Ed highlighted this question a week ago, i.e. what does it take to get arrested around here? More recently, Bankman-Fried agreed to testify before Congress on the 13th which is tomorrow. However it turns out he didn’t mean in person. Earlier today he explained that his plan for the hearing was to “call in” from his home in the Bahamas. But it turns out that he may need to call collect if he still wants to call in:
Sam Bankman-Fried, the disgraced founder of the collapsed cryptocurrency exchange FTX, was arrested in the Bahamas on Monday after U.S. prosecutors filed criminal charges, according to a statement by the government of the Bahamas.
“S.B.F.’s arrest followed receipt of formal notification from the United States that it has filed criminal charges against S.B.F. and is likely to request his extradition,” the statement said…
Prosecutors for the Southern District of New York confirmed that Mr. Bankman-Fried had been charged and said an indictment would be unsealed on Tuesday. The charges included wire fraud, wire fraud conspiracy, securities fraud, securities fraud conspiracy and money laundering, said a person with knowledge of the matter.
I don’t suspect extradition from the Bahamas will take a long time but I’m guessing he won’t make it in time for the congressional testimony tomorrow. Meanwhile, his replacement at FTX is still scheduled to testify.
Also set to testify Tuesday was FTX’s new CEO, John J. Ray III, who took over for Bankman-Fried on November 11 and is tasked with shepherding it through the bankruptcy process.
Ray has so far painted a picture of a crypto empire with virtually no corporate controls and a shocking lack of financial and other record-keeping.
“The scope of the investigation underway is enormous,” Ray said in prepared remarks released Monday ahead of his testimony.
While the probe isn’t completed, Ray said, FTX’s collapse appears to stem from the concentration of power “in the hands of a very small group of grossly inexperienced and unsophisticated individuals” who failed to implement virtually any corporate controls.
That matches, at least superficially, with the story Bankman-Fried has been telling, i.e. that he wasn’t malicious but just didn’t know what he was doing:
Bankman-Fried has denied knowingly commingling funds and sought to distance himself from the day-to-day management of Alameda, which made a number of high-risk trading strategies such as arbitrage and “yield farming,” aka investing in digital tokens that pay interest-rate-like rewards, according to reporting from The Wall Street Journal.
He has admitted to mismanaging FTX and not paying enough attention to risk.
Bankman-Fried was a big Democratic donor and, supposedly, a proponent of “effective altruism” the idea that giving decisions could be made on the basis of data and reason. Here’s what the NY Times wrote about that back in May.
The origins of that pragmatic style can be traced back to his childhood in the Bay Area. Both Mr. Bankman-Fried’s parents are Stanford Law School professors who have studied utilitarianism, an ethical framework that calls for decisions calculated to secure the greatest happiness for the greatest number of people. “It’s the kind of thing we’d discuss in the house,” said Mr. Bankman-Fried’s father, Joseph Bankman.
As might be expected for a young man raised on dinner-table discussions of moral theory, Mr. Bankman-Fried is also an admirer of Peter Singer, the Princeton University philosopher widely considered the intellectual father of “effective altruism,” an approach to philanthropy in which donors strategize to maximize the impact of their giving. When Mr. Bankman-Fried was an undergraduate at the Massachusetts Institute of Technology, he had lunch with one of Mr. Singer’s disciples, Will MacAskill, a co-founder of the Centre for Effective Altruism. “He was like, ‘Oh yeah, I was raised as a utilitarian,’” Mr. MacAskill recalled. “I didn’t know that happened.”
Mr. MacAskill pitched Mr. Bankman-Fried on an approach to effective altruism known as “earning to give” — a model in which do-gooders devote themselves to lucrative careers, aiming to earn as much as possible before giving it away. Mr. Bankman-Fried was intrigued. After graduating with a physics degree, he accepted a job at the high-frequency trading firm Jane Street and started donating half his salary to charity.
Effective altruism (EA) actually gave Bankman-Fried a certain credibility that he and his company may not otherwise have had. After all, he wasn’t just trying to make money to buy a bigger yacht he was “earning to give.”
There is a whole side-discussion going on about where EA stands now that Bankman-Fried has gone bust. The NY Times published a story last Friday saying the whole movement was on the defensive because of the collapse of FTX. Vox published a story today by Dylan Matthews who identifies himself as a disciple of EA and says he’s been angry and embarrassed by what happened to Bankman-Fried, in part because the site took money from him earlier this year:
Something went badly wrong here, and my fellow journalists in the take mines have been producing a small library of theories of why. Maybe it was SBF and Ellison’s choice to earn to give, to try to make as much money as possible so they could give it away. Maybe the problem was that they averted their gaze from global poverty to more “longtermist” causes. Maybe the issue is that they were not giving away their money sufficiently democratically. Maybe the problem was a theory of change that involved billionaires at all.
It took me a while to think through what happened. I thought Bankman-Fried was going to commit billions toward tremendously beneficial causes, a development I chronicled in a long piece earlier this year on how EA was coping with its sudden influx of billions. The revelation that his empire was a house of cards was shattering, and for weeks I was too angry, bitter, and deeply depressed to say much of anything about it (much to the impatience of my editor)…
First, a disclosure: This August, Future Perfect — the section of Vox you’re currently reading — was awarded a $200,000 grant from Bankman-Fried’s family foundation. The grant was for a reporting project in 2023, which is now on pause.
Having finally overcome his initial reaction to the news, Matthews now argues that the problem with FTX wasn’t EA per se it was utilitarianism.
Bankman-Fried’s error was an extreme hubris that led him to bite bullets he never should have bitten. He famously told economist Tyler Cowen in a podcast interview that if faced with a game where “51 percent [of the time], you double the Earth out somewhere else; 49 percent, it all disappears,” he’d keep playing the game continually.
This is known as the St. Petersburg paradox, and it’s a confounding problem in probability theory, because it’s true that playing the game creates more happy human lives in expectation (that is, adjusting for probabilities) than not playing. But if you keep playing, you’ll almost certainly wipe out humankind. It’s an example of where normal rules of rationality seem to break down…
These are fun dorm room arguments. They should not guide the decision-making of an actual financial company, yet there is some evidence they did. An as-yet-unconfirmed account of an Alameda all-hands meeting describes CEO Caroline Ellison explaining to staff that she and Bankman-Fried faced a choice in early summer 2022: either to let Alameda default after some catastrophic losses, or to raid consumer funds at FTX to bolster Alameda. As the researcher David Dalrymple has noted, this was basically her and Bankman-Fried making a “double or nothing” coin flip: By taking this step, they reasoned they could either save Alameda and FTX or lose both (as wound up happening), rather than keep just FTX, as in a scenario where the consumer funds were not raided.
This is not, I should say, the first time a consequentialist movement has made this kind of error. While Karl Marx denied having any moral views at all (he was a “scientific” socialist, not a moralist), many Marx scholars have described his outlook as essentially consequentialist, imploring followers to act in ways that further the long-run revolution. More importantly, Marx’s most talented followers understood him in this way. Leon Trotsky defined Marxist ethics as the belief that “the end is justified if it leads to increasing the power of man over nature and to the abolition of the power of man over man.” In service of this end, all sorts of means (“if necessary, by an armed rising: if required, by terrorism,” as he wrote in an earlier book) are justified.
Read the whole thing if you’re interested in a deep dive into how this happened. I sort of doubt the hearings tomorrow (or whenever Bankman-Fried finally gets dragged before Congress) will be as revealing about how and why this whole mess happened.
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