Money Stuff: FTX might have found some money

EDIT: there's also an interesting philosphical bit at the end

TL;DR – FTX (Sam Bankman-Fried's now very bankrupt crypto exchange) invested US$500mn in the very solvent AI startup Anthropic, which is now worth considerably more than it was when he invested the funds. Perhaps this will make it possible for FTX to pay back its creditors (who are in the unfortunate position where they are creditors of FTX and FTX does not appear to have been mere custodians of the assets), but it seems unlikely.

Many financial frauds have roughly the same shape. Investors give you money because you tell them you are doing something safe and sensible with it. In fact, you are using the money for some combination of (1) paying your personal expenses and (2) making wild gambles. The gambles do not work out, the money is gone, the investors notice, you go to prison.

What if the gambles do work out? Well! I think a lawyer would tell you that, if you are lying to your investors and using some of their money on personal expenses and putting the rest into wild gambles, and the gambles pay off, that is also fraud. It is arguably just as much fraud: What matters, as a legal and moral matter, is that you were doing wild dumb gambles and lying, not whether your gambling turned out to be lucky. Still, it does feel like there is a practical difference. If investors give you $100 and you do a series of dumb things with it and give them back $150, they probably won’t complain. What you did was illegal, but you don’t go to prison just because you did something illegal. You go to prison because you did something illegal and prosecutors bother to prosecute you, and if all your investors are happy they are less likely to bother.

“Pharma Bro” Martin Shkreli is unusual because:

1. He became a public figure for doing a variety of very annoying but non-fraudulent things, so everyone was primed to dislike him.
2. He was also, though more quietly, doing financial fraud: He ran some hedge funds in which he was taking wild gambles with investor money, losing it and lying to the investors.
3. He took one last gamble with his investors’ money, and it worked out great: He made all his money back and then some, and he paid all his investors back with profits.

“All my investors made money” is not technically a legal defense to fraud charges, but it is ordinarily practically sufficient. Shkreli created enough special circumstances that it wasn’t. He spent about six years in prison.

Philosophy:

And in fact it seems like Bankman-Fried, maybe more than anybody else I’ve ever heard of, really did think that way. In March 2022, Tyler Cowen asked him:

COWEN: Should a Benthamite be risk-neutral with regard to social welfare?

BANKMAN-FRIED: Yes, that I feel very strongly about.

COWEN: Okay, but let’s say there’s a game: 51 percent, you double the Earth out somewhere else; 49 percent, it all disappears. Would you play that game? And would you keep on playing that, double or nothing?

And Bankman-Fried said yes! And Cowen went on:

COWEN: Then you keep on playing the game. So, what’s the chance we’re left with anything? Don’t I just St. Petersburg paradox you into nonexistence?

BANKMAN-FRIED: Well, not necessarily. Maybe you St. Petersburg paradox into an enormously valuable existence. That’s the other option.

That’s insane! You keep flipping a slightly weighted coin. Every time it comes up heads, the population of humans in the universe doubles. If it comes up tails once, every human in the universe is dead forever. How many times would you flip? Bankman-Fried’s answer was … as many times as it takes to kill everyone? Okay! Great! Nice utilitarianism you’ve got there.