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Sunday, December 4, 2022

Glamour – The Reformed Broker

Glamour is a supernatural form of mental compulsion or influence that is specific to vampires. Glamouring is similar to hypnosis, and while all vampires have this power, it needs to be taught as it does not appear to come naturally…

The process of glamouring begins with eye contact between a vampire and a respondent. Once eye contact is made, the respondent is held in a trance, making them susceptible to the power of suggestion, until the glamour session is ended. Based on the examples in the television series, verbal commands seem to be necessary. It is sometimes possible for the victim to look away if they quickly realize they are being glamoured.

A respondent enters a trance-like state, becoming highly susceptible to suggestions and commands, but can respond to questions at will, as they are still semi-conscious. The respondent is still at least partially conscious and can even show resistance to the suggestions. Most vampires try to use persuasive dialogue while glamouring to facilitate the process. Glamouring can be avoided by avoiding eye contact with the vampire.

– True Blood wiki

In last decade’s HBO series True Blood, the vampire characters were able to influence their human counterparts via the device of Glamour or by glamming them. The vampires, in addition to possessing this supernatural ability, were also super sexy, which probably didn’t hurt their efforts.

The FTX scandal is on a par with the Madoff fireworks of fifteen years ago in terms of the amount of people affected, the institutions duped and the money that’s missing. There might be as much as $10 billion missing and no one knows exactly where it went. According to the preliminary bankruptcy filing of the now disgraced crypto exchange, there could be as many as one million individual creditors owed money from this fiasco. Not only did the FTX founder, Sam Bankman-Fried, fool the mainstream media, he was also fantastically successful at tricking some of the most storied, prestigious investment firms in the world – BlackRock and Sequoia among them. He glammed them.

How did this happen? Where was the due diligence on the part of the venture capitalists, asset management firms, banks and hedge funds that were both investing directly in FTX or utilizing its platform? All of that information is coming out now, but it seems as though Bankman-Fried and his inner circle were able to glamour everyone over the last three years by throwing around money. No sex appeal or supernatural powers necessary. He bought his way into prominence and then leveraged the attention, relationships and positioning to his further advantage. The effect was cumulative. The more status he attained, the more that set him up for even greater success.

Everywhere you looked, there it was, the ghostly outline of three letters: FTX.

The confab in Chicago this week was supposed to be another celebration for the golden boy of market structure, Sam Bankman-Fried. His FTX flexed its platinum status at an earlier Futures Industry Association conference in Boca Raton, Florida, hosting a late-night cocktail party by the beach, holding a fireside chat with A-Rod and handing out branded swag from its tricked-out mega-booth in the exhibition hall.

This article, about how FTX spent its way into platinum status at a major futures trading conference, is just one of hundreds of tales that are starting to emerge. Bankman-Fried’s origin story – a whiz kid MIT alum who learned to trade at Jane Street and began arbitraging the price of crypto between the US and Japan – was repeated so often it just became accepted as established truth. Maybe it was true. Maybe not.

There were people who were suspicious of this guy who came out of nowhere to become one of the largest players in the market within a year of founding his firm, but most people weren’t. There were people who were concerned about the inter-related nature of his exchange and his proprietary hedge fund operating on it, but most people weren’t. The skeptics turned out to have been right. They deserve credit. They were clearly in the minority. Ironically, one of the lynchpins of Bankman-Fried’s strategy was to appear as though he was the preeminent pro-regulation player amidst all the lawlessness of the ecosystem. The political donations were a big part of that. It obviously worked, for a while.

Bankman-Fried’s presence at crypto events and trading conferences had become ubiquitous. High profile magazine articles and frequent television appearances bolstered his image as being the man with a plan in a nascent industry that seemed chaotic and incoherent even on its best day. He appeared on the cover of Forbes and Fortune. He was compared to Warren Buffett. He was compared to J. Pierpont Morgan. Hiring celebrity spokespeople like Tom Brady and appearing in pictures with them was the icing on the cake. The Miami Heat were playing their home games at the FTX Arena. He had the whole world fooled into believing that his exchange was a money-printing machine sitting at the heart of Crypto World. Billionaires, hedge funds, brokerage firms, proprietary trading shops and retail investors just assumed that a firm as high profile as FTX must be doing things correctly to have reached this level of renown.

Unfortunately, it now appears that the FTX exchange’s profitability was not the source of all the money Sam Bankman-Fried was throwing around. It’s beginning to look more like he was spending and gambling with customer deposits, raising new money to hide old losses and moving funds around from one venue to the next to keep the con going. The glamouring has now worn off and it’s all unraveling in real-time right before our eyes. It’s a remarkable event that will likely go down as one of the biggest financial frauds of all time if the allegations prove true.

In investing and trading, there are many types of risk. The type that’s now coming to the forefront of the discussion is counter-party risk – doing business with someone who does not have the wherewithal to complete a transaction. And within the category of counter-party risk, there is a version where you are doing business with someone who is lying or stealing. That’s the worst kind.

One thing I’ve learned in this business is that if you’re doing business with someone who is determined to trick you, the odds of them succeeding are pretty good. Sam Bankman-Fried appears to have been among the most talented tricksters of all time. Look at the list of his biggest victims to gauge the level of his prowess.

The overall environment in which he pulled this off can also be partly to blame – zero percent interest rates and the concomitant hunt for yield, trillions of dollars in sopping-wet excess liquidity, an unregulated marketplace, an emerging wave of technological innovation, a social media-driven investment mania, celebrity culture converging with the realm of experimental finance, a decentralized work-from-home era in which eye contact and in-person conversation were subordinate to the need for speed and the imperative to get in on the deal. The FTX kids probably wouldn’t have gotten this far without these atmospheric preconditions being present.

Everyone has investment losses this year. Stocks went down. Bonds went down. Crypto went down. Regardless of where we finish, 2022 will forever be looked back on as one of the worst years for the investor class in history. Long-term investors accept the fact that there will be years like this that must be survived in order to participate in the upside. Stocks rally in three out of four years, the statistics tell us. This is that fourth year we’ve been warned about.

But that’s just market risk. It comes with the territory. Counter-party risk is something else. Being victimized is different than buying things that rise and fall. Being lied to, cheated and stolen from is another level. Long-term investors do not want to accept that risk going in. It’s not supposed to be part of the experience. When it happens during a bear market, it takes what little trust is left and sets it on fire.

FTX has many sophisticated shareholders and counter-parties who are wealthy enough to simply write their losses down, hope for some recovery of assets and then move on. They invested in a person who, allegedly, was willing to lie to their faces and use their capital for activities that they were not aware of. They invested in a platform that violated the trust of its customers and potentially broke the law. No amount of due diligence in the financial services industry can prevent a person or organization from going rogue. You can vet the leadership, you can analyze the balance sheet, you can background-check, you can ask for references, you can obtain signed pieces of paper, you can demand third-party custody, you can vigilantly check in on the website and analyze activity logs, you can do all of these things – but if someone decides to commit a crime, the end result is going to be the same until that crime is revealed. No matter what regulations are in place, we are always – all of us – subject to this risk.

Counter-party risk can never be entirely guaranteed against. Some level of trust is going to be necessary in any endeavor. Sometimes we trust the right people and sometimes we don’t. It’s not always obvious in the moment. And during episodes like this, we get that reminder. If trust were a stock trading on the market these days, it would be heading toward an all-time low.

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