I’ll come clean: when the FTX and Alameda complaint against SBF’s parents was released, I hoped it would provide fodder for the rest of Season 2 of Unqualified Opinions. Unfortunately, nothing in that complaint was funny or clever or even interesting. Instead, it was gross, with the epitome of grossness being SBF’s dad complaining in an email to his son that he wasn’t being paid enough to do nothing and cc’ing SBF’s mom to solve the problem. Yuck.

So that meant I also wasn’t that interested in reading Michael Lewis’ new book Going Infinite about the whole sordid and illegal (and gross) affair. That is until Matt Levine of Money Stuff started excerpting from it and then the trial started and then it was everywhere, and so I was unavoidably pulled back in.

Now, as chair of Permanent Equity’s Matt Levine fan club, you can rest assured that I don’t find fault with most of what’s published in Money Stuff, but this whole SBF/FTX saga has been so bizarre (and gross) that it’s prompted people to take some unexpected positions. For example, here was Levine opining on SBF’s first employer, investment firm Jane Street, and its practice of requiring interns to learn how to bet against one another:

It is optimal for a firm like Jane Street with a lot of traders to encourage each of them to take a lot of positive-expected value risk, because Jane Street has enough of them to benefit from the law of large numbers. With enough independent positive-expected-value bets, it will make money, even if some traders lose money.

And then here he was carrying that line of thinking through to a discussion of public company CEO compensation:

This is analogous to why corporate chief executive officers are often paid with stock options: It encourages them to take the amount of risk that is appropriate for their shareholders. A CEO generally has a huge chunk of her human and financial capital wrapped up in her job, and it is very important to her not to lose it. So she will naturally be conservative, preferring steady mediocrity to risky expected value maximization. But her shareholders are diversified funds who own lots of companies and want each one to maximize expected value. So they adjust her utility function by giving her stock options that pay a ton in the upside cash and nothing in the mediocrity case.

Say what?

In the case of Jane Street, yes, that math can work for some period of time, maybe even a lifetime, but the reasoning falls victim to the fallacy that a lot of independently stupid decisions can sum to a broader good decision (they can’t!). Further, it underestimates the likelihood that if one bad thing happens, it will make it more likely for other bad things to happen. For example, if the market got wind that some Jane Street traders were getting smoked, it would likely start actively trading against the other Jane Street traders. 

In the case of executive compensation, the CEO in this strawman, who is probably already financially secure, has every incentive to be reckless in order to get those options to pay off because she stands to gain a lot and lose very little. This is why so many public companies lever up to repurchase shares. Doing so risks up the business, with that risk being borne by shareholders, in order to jumpstart the stock price, with that reward being reaped by the options-holding CEO.

Yet Levine isn’t the only one that SBF/FTX has gotten to think funny. The aforementioned and previously unassailable author Michael Lewis (Moneyball remains a classic) seems to have fallen victim to a con, writing 288 pages about a visionary who was actually just a criminal and not bothering to verify any number of wild claims. Moreover, he seems to be doubling down in recent interviews that SBF, despite an objectively incriminating fact pattern, is simply some kind of misunderstood. Asked point blank if he believed SBF was a serial liar, Lewis responded, “I think he’s a serial withholder. Unless I asked exactly the right question, I did not get the full picture.”

Which, you know, is what happens when someone is a liar.

Anyhow, there is still more trial to come, and everyone is assumed innocent until proven guilty, but my opinion, in case you missed it, is that it’s gross.

– By Tim Hanson

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