolt would enable them to significantly improve their lot.

A quick aside — such an uprising actually almost came to pass. If you want to learn more about this near second American revolution, I recommend that you study the Whiskey Rebellion, and how celebrated Alexander Hamilon “saved” the day. TL;DR, everyone’s favourite Broadway star received authorisation to raise an army to crush this revolution before it could spread. Hamilton didn’t believe in democracy to the fullest. Rather, he thought that the monarchical European system actually hadn’t been so bad because the “right” people ruled — and that if America strayed too far from that framework by completely equalising the playing field, it would be getting itself into dangerous territory.

Recognizing the danger of a potential revolt by the poor whites, the establishment realised that it just needed to make them feel like they weren’t at the bottom of the totem pole — because when humans feel they are better than someone else in any system, they are more likely to support its continuation. So to engender solidarity among the poor whites, the state sponsored the systemic denigration of black people, whose enslavement also conveniently provided free labour for the agricultural South (talk about two birds with one stone).

As a poor white, life was tough, but thank the Lord Jesus Christ you weren’t no black slave! Hating those dark-skinned folks sure made you feel better about your situation at the bottom of the white economic barrel.

As America’s economic prosperity grew, the country needed more cheap labour — especially after the blacks were “freed” in the 1860s. As a result, the Chinese were allowed in to build the railroads starting in the mid-to-late 19th century. They were followed by the poor whites of the many parts of Europe that faced economic stagnation in their home countries during the late 19th to early 20th centuries — such as Ireland, Southern Italy, and Eastern Europe. These whites flooded the booming manufacturing towns of the Northeast (Buffalo, Detroit, Pittsburgh, etc.). And in the Southwest, the border with Mexico ensured that a steady stream of Central and South Americans came north seeking better opportunities.

At this point, the racial caste system needed a bit of tweaking. Just being white was great, but having a better existence than a class of former slaves and Chinese coolies ain’t really something to aspire to — and so the social pecking order within the white subgroup became stratified, too. I’m sure many of you have watched movies such as Gangs of New York, The Godfather, and other tales about late 19th and early 20th century hubs like New York City and Chicago, which offer helpful illustrations of what this pecking order looked like. It also became codified in the many colourful racial slurs that you still see and hear today (albeit less often), covering basically every white subgroup apart from Anglo-Saxon Protestants. Where you came from in Europe and what religion you practised gave root to these slurs.

A quick story. As a student at Penn, I received a crash course education on the finer nuances of whiteness. The Fraternity system allowed the groups of same-caste whites to congregate together. There were Jewish, Southern White, WASP, and International White frats. While they didn’t put a billboard up saying “if you are not this or that, please don’t apply”, everyone surmised pretty quickly which house was which. My house was one of the traditionally more diverse fraternities, at least as far as Penn fraternities go. In the early 1990’s, the house got into a bit of trouble when a member of the WASP frat called a black brother by a racial slur. One of our house’s brothers or pledges retaliated by kidnapping a brother of the WASP frat, tying him to a flagpole in the black West Philly ghetto with a boombox playing Malcom X speeches.

As the 20th century progressed, the hierarchical lines between these white subgroups began to blur with the continued stirring of the American melting pot. The white castes’ ranking system started to coalesce more around educational background, wealth, and location. Gone were the days like in the 1960’s, when being an Irish Catholic meant you were just not allowed to do certain things in the white world. (Side note — that is why the election of John F. Kennedy was such a milestone event for the white social caste system.)

That said, there is one major white rift from the olden days that is still going strong — and it can be traced back to what happened during the Civil War. The Civil War was an economic conflict between the North, which was dominated by manufacturing businesses (comparable to the “tech” sector of this era) and the South, which was an agrarian plantation economy. As you are likely aware, the North won. One the strokes of strategic genius executed by President Lincoln was to “free” the slaves and allow them to enlist in the Union army. According to the 1860 census, the “colored” population represented 41% of the total Southern population. In one fell swoop, Lincoln added a very motivated group of soldiers and, for a time, undermined the South’s labour force as their black population sought refuge in the North.

The war was won, but the tribalism that underpinned it has remained. The fact that, to this day, some white southerners like to parade around with the Confederate flag, should tell you all you need to know about the seething rage that still exists within a subset of the white American population. It’s been over 150 years, and they still haven’t come to terms with their defeat.

Given that the North has historically been considered more progressive, more educated, more cultured, and wealthier than the South, the white Northerners believe their Southern brothas and sistas are a bunch of ignoramus farm hands. Hilary Clinton, when running for president in 2016 against Donald Trump, referred to them broadly as deplorables. The politically correct way to describe these white farm boys and girls is to call them “folks from the flyover states.” Basically, if you ain’t from the West Coast, whose cultural and financial capitals are Los Angeles and San Francisco, or the East Coast, whose cultural and financial capitals are New York City and Boston, then you are a know-nothin’ white piece of trash.

Think about it. The most prestigious US high schools, like Harvard Westlake, Brentwood, Andover, Exeter, Choate, etc., are all on the coasts. Likewise, most of the US’s most prestigious universities — such as Stanford, CalTech, MIT, Harvard, Yale, Princeton, University of Pennsylvania (Go Quakers!), etc. — are all on the coasts. And notably, none of them are in the South. The capital of the American financial empire sits in New York. The capital of the American tech empire sits in San Francisco. The entertainment and cultural capital of the American empire sits in Los Angeles. And the mainstream financial press outlets spew the narrative of the ruling class from their perches in New York and Boston.

A quick aside on the control and influence that America’s uppermost caste exerts from these cultural hubs, which are largely responsible for the creation and export of the country’s culture. When I first got to Hong Kong, I noticed that middle of the road restaurants in malls would play gangsta rap. There was cussing, and all sorts of provocative language — and yet it was blasted out to middle class Cantonese folks enjoying a wholesome family dinner. Their children bopped along to the beat, oblivious to the historical context of this art form and the irony of its appearance in their culture. Rap music was created by individuals at the bottom of America’s social caste as a form of protest — but it has since been co-opted by America’s ruling caste, who simultaneously get to enjoy it while also a) using it to perpetuate stereotypes about rappers and people like them to keep them relegated to the bottom of the caste system and b) shipping it out to other places like Hong Kong, infiltrating their cultures and restaurants and advancing America’s position at the top of the international caste system. TL;DR, America’s coastal ruling class was able to successfully take a lower caste’s form of protest, repackage it and broadcast it in a manner that not only reinforces its place at the head of the American caste system, but reinforces their empire’s role as the world’s foremost cultural superpower. That is the power of their subtle but overwhelming influence.

My point is that, although it’s evolved considerably over time, America’s caste system still exists today, and if you fall into the coastally-driven, top-most class — which I’ll call “the right kind of white” — you’ll have an outsized chance of succeeding in the working world. This is because those that control the major aspects of Pax Americana sit in particular places and went to particular schools, and as a result, they tend to support those who are also in those places and went to those schools. They are human, after all.

Think about it — what are youngsters told about how to be successful?:

“Study hard at school, get good grades, so you can go to a top university.”

“Take out an enormous amount of debt because a university degree makes more money over time.”

“Be a lawyer, financier, engineer etc. so that you can work for a company at the top of the establishment’s economic pecking order.”

So how does this all relate to SBF? Well, he’s the right kind of white. Below is a short passage from a Bitstamp article about SBF’s background that explains all you need to know about why the people and institutions who control the finance, tech, media, and cultural organs of Pax Americana fell head over heels for him whenever he walked into the room and started talking crypto.

Bankman-Fried was born in 1992 in California to two law professors at Stanford Law School. Both of his parents subscribe to the philosophy of utilitarianism — that actions are right if they are useful or for the benefit of a majority. This moral philosophical upbringing set the foundation for Bankman-Fried’s later philanthropy.

Growing up, Bankman-Fried hated school, finding it boring and overly structured. He attended the Canada/USA Mathcamp over summers in high school, which provided the intellectual challenge he needed. He attended the Massachusetts Institute of Technology (MIT) and graduated in 2014, earning a degree in physics and a minor in mathematics. He remains dismissive of formal education, noting that nothing he learned in school ended up being useful in his professional life.

In his sophomore year of college, Bankman-Fried attended a talk by Will MacAskill, a founder of effective altruism. Bankman-Fried considers this introduction a turning point in his life, embodying his long-held beliefs with a name and a movement.

Let’s go down the checklist for social acceptance by the establishment.

Coastal “educated” White — Check

Professional Parents — Check

Educated at “top” university — Check

Bonus round: Has a penis — Check

These characteristics are particularly attractive to people in industries like finance, law, and tech, which tend to be filled with folks whose life goal is to be viewed as high achievers themselves (i.e., those who aspire to be at the top of the pecking order and, by the transitive property, want to be the right kind of white).

So, when a man with the pedigree of SBF begins shilling his bags, you sit up and listen. You don’t question why this guy was allowed in the room. You don’t question whether he actually knows his shit. You don’t question anything, because you are pre-wired — due to a racial and social caste system many hundreds of years in the making — to believe whatever SBF says at face value.

In short, you fail to engage the rational thinking part of your brain because this is how humans cope with an uncertain world filled with too much information. We use heuristic shortcuts and stereotypes to more easily make decisions. Without them, we would be unable to make sense of our surroundings quickly enough to function normally in our society.

SBF recognised this and capitalised on it by leaning into his “right kind of white boy”-ness. That is how he grew the Death Star from his middling prop trading firm, Alameda, into the global financial powerhouse that was (emphasis on was) FTX.

I want to thank the blog Milky Eggs for their excellent breakdown on the history of the Death Star. They have done much more in-depth research on this subject, and their conclusions broadly align with my theories. I shall annotate this section with quotes from their blog.

SBF was, by all accounts, a successful quant trader at the Chicago-based Jane Street. Jane Street is one of the top proprietary trading firms in the world. He then got into crypto in 2017 by doing arbitrage trades and other high-to-medium frequency predictive trades.

As crypto matured, it became harder and harder for supposedly market neutral trading shops to make money. That is because the big boys who dominated the global equities and foreign exchanges markets began allowing small internal outfits to experiment in trading crypto. They soon discovered that their technology and intellect — honed to perfection in the super competitive TradFi markets — allowed for easy pickings against slower and less agile trading firms in crypto.

I imagine Alameda started to notice their alpha on trades got smaller and smaller. I believe that SBF came to the conclusion that Alameda needed better information about the market to get an edge over his competitors, the other large trading shops. The best way to get the best flow was to own an exchange and trade against its customers. Somewhere along the way, they also decided to ditch being strictly market neutral and trading on small time scales, and became degen crypto shitcoin punters on the long side.

Their team’s social media history clearly supports the idea that owning the information flow and going full degen were core tenants of their trading strategy. For example, here are a few tweets from Sam Trabuco and Caroline Ellison, who ran Alameda.

(Side note: Sam was right — it wasn’t random chance, because all manner of dogshit levitated to all time highs in lockstep with the Fed’s balance sheet. Everyone felt like a genius from 2018 until late 2021.)

From the very beginning of FTX, the company was super transparent that an affiliated trading firm owned by the founder, Alameda Research, was the anchor market maker on the exchange. If you assume that FTX did not give any special privileges to Alameda, then there is nothing wrong with this arrangement on its face. Alameda was providing a very valuable service by being there 24/7 to provide liquidity at decent spreads for FTX clients.

As it turned out, Alameda was able to offer extremely tight pricing on FTX. That’s one reason FTX was able to quickly take volume from its more established exchange competitors. Another was that FTX offered features that were extremely difficult to implement safely, like multi-coin collateral margining, in record time. We now know that wasn’t due to any sort of incredible technical prowess — Alameda just took on risk and hoped the gyrations of the market would save them, rather than building a safe technological solution to this problem.

As FTX and Alameda grew side by side, everyone started to assume that SBF was one of the best traders ever because of Alameda’s supposed amazing returns. I kept hearing rumours year after year about how many billions in profit the trading firm made. But due to revelations that have come to light in recent days, it would appear that Alameda probably had a few secret weapons. One secret weapon was the likely ability to borrow money from FTX directly out of the customer deposit cookie jar. It doesn’t matter what, if any, collateral was provided — lending customer funds to Alameda without the express consent of said customers is at best unethical. The other secret weapon was their potential ability to trade faster than its competitors on FTX. If they did have such a latency advantage, Alameda’s trading signals would have been super profitable. This would have been achieved by allowing Alameda to make more calls to FTX’s trading engine API than other firms. The more calls you are allowed to make, the more often you can submit, update, or cancel your orders — allowing you to move more quickly than the people you are competing against.

As they started to take off, the goal then was probably for FTX to onboard as many retail and institutional clients as possible to boost trading volumes and the deposit base. Then, Alameda could borrow these deposits and trade against FTX’s customers. Assuming these things are all true, it’s almost like FTX clients were given a rope to hang themselves with via their deposits to FTX and hardwired slowness vs. Alameda.

I believe Alameda was likely making money hand over fist until early 2022, when the Fed started to raise interest rates. But then the crypto markets peaked in November 2021, and Alameda became the liquidity provider of last resort. As the market started a one-way train to goblin town, it was Alameda on the other side of all the massive amounts of liquidation orders.

If we believe that Alameda used the customer funds of FTX to acquire a vast array of shitcoins, then if said shitcoins fell precipitously in price, Alameda would not have been able to pay back its loans from FTX. We don’t know all this for sure, but we do know that Alameda provided FTT, the native FTX token, as collateral to FTX for loans from the customer deposit cookie jar. It is not a stretch to guess that Alameda probably engaged in the circular behaviour of using borrowed funds to buy shitcoins, and then pledging said shitcoins to get more borrowed funds. We do know that Alameda was a large participant in the FTT token initial coin offering. Did Alameda get the funds to subscribe to the offering from FTX client deposits?

CNBC has an excellent walkthrough on how the FTT circle jerk operated. And just to be complete, here is the venerable New York Times describing how customer funds were pilfered from FTX and landed in the hands of the money-losing Alameda:

Meanwhile, at a meeting with Alameda employees on Wednesday, Ms. Ellison explained what had caused the collapse, according to a person familiar with the matter. Her voice shaking, she apologized, saying she had let the group down. Over recent months, she said, Alameda had taken out loans and used the money to make venture capital investments, among other expenditures.

Around the time the crypto market crashed this spring, Ms. Ellison explained, lenders moved to recall those loans, the person familiar with the meeting said. But the funds that Alameda had spent were no longer easily available, so the company used FTX customer funds to make the payments. Besides her and Mr. Bankman-Fried, she said, two other people knew about the arrangement: Mr. Singh and Mr. Wang.

Assuming that Alameda was engaging in this circular behaviour, if the price of shitcoins went down, Alameda wouldn’t have been able to pay up. Maybe Alameda was operating at a slightly loss, if not barely profitable, going into the LUNA / TerraUSD (I’ll refer to this as Terra) collapse, which saw the Terra ecosystem — which was valued at $40 to $60 billion in May of 2022 — go to $0 in one week. LUNA was the governance token of the Terra ecosystem, and UST was the USD pegged algorithmic stablecoin. Both LUNA and UST were traded on FTX in large volumes.

As LUNA and UST began their mathematically-guaranteed death spiral, clients rushed to sell what they could. Alameda had to be there and absorb all that flow. SBF probably didn’t bother reading or understanding the Terra Whitepaper. Surely, with his supposed maths acumen, he would have seen that the whole ecosystem was destined for ZERO once the peg began slipping. But instead, SBF got high on his own supply. Alameda had to continue to offer liquidity all the way down, because to not do so would diminish the value of FTX. There would have been no FTX without Alameda providing 24/7 liquidity, because no other firm would seriously commit to offering that level of liquidity without being afforded the privileges that Alameda likely received — and especially not when shit hit the fan.

Milky Eggs offers their summary of the Death Star losses, and much of these line items can be traced back to the Terra collapse and its collateral damage throughout the industry.

• Voyager/BlockFi acquisition: $1.5b
• LUNA exposure: $1b
• KCG-style algo crash: $1b
• FTT/SRM collateral maintenance: $2b
• Venture capital: $2b
• Real estate, branding, other frivolous spending: $2b
• FTT drop from $22 to $4: $4b
• Discretionary longs going bad: $2b
• Total: $15.5 billion

I must also mention that Alameda appears to have likely used its portfolio of shitcoins — and importantly, shitcoins in which Alameda was the largest investor / HODL’er — as collateral for loans. As all crypto assets fell 50% to 75% in the wake of the Terra / Three Arrows Capital / Celsius / Voyager failures, Alameda was fucked on both ends. They lost billions providing liquidity to all their closely held shitcoins on FTX, and they owed money to FTX and others which was also collateralised by the same now worthless portfolio of shitcoins.

And remember — Alameda’s dominance on the FTX platform made it uneconomical for the larger trading houses to seriously commit to supplying FTX with liquidity in adverse conditions. So when Alameda went under, there was no one there to step in and provide the liquidity necessary to keep FTX afloat.

At that point, SBF would have had no choice but to do something drastic. He likely would’ve had to borrow most of the FTX customer deposits to cover the massive hole in Alameda.

This is how lending crises always end. When the lender doesn’t continue to lend, all their previous loans cannot be paid back. The activity was never economical in the first place, and therefore, the loans were always bad. The only reason we believed that Alameda was a sound entity was that credit always flowed from FTX depositors.

Please don’t get it twisted. This is a simple story. Alameda lost money, and instead of accepting the loss, SBF and other senior executives decided to take money from FTX customer deposits. If you are a lazy journalist reading this essay, that is all you need to know in order to properly characterise how the Death Star ceased to be.

And before we get to my pithy conclusion, please read the words of the new CEO of the bankrupt Death Star, John Ray:

Part Deux

You now know my theory on the Pax Americana social caste system and understand how the Death Star was constructed. I have hopefully also demonstrated why it was necessary for SBF to socially con the entire Western-led established financial elite into co-opting him and FTX into their racket, and how he was able to do it.

Here is the always eloquent Dave Portnoy offering his perspective on SBF’s con artist ways:

In my next essay, I intend to demonstrate how SBF constructed a completely false life and persona in order to fool everyone about who he was and his intentions. How he dressed, where he lived, what he ate, and what believed in were all fugazi. He created the persona we know as SBF in a bid to fool us all. And it worked, until the callous hand of the market caught up with his flagrant disregard for risk management.