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FTX, Sam Bankman-Fried and this month’s morality tale
Let’s approach the FTX/Sam Bankman-Fried (SBF) scandal through a series of complications, gleaning everything that we can along the way as a moral lesson.
Begin with something boring because it’s so common. Consider someone with responsibility for someone else’s money, who risks that money, and loses it, on some speculative investment. Imagine a trustee of a university, for example, who embezzles funds from the university’s endowment for a misguided real estate venture, which goes bankrupt (as happened at my university soon after its founding). Or imagine the head of a household who, without consulting his wife, uses family savings for some speculative investment, and then has to explain to his wife how he lost it all.
Cases like this need not involve speculation but mere gambling, which is similar. Sometimes the person who takes the funds has an addiction to gambling and risk-taking.
These are cases of misappropriation and even theft. We don’t need a law to see why they are wrong. They are against the natural law. The FTX scandal is, at bottom, this. SBF took the money of clients who deposited it on the FTX crypto exchange and lost it on risky investments with the Alameda hedge fund.
Now, add a complication. Suppose that this person with responsibility for someone else’s money had actually solicited that money. It’s not that someone assigned him a fiduciary responsibility. It is, rather, that he went around and asked people to deposit money with him, on the understanding that their funds would be safe.
Now what he did is even more gravely wrong, as he abused the trust of others and failed to keep his end of a contract. Again, we don’t need a law to see that this is wrong.
Add another complication. Suppose that this person who solicited money from others doesn’t just invest it in some random risky investment. He hands it over to his girlfriend, who runs a risky hedge fund. Actually, she lives with him, in the same apartment, with several others. Apparently, sometimes she is his girlfriend, and sometimes not. (Such was the relationship between SBF and the CEO of Alameda.) Here, ordinary prudence points out the unwisdom of such a glaring conflict of interest (as it gets called, somewhat euphemistically).
Another complication. This person who solicits money from others, guaranteeing safekeeping, but who hands the money over to his girlfriend for risky investments, actually keeps worse financial records than a couple of teenagers just starting a lawn business. He has no clear idea how much he has handed over, how much has been lost or what he owes his clients. No proper bookkeeper, never mind accountant or CFO, keeps records for him, and nothing is ever audited. He observes none of the standard controls for good business practice. (This is what the man overseeing FTX’s bankruptcy is now telling us about SBF’s business practices.)
Add now a very big complication: All of these misdeeds and injustices, this gross lack of responsibility and complete lack of seriousness, would be bad enough if a few thousand dollars were at stake. Thefts of that size count as felonies at law and probably count, too, as “serious matter” in a sin. But FTX was responsible for about $16 billion of customer assets and, apparently, has lost at least $10 billion!
To put this in perspective, consider the case of Rita Crundwell, the comptroller of the town of Dixon, Illinois, who in 2013 was sentenced to 19 years in prison for stealing $54 million dollars over a 20-year period to fund her quarter-horse empire. A billion is a thousand million. Therefore, SBF was like 200 Rita Crundwells.
True, Crundwell stole from taxpayers and the town. Public works projects and schools went unfunded. SBF stole from a lot of wealthy people, as well as gullible ordinary folks. But we cannot dismiss the theft by saying “investments in crypto are inherently risky, so investors have no grounds for complaint if they lose everything.” Depositing money on an exchange is not supposed to be itself risky. And these customers did not place the losing bets: SBF and Alameda did.
Suppose I give you $10 and ask you to buy a lottery ticket for me. You go to a bar and buy your girlfriend a beer with the money. Later I ask where my ticket is. It won’t do any good for you to say, “You were prepared to lose that money on the lottery. You can’t complain if it doesn’t come back to you.”
One very wrong conclusion to draw from the FTX collapse, then, is that “these people got what they deserved for investing in cypto.” Likewise, it would be wrong to conclude that cryptocurrency is fraudulent because SBF and his exchange for trading cryptocurrency were fraudulent. Cryptocurrency remains an important initiative for the development of a means of exchange that could not be controlled by dictatorial central authorities.
Maybe you have noticed that central bankers have recently become interested in something called Central Bank Digital Currencies (CBDCs), which would completely replace cash. Some have even advocated “programmable” CBDCs, so that parents, for example, could give an allowance to their children in digital money, while programming in advance what that money could, or could not, be spent on. Imagine now a social credit system where, say, funds are cut off to any family that has more than two children (China’s policy now), or where truckers who protest against a regime, instead of having their assets seized (Trudeau’s decision earlier), simply have their money turned off.
But let’s return to SBF and perhaps the most interesting complication. Some commentators have wondered how precisely he was able to lose $10 billion in such a short period of time. Others wonder why anyone trusted him in the first place. This most interesting complication is that SBF was a master of virtue signaling. He had the right credentials. His parents are Stanford Law School professors specializing in ethical questions. He has a physics degree from M.I.T. (But you and I know there is no connection between these things and being trustworthy with money.)
SBF also went around declaring his commitment to “effective altruism” — the view that people should earn as much money as possible in order to give it away as rationally as possible to minimize suffering. (Yes, one must stipulate that the goal is to minimize suffering.) The world’s leading “effective altruist,” an Oxford professor, says that the second most serious problem in the world, crying out for an effective solution, are the millions of animals raised for food in confined spaces. The deaths of unborn babies count as nothing for him, as their suffering is minimal.
SBF’s favorite causes were global warming and pandemics. Naturally, if you entrusted your money to him, you would be helping the world, signaling your own virtue, too, while maybe making your own billions. He was the second leading donor to the Democratic Party in the last election cycle, behind George Soros — probably not additional “altruism,” but “regulatory capture,” yet another (yawn!) tawdry play for legislation favorable to his business.
This month’s morality tale shows us that, truly, there is nothing new under the sun, and nothing deserving of our (cautious) trust except good character proven over time with humble good deeds.
Michael Pakaluk is a professor of ethics and social philosophy in the Busch School of Business at The Catholic University of America in Washington, D.C., and a member of the Pontifical Academy of St. Thomas Aquinas.