 Let's start just with the with a headline story FTACs, which is the largest the third largest Crypto trading platform together with its sister company Alameda research, which was a nominally a crypto a trader not a trading platform, but somebody who traded crypto for profit and Did other things as well invested in different crypto companies? Invested in different things will get to Alameda in a little bit Both of those companies plus the US subsidiaries Alameda is in Hong Kong and FTX is is established in Established in Bahamas I I will stop calling people by name to do it. Sorry. Sorry guys But thank you for all of you who are subscribing to the membership platform. Thank you So all of the entities in the US subsidiaries as a Friday filed for bankruptcy Sam backman freed Sam back and freed who goes by SBF and is known as SBF in the crypto world and and talks about himself as SBF in the crypto world SBF six months ago or so seven months ago in the spring was worth $26 billion He's a second Largest fortune made from crypto as far as we know They might be richer people who we just don't know but SBF had 26 billion with a B billion with a B As of in the spring as of Last Friday not this Friday or there a week ago maybe two weeks ago. Don't know. They're not sure the exact date right now He was worth 16 Billion dollars so he had lost some money with all the crypto challenges and all the crypto Everything else, you know declining in crypto. He had lost some money, but he was still with 16 billion dollars I don't know if you have a sense how much money that is that is unbelievable In terms of the the the size of wealth the quantity of what one of the richest people in the world as of today he's worth some way in the vicinity of Zero zero That is one of the Largest individual Wealth although I'm gonna put wealth in quotation marks for now wealth destruction in history and it's Happened faster than I know from anybody So we saw it collapse within a week From 16 billion to zero That's pretty amazing That's pretty amazing All right, so let's try to walk through this and and let's try to see first. We'll talk a little bit about SBF And We'll talk we might mention a CZ whose name I can't pronounce But CZ who is actually the richest person in the crypto world who is the CEO found an owner of Binance another crypto exchange so I want to go through kind of the history of this the story that is involved about this and And You know, we can we can see then What lessons can be learned on this? It's very simple to say SBF is a dishonest guy. He's a bad guy. He's just you know, he's you know That's it. It has no relevance to the rest of the world because he's just a bad guy's a fart. He's a crook Maybe Maybe to turn out he's a farting crook suddenly there's no question that he did some fraudulent things here There's no question that That he he lied and deceived That's no question. The bigger question is Why did people Engage with him if everybody knew he was a farting crook, why do people continue to engage with him? Why did this? Scheme continue to go on for as long as it did. Why was he worth 16 billion dollars? Is this relevant to anybody else? After all FTX is not the last first not the first crypto exchange to go under It's not the first crystal scheme to go under many others have gone under in particular some very large ones over the last six months Have gone under so is this really an aberration is this an aberration because one individual is a bad guy Or does this represent something more substantial about crypto? And a weakness in the system in the market and then now the big question, of course Which is going to have all of this in a big way and you're going to see people talking about this a lot Is does this mean? Does this mean that You know Crypto needs to be regulated controlled indeed does this is this proof as many people are already claiming and more You'll hear more in the in the days to come Is this proof that generally finance has to be regulated because finance left alone as crypto generally is left alone results in Instability and collapse in disaster in all these horrible things that are actually indeed Happening in the crypto world. So is this a consequence? And this this will be the language Is this a consequence of too much freedom? Of too much freedom right so So those are kind of some of the issues I think that are important to discuss and and and go through as as We look at this and if I skip any of what I just promised to talk about feel free to send me a A What do you call it a super chat to remind me that I promised to talk about x or y or z. All right I see a lot of super chat questions coming in. That's great. We've got time today. We should cover them all It would be great if ultimately we had some on the topic I also see a lot of 20 and 100 dollar for michael. Thank you michael Super chat questions coming in feel free to yeah, I mean 20 plus Dollar questions are significantly preferred particularly when I have a lot of content and we can't go all day So yes, let's let's blow away the 650 dollar goal And and and you know reinforce This the the the new strategy for the run book show. Okay So just a little bit of history because I think it is interesting sam beckman freed A graduate from mit He's got both his parents are professors of law at stanford, which is interesting because I I suspect sam Is going to need a good lawyer Uh, so he comes from a a successful family a family of academics He is an mit grad. So he obviously did well. He worked for Janice I think janice securities for a while and then left in 2017 To found a a crypto trading A firm so this is a firm that actually trades in crypto and this is alameda research Sam is sfb. Sam is sam sfb Sbf sorry sbf sam is the founder and up until Friday the ceo of ftx so He founded alameda research as a trading company He founded this company in hong kong To avoid basically u.s law and use regulations because the things he was doing Were illegal in the united states And a lot of what they did early on was what's called arbitrage arbitrage is You know arbitrage should be risk less And what you're doing with arbitrage typically is taking advantage of mispricing of a price, let's say Let's say I'm trying to think of an example. Let's say the iphone Is selling in at the store over here for $1,000 and across the road It's selling at a store for $1,500 And you could trade you can trade with the stores and you can replace the store So basically you go into the store for $1,000 and you buy it and basically you sell it for $1,500 You're the store on the other side of the road. You sell for $1,500 now Like that can't happen if the stores are across the street from one another because people would go to the cheaper store And they would never go to the more expensive store But it can happen Unsophisticated assets like a bitcoin When the two assets are trading on exchanges on different continents, maybe with different rules Maybe because maybe because there's a information is moving slowly Maybe you have some kind of informational edge or maybe you have just a A trading edge. So what what? sbf what what they would do is sbf is Back when we feed so what lmd research would do is they would buy They would buy A bitcoin Where it was cheap and sell bitcoin where it was expensive And you don't make huge amounts of money on any particular deal But if you do it in bulk you can make a lot of money Now this was a business in 2017 That was quite profitable today. It probably is not profitable at all because A lot of people in the business as you do that the price is converging. It goes to zero So it just doesn't exist anymore. And and of course networks have become faster arbitrage has become As networks become faster arbitrage goes away But that's how we got to start basically on trading strategies how to make money off of bitcoin trading That expanded how to make money off of crypto trading Generally buying and selling crypto in some extent speculating buying the cryptos that have maybe peaked Sorry selling the cryptos that have maybe peaked buying the cryptos that were up and coming You know cryptos have this You could launch a crypto and it can go through the roof suddenly dodgecoin if you remember which was launched as a joke Was embraced by a lawn musk and it went through the roof and it still trades at a massive price So the whole idea is to try to figure out who the losers and who the winners and buy and sell and buy and sell and buy and sell And then he got into the business and he created ftx and ftx is a platform that basically allows people to store their coins their cryptos And to trade them To go through this exchange, right? I can I can buy it I can give them dollars and get bitcoin I can store my bitcoin. I can use that bitcoin to buy Ethereum or I can buy dodgecoin or I can buy ft which is the Coin issued by ftx Which is the exchange they issued a coin think about the ft coin the coin Some crypto companies issues is almost like stock that they've issued. It gives you some stake in the company now You're a lot of people because the trading right the buying and selling buying and selling buying and selling different cryptos And also in and out of dollars they store their crypto in At the at the at the exchange so it's stored at ftx so that it can easily be you've got an account at ftx It's like you guys have an account Let's say a Schwab and then you know the money sitting in accounting cash And then you can use that cash to buy stocks whenever you want you don't have to like oh I need to I want to buy a stock right now. Let me transfer money for my bank to Schwab and then no you keep the money at trump Well people kept their equivalent of their money their cryptos at ftx so that they could trade them now ftx promised that Everything that you stored at ftx was going to be held by ftx So anytime you would want it anytime you wanted to withdraw your money it would be there because they claimed they had It fully reserved Turns out that was a lie It turns out that they were using some of your deposited crypto for other purposes Maybe the biggest purpose that they used this other crypto was to lend money to the sister company also owned by SBF and that sister company was Is alameda research now alameda research When uh as being trading we don't know how much money it it was making on trading it was doing speculative things but it was also investing in um In um startups in crypto startups all kinds of crypto started very very illiquid Can't get out of a crypto startup very quickly if at all if ever So it was acting like a venture capitalist in addition to trading in addition to doing Who knows what we will find out in the months to come. What else they were doing? Okay, remember that in addition to that when a lot of the other crypto exchanges and crypto companies got into trouble earlier this year Alameda research Marched in and helped bail some of them out Literally gave them money to bail them out in exchange for I think an equity position And it sometimes just took them over so f Both the exchange ftx and alameda went in And bailed people out used whatever resources they had to bail them out now one of the questions is Where were they getting their money? Well, it turns out that a lot of what Alameda research was doing this trading And bailing everybody out and investing in venture Was not just the equity the money that its investors had given it But it turns out that it was borrowing money from banks Borrowing large sums of money from you know, I don't even know if it's their banks We'll find out again in the months to come but they were borrowing money from somebody Large amounts of money. They were borrowing in order to engage in All I can say speculation and I'll say something more about crypto in a minute and speculation and crypto But it's in speculating and in making these long-term investments investments So we're borrowing a lot of money but when They started bailing out these troubled companies and when bitcoin started declining dramatically earlier this year and all the other crypto Were going down significantly Particularly over the last six months, but really over the last year when all of that started happened its borrowers Said wait a minute We want our money back We're a little worried. This looks a little riskier than we thought in the Go-go days at the beginning of crypto, you know last year when anything you touched in crypto went through the roof We want our money back We're gonna or we're not gonna lend you more money or we want you to pay off your debts Well, it turns out that during that period FTX Lent money to Alameda research Alamedan research not Alameda Alameda or Alameda Alameda I think Alamedan research Lent their money In order to pay back the banks now What was this money? This is the money that The equivalent of this is the money backing up those deposits people had with FTX So they went out taking your deposits and shifting them with the idea that Alamedan will pass back when they pass back We're whole with our investors no problem it turned out that Alamedan and I'm sorry this is getting complicated. I know it's complicated You know life in the world certainly crypto and fraud generally is complicated It turned out that Alamedan research Who was borrowing money from all kinds of people right? Sorry Alameda Alameda. Okay. So Alameda research was borrowing money from all these people Was using in a sense as collateral As a basis for the evaluation the asset base They were using FTT which was the coin issued by FTX She can see now how everything was kind of wrapped around itself There was no there there There was no real asset There was just FTX and Alameda Switching money around to where was needed and moving it around now. I think FTX was probably profitable Off of its trading business just just because what does an exchange do an exchange takes no risk theoretically All exchange does is it facilitates transaction. It takes a fee So it really looks like FTX just straight out on their trading business was profitable But most of those profits were sent to Alameda which was not profitable was losing money Or it was investing in a very very illiquid stuff that we won't know if it's profitable from a long long time And at the same time and at the same time They were covering for each other So that both in the end landed up being insolvent But because a big chunk of FTX's assets now all those profits And some of the deposits were now We're now basically in IOU from Alameda, but Alameda Its assets were basically the coin of FTX One if one of these two goes under Both go under So about a week and a half ago An article was published in one of the big crypto magazines coin coinbase something like that Basically saying You know, we've looked at Alameda's Balance sheet And it looks kind of Spooky It doesn't look Very clean Something weird coin desk. Thank you coin desk. Probably should it doesn't look very clean Something wrong is going on here. It has too much of this FTX stuff But there's just it looks like this business is really losing a lot of money As a consequence of that People started Selling Selling The coin FTT That underlies FTX and Alameda and its price started going down People also started Drawing because they knew of this relationship between FTX and Alameda. They started with drawing The coin from FTX The real kicker was I think it was Monday or Tuesday last week The CEO Binance His name is CZ. He goes by CZ. Let us see the letter Z Announced that they were selling all of their FTT coin. It turns out that they had invested In a bunch of FTT coin. They had a lot of it Now we'll get to Other reasons why Binance didn't like FTX There are other reasons legit that they didn't like them But we'll get to that in a minute and I haven't yet looked into the business model Binance And whether it's solid, but We will see So CZ Announced that they were gonna Sell A bunch of FTT all of their holdings of FTT Coin this of course only accelerated The sale of FTT coin across the board people were drawing their money from FTX SBF Sam Bankman freed Came on and said oh, don't worry people were fine. We can we can redeem you. We can pay you back Everything is good You know, we can actually if you've got coin deposited with us. We will return that coin to you Don't worry about it. Everything's covered Within a day. It was obvious. That was not true Within a day. It was obvious that they could not They could not Redeem everybody out. They could not send coin to everybody While SBF was telling the world that everything was fine. No problem. He was calling up potential investors Beginning he just he tried to raise one billion dollars To give them liquidity to be able to cash people out But as the day evolved it turned out that one billion was not going to be enough It went up to six billion dollars and of course, there were no investors out there willing to bail him out Nobody was willing to put the cash Even though for a variety of reasons we will get to SBF was the poster child of crypto Nobody was willing to give them the money And as the week evolved it was clear That they were bankrupt that they were going bankrupt on wednesday. I think it was CZ um Announced that that binance would actually buy fdx And bail them out not clear what the price was he said Uh, we'll do our due diligence. We'll determine the price But we're gonna buy it at a significant discount and we're gonna take it over by thursday CZ Binance announced that they were not going to buy it the things looked much worse worse At fdx than they expected that they did not want the headache They did not want the hassle and it didn't look like it was worth it and they withdrew they were offered to buy them And at that point fdx imploded Friday morning. They basically announced a complete and out of bankruptcy We'll see How many people get their money back? You know, uh, uh, how many people, you know, they're billions of dollars here of people's deposits Some people will get their money. Some people will not some people will get a fraction We will see how it all ultimately evolves All right Put a line in the sand there. That's kind of the story of what's happened one other dimension to this Which I think is fascinating and uh, which is really reflected in In a watching a post headline From um, yesterday, which I think I think captures a dimension of this, which I think is interesting Crypto, this is the this is the headline Crypto king sam bankman freed charmed washington Then ftx failed Now this is actually a pattern A pattern Um, it turns out that sam bankman freed was at the forefront of trying to get Government to regulate crypto He was very active in washington dc. He knew everybody in washington dc. Indeed, there is now suspicion that, uh sec, I think sec chairman, uh, uh, gensla um Was somehow involved with uh, spf and maybe Maybe even received some funds from him. So maybe there's corruption at the highest levels of the sec We don't know pure speculation, but there is a story out that suggests that maybe something Something was going on there that is uh, that is irresponsible um Or fraudulent, but we'll see i'm not gonna say it is because I don't want to get into trouble I and I don't know for a fact that that's the case But there's no question that the spf Um, spent a lot of time in washington Many people say he spent more time in washington lobbying Then he spent in the bahamas where the company is based actually running the company His lobbying Was to try to put together regulation Um, that would benefit ftx And according at least the binance cz at binance Uh, this regulation Would have helped ftx and heard binance and heard the rest of the industry indeed one of the conflicts between Binance and ftx Was around this idea of regulation binance at least says That they are for they are for Um Markets free markets no regulation let crypto rip And um, no government regulation right? And ftx was obviously for regulation So one of the areas of conflict and one of the Comments that binance ceo, uh cz mentioned When he said he was going to sell, um ftx's coin ftt Was we don't want to support somebody Who's trying to regulate the business and trying to regulate in a way that favors them and hurts us So good for them for doing that another aspect of sbf's Time if you will in uh in washington, right? Is that um You know this became kind of a political issue Um, it was not just now just even a regulatory issue. It was not just now an issue of Uh Of the business model Sam bank would feed became if you will a real political figure It turns out that sbf Is the second largest contributor Second largest individual contributor to the democratic party Anybody know who the largest contributor to the democratic party is? I'll give you five seconds to think of it before I tell you It is of course, george soars the second largest Benefactor to the democratic party individual Is sam bankman freed Who gave hundreds of millions of dollars last year to the democrats? um sbf Got involved in a number of different campaigns and number of different Political issues and became a real force behind the democratic party and bought lots of influence within the democratic party this is going to make the whole court hearings and uh and His trial and and and uh, you know prosecution if it's going to come to that very very interesting because this guy Is deeply connected into the entire Democratic party infrastructure One other dimension of this which I think is interesting. This is a fascinating case Fascinating case one other dimension sbf Not only 26 billion dollars not only the biggest supporter of the democratic party Not only uh an advocate of regulation, but all of this Comes from a philosophical perspective sbf is one of the more philosophical CEOs at least was until fighting CEOs in america sbf who's by the way only 30 years old imagine being worth 26 billion dollars when you're not even 30 but sbf um 30 years old Was a big big advocate of effective altruism which he picked up at mit And he claimed that the reason he wanted to be rich the reason he wanted to make as much money As possible the reason he wanted to make a gazillion dollars a gazillion dollars gazillion or whatever that is Is to give it away That's effective altruism So that's the idea that you should go into the profession In which you will make the most money so that then you can give that money away and be effective in giving it away So the other part of effective altruism is when you give it away You give it to the best cause as possible and you monitor them and you you check their effectiveness In the goal of filling the blank whatever the goal that they make up for effective altruism Indeed Before Friday effective altruism sbf And his variety of entities had given Well, about a hundred million dollars To effective altruism causes. I mean one of the real cries of despair you probably heard Friday and over the weekend All across america and maybe all across the world Is from people who have uh People involved in the effective altruism cause who probably lost a lot of money because a lot of them were it were part of sbf of You know World of of investment and coins and all of that so they've lost a lot of money in second All the people running charities That were getting money from the effective altruism investors have gone indeed. I've seen some articles Some articles on the web Declaring effective altruism over Finished gone And indeed many of the charities that were doing effective altruism are probably Going to be hoarding significantly because of The extent to which they were dependent on sbf Anyway, so that is the world in which we live That is the world in which we live. It's a it's a it's crazy world And there's a sense in which all of this is built on kind of a speculative Mythology that's going on. There's a mythology around crypto And that is that these coins are worth anything That is that there's a business model here That makes some sense Now I get bitcoin bitcoin wants to be the world's currency People who are bitcoin advocates Believe that it will become The world's currency that if there's enough adoption And it has these amazing characteristics And it can be anonymized That it Can become a decentralized private currency and they want to demolish central banks and this is the way in which It will happen And they've created an algorithm with a finite number of bitcoins So that you can never have inflation You have other problems. I'm not going to get into the whole critique of bitcoin You have all kinds of other problems, but it's a currency. That's its use the the use of bitcoin is a currency I get that I even respect that I don't think it'll ever happen I think it's a myth. I think it's part of this mythology but They have a case. There's there's something to be done here, right? I also think that ethereum to some extent to the extent that I understand ethereum Is trying to make a case That they are creating something that's more than a currency They're creating in a sense a medium exchange that is tied up with a contract with a customizable contract So that when you exchange stuff, you're not just transferring money But you're actually engaged in a contractual relationship with the other side And that is what ethereum this is the whole idea of smart contracts and a gazillions applications of smart contracts So I get The value and and I think there's something there again. I don't understand it enough I haven't dug into it enough to know but it strikes me that there's something there I don't think anybody's figured out exactly what that thing is, but I think there's something there So I get bitcoin I don't think it'll be succeed, but I get it. I get ethereum I actually think it has a better chance of succeeding at least the model whether it specifically exceeds or not But then one of these other all these other coins and cryptos And what are these exchanges actually doing? I mean, it's one thing if the exchanges were involved in people buying bitcoin or buying ethereum or buying Let's say half a dozen other Crypto coins that had some rationale behind them But my understanding is most of what happens in the exchanges Is people exchanging coins for coins? tokens for tokens Not Using dollars to buy stuff, but constantly just living in a world in which there's speculation around these different coins Now the reality is That in the world in which we live right now 90 plus percent of those coins are actually worthless that the only thing keeping them afloat Is people's interest in exchanging them There's no there there This is speculation for the sake of speculation and indeed I think it's not just speculation because speculation is actually a good thing. I'm pro speculation This is most gambling I think dodge coin will go up this week. Let's buy some dodge coin Oh, there were late wheel hit red and I bet on red cool. I won So what is going on in the crypto world or has been going on? I'd say over the last two plus years Is pure gambling? Just you know, the worst kind of speculation Now again, it could be That in some cases there is some value some way And some of the exchanges that are doing this speculation Probably have value because they're making money off of the stupidity of other people. They're facilitating this trade They actually have reserves to cover all the deposits They actually have reserved one for one for every dollar deposit they ever reserve For every coin deposit they have the coin there. They haven't done what sbf has done. They haven't done But you know what ftx and and alameda which was unique because there was the two entities They haven't done what The previous situations of stable coins, which were anything but stable Algorithmic stable coins, which is just again gambling. It's just speculating That as long as people like your coins, everything is fine The the the algorithm that keeps the coin value stable keeps stable But as soon as people start disliking your coin It spirals out of control and you go bust. What did it happen with them in just a few days? so Most crypto is worth zero And it's kept afloat by nothing other than People's subjective desire now people's subjective desires obviously was something People buy stupid stuff all the time remember Maybe you don't remember because this is back in the 70s or whatever people used to buy pet rocks I mean people buy dumb stuff all the time Stuffed animals for thousands of dollars all kinds of things stuffed animals at least are kind of cute, but People are buying coins for the sake of buying coins There's no they're there. What does the coin represent? What is it worth worth? I can even talk about worth Now get NFTs A little bit more complicated because NFTs you're getting something in return for your investment You're getting an image. You're getting something that supposedly unique gives you some kind of unique property right over it One of a kind or whatever again, that's You know your estimation of the value of it fine NFTs I have no problem with NFTs I wouldn't buy an NFT because I don't value the thing that I would be getting but this isn't even NFTs. This is just coins It's it's just stuff. It's just a digital zeros and ones People are fascinated by this just like they were fascinated by tulips just either fascinated by Sudden stocks. They're fascinated by comms. They're fascinated by real world stocks when they came out Here, of course, it's all Hyper it's hyper. It's more than any of those. It's a bigger bubble than any of those Because it it's all abstract. It's so easy and people have convinced themselves That other people desiring it gives it actual value Actual value to do what I mean I get bitcoin bitcoin is if you believe in the dream that it will become a currency one day Well, there's a currency it's going to be very very valuable because there's a limited supply of it And if it has to fund every transaction in the world and it's going to replace the dollar I guess that's where the value comes as a medium exchange Again, I think that's a bad argument. I don't think it's I don't think it'll ever happen. But if it happened, I get it But all these other coins Don't even have that dream And and there's no basis for that dream because many of them Can be issued. I mean one of the things that happened this morning or yesterday Is that they've suddenly discovered 400 million Extra ftt coins were distributed were issued yesterday out of thin air They're supposed to only come out on a certain schedule and yesterday was not part of that schedule And then they so somebody hacked it looks like somebody hacked the ftx system and distributed 400 ftt's 400 million ftt's worth of ftt's now I mean that's the point you could just issue 400 and what's it worth? What do you buy what's behind it? So one of the case of ftx there seems to be Financial fraud and we'll get to the kind of financial fraud because I think it's interesting because I think most fraud cases And this is a good example The person doing the fraud never sits down and thinks how can I defraud people? I don't think sbf was a fraudster in a sense of I'm gonna take people's money. I'm gonna steal people's money. That's my goal in life I think he Got into the slippery slope of kind trying to cover his ass Which is what mostly happens with financial fraud. We'll get to that in a minute crypto today has Mostly has no value Yet people trade the only value of the crypto exchanges is people exchanging crypto That probably doesn't have any value People give it value only because of their desire to hold it And at some point That desire switches goes away transfers to something else. They need to buy a house. They have to liquidate the crypto They need to buy this they they live in the real world So be very very careful Be very very careful Now supposedly binance has a better business model ftx. I don't know Do you know for a fact that that's true One of the things they're trying to get all the crypto exchanges to do Is actually audit them So that they have a proof that they have every coin that was deposited still being held there for you But there's challenges with auditing partially it goes against the whole idea of crypto because You can have human auditors the whole idea is to eliminate the human there are protocols that could do the auditing But they're not for proof So they're real challenges. I would be careful I would be very very careful This is in many ways much worse than anyone But so let's talk a little bit about financial fraud And then we'll talk about regulation um Most financial fraud happens in the following way and this is what i'm describing now is basically financial fraud That happened in a number of companies in the in the early 2000 late 1990s early 2000s Let's say your company is doing great And every quarter you're Announcing better and better earnings And the share price is responding accordingly. It's going up and up and up and up And shareholders are happy and you are happy as the ceo And all your employees are happy and the world is just an amazing happy place And then suddenly one quarter Earnings disappoint and they don't go up They maybe stay flat or maybe they go down a little bit And you say to yourself You know if I announce these earnings People are going to be disappointed. They're going to be unhappy People will sell the stock the stock will go down investors will be unhappy. My employees will be unhappy. I will be unhappy But I know i'm convinced convinced that next quarter We're going to have phenomenal results So What i'm going to do is this quarter I'm going to Inflate my results a little bit just so we have a good quarter Next quarter when we have a phenomenal quarter because I know it's happening I will deflate the results a little bit. This is called income smoothing. I'm going to smooth my income I'm not going to announce disappointing earnings just to fudge you a little bit a little bit nothing serious So you do it once Nothing bad happened You know earnings announced stock keeps going up. This is cool. The problem is that the next quarter Turns out not to be great It turns out that maybe the previous quarter was down for a reason. Maybe there's a recession looming Maybe there's just less interest in your firm And the second quarter is again disappointing Now You can announce big disappointment. The first quarter would have been a little disappointed now. It's big disappointment. You don't want to do that She said look, this is just this is just silly. It's just accumulating. It's just it everything's going to be fine I'll just smooth it again I'll just I just we'll just and you get to see a phone involved and there's enough In there's enough flexibility with accounting that you can do this without it completely being nuts. You do it again And everything's fine except the third quarter is even worse than the first two This is exactly what happened at will come will come So you fudge again and now If you don't fudge You're gonna have to admit that you fudged in the past because now it's not smoothing anymore. It's not a little stuff anymore Now it's big now. You're trying to trying to save your ass. You're really trying to protect yourself now. It's legal stuff And you can do this for a while you can get away with false earnings for a while and then at the end and if You get lucky and things turn around and things go through the roof and things become great again You can probably get away with it. You can smooth it all out But it really happens that way and it really happens every time. So once in a while, maybe things will go back up and you'll be fine But enough times things will continue going down and you'll be crushed I have a feeling this is exactly what happened here FTX wanted to keep a one-on-one, you know, really good What do you call it? Liquidity for its investors they wanted to be able to redeem everybody But then, you know, other companies started going bankrupt around and Alameda was there and it was like All this other crypto stuff is so cheap. I got to get involved in this. I don't have enough money right now I'll just borrow a little bit I'll pay it back later because I know I'm profitable And I know I know by the way crypto will turn around bitcoin will turn around everything will turn around Remember everybody holds bitcoin is collateral because bitcoin is the most stable and bitcoin is down What almost 70 percent for the year 7 t 7 0 That's a lot Things will turn around everything will be fine So you help everybody out everybody likes you because you're an effective altruist and everybody loves you and they send their love to you But then things get worse and and and now, you know, some of your investment go bad and Bitcoin continues to go down and other cryptos that you're using as collateral continue to go down And uh, you the whole balance sheet is off and you have to lend even more money to Alameda and But it all turned around. I'm sure sbf till the very last minute believed. Oh You know crypto such a solid asset is all turned around everything will be great But it isn't because once this is a great moral point. Here's the moral point This is the objectivist moral point Evasion never works Evasion always leads to spiraling out of control Lying deception dishonesty and by the way the worst kind of lying the worst deception the worst dishonesty Is lying to yourself being dishonest with yourself Always involves more and more and more and more dishonesty It doesn't just end it doesn't get fixed Things just get worse Constantly always So you can learn for life about from this. You don't just have to not just if you're in finance generally in life Once you start deceiving yourself and others Once you start on a path of deception There is no coming back. It is a disaster It is an absolute disaster Evasion ignoring facts of reality pretending things are not something different than what they really are Pushing stuff into the future. Oh, I'll think about it tomorrow the famous line from um from God gone with the wind from gone with the wind. I'll think about it tomorrow Whenever you're tempted to do that Stop You're self-destructing Thing bad things are happening Don't do it so That kind of evasion that kind of dishonesty that kind of pushing things to tomorrow I think about it dan. I won't think about it now. I'll pretend things are better than they are Always comes back Always backs fires always is destructive That's the bigger moral point here, okay think it through Face You know we'll all fail. We all make mistakes. We all screw up all of us face it Admit it to yourself And if you have investors or you have employees you have admit it Pay up pay the piper You'll be so much better off If disappointing earnings happen the first quarter Okay Stock will go down. I'll be worth a little bit less. So what? Well, I have my integrity I'll have my honesty And yes, it might get worse, but then I need to look at why earnings going down. That's the question Is it a recession? Is it the economy? Is it me? Is it the company? Do I have some bad salespeople? What is going on? but you see by by by Covering it over You don't take the necessary actions to fix it By rationalizing it away You don't do what is necessary to put you back on the right track You rationalize it away and then things are guaranteed to get worse and worse and worse because you never fix the problem That the bad earnings or the bad Something is reflective of so a lot of good life advice From following these things and knowing what what not to do in the future All right Let's see Two other things I think the work that I find interesting one is A lot of times companies that have CEOs that spend more time in washington dc than they do At corporate headquarters are the first ones to go Enron was like this The CEO of Enron Really didn't run the company. He was in charge of regulatory schmoozing so A good sign of a stock to avoid of a company to avoid of a person to avoid of a business to avoid Is when they themselves Spending huge amount of time in washington dc. I I guess everybody needs lobbyists But if you're there if you're schmoozing if you're interacting if you become politicized in that way You're probably not Doing what's good for the business so avoid political schmoozing CEOs Jeff emelt of ge was a schmoozing political CEO So that's one second This is not to condemn markets This is what happens in markets People do stupid things. They pay for them And some of the people doing the stupid things are the people who invest in these kind of people the people who use these kind of exchanges and don't do their due diligence Don't do a proper due diligence into what's going on Ultimately, they're going to be responsible for what happens So this is not sold by regulation Enron was a regulated business many indeed I would argue that More financial crises happen in regulated industries than in unregulated industries So Regulation is never the solution and indeed banks When they were free market under a proper Property rights regime not in the united states or in a place like canada scotland Did phenomenally well with no regulation Even though they had fractional reserve banking But they held enough reserves And they were disciplined by the market and you didn't have the kind of bank runs you had in the u.s Which was a politicized financial system from day one the more politicized it becomes the more problems there will be Regulations doesn't solve this now. There are no bank runs in america banks anymore At least small banks anymore because we have fdsc insurance so the government can solve the bank run problem But by doing fdsc insurance you create other problems More hazard problems you create other problems that are associated with inefficient banks with lack of innovation lack of progress lack of Good investments all kind of other problems Regulations are never the solution. I have to admit that one of the astounding things about fdx Is the sum of the investors in fdx pretty smart guys Sequoia capital had 260 million dollars invested in fdx They have basically written a letter to the investors saying they have written that down to zero They have lost 260 million dollars of their investors money on fdx now Sequoia can afford to do that because they make so much money on other investments at least used to We'll see in the future if sequoia is the same sequoia As it was when it you know the founders of sequoia basically passed away So this generation of sequoia vcs are they as good? Do they know what they're doing? I saw them once make a Big investment in a company that went bust in nine months. So even in the good old days They went bankrupt more than they succeeded But when they succeeded They succeeded so much that they could afford to go many many times bankrupt, but this is still a big amount All right Thank you for listening or watching the iran book show If you'd like to support the show We make it as easy as possible for you to trade with me. You get value from listening. You get value from watching Show your appreciation. You can do that by going to your own book show dot com slash support by going to patreon subscribe star locals And just making a appropriate contribution On any one of those any one of those channels also if you'd like to see the iran book show grow Please consider sharing our content and of course subscribe Press that little bell button right down there on youtube so that you get an announcement when we go live And for you those of you who are already subscribers and those of you who already supporters of the show Thank you. I very much appreciate it