The author Michael Lewis on the lessons of Sam Bankman-Fried

On October 3, the trial of Sam Bankman-Fried began at a federal court in New York City.

SBF (as he’s more commonly known) is the disgraced founder of the crypto trading firm FTX. He was indicted last December by the FBI for defrauding customers to the tune of billions of dollars.

Before he was charged, SBF was widely seen as a benevolent genius, some kind of digital-era Robin Hood, who was going to make obscene amounts of money and then give it all away to worthy causes. (Disclosure: In August 2022, Bankman-Fried’s philanthropic family foundation, Building a Stronger Future, awarded Vox’s Future Perfect a grant for a 2023 reporting project. That project is now on pause.)

I’ve long wondered what was so irresistible about the SBF story and why so many smart people were so willing to buy it. Luckily, a new book by Michael Lewis, the financial journalist and author of such bestsellers as Liar’s Poker and Moneyball, presents the first truly behind-the-scenes look we have into whatever the hell actually happened here. Lewis was present for pretty much the whole thing, including at the end when SBF was arrested in the Bahamas.

So I invited Lewis onto The Gray Area to talk about what he witnessed, what SBF actually did, and what lessons are worth drawing from this bizarre saga. Below is an excerpt of our conversation, edited for length and clarity. As always, there’s much more in the full podcast, so listen and follow The Gray Area on Apple Podcasts, Google Podcasts, Spotify, Stitcher, or wherever you find podcasts. New episodes drop every Monday.

Sean Illing

Your initial encounter with SBF was a bit random and I’m curious about your first read on the guy? Did you have the vague feeling that this would end in a train wreck but wanted to be around to see it?

Michael Lewis

The initial feeling was excitement about a character and a situation. It was more like, “I cannot believe this person had $0 two years ago and now he has $22.5 billion according to Forbes Magazine.” And he’s using it to create havoc in American politics, in global finance. He’s talking about upending philanthropy. It was trouble everywhere you turn and he was just different as a person.

He read differently than anyone I’d ever met and was clearly very bright and had an almost Martian’s view of the world. Everything he encountered, he didn’t listen to what anybody had to say about it, didn’t believe any of the received wisdom about how to spend money in American politics. He was instead just going to figure it out all by himself with basically a bunch of other kids.

I thought it was kind of a funny situation, and it was obvious literary opportunism. People may not understand but with me, I don’t really know what a book is. Often this is the way they start: I find some person and I just want to follow him around and figure out what the story is later. So what I said to him was, “I don’t know how this is going to end, but I would really like to just watch,” and he said, “Sure, come along!”

Sean Illing

Something about this guy’s shtick always drove me nuts. He had this whole eccentric-cargo-shorts-and-thrift-store-sneakers-tech-genius persona and it seems so contrived to me, but people were really mesmerized by it—

Michael Lewis

So it’s really important to understand it did not come across as contrived and nor was it. It was who he was. You go back and talk to people who were in high school with him and they saw him after he was a billionaire. They said, “Same guy.” The shock was that that guy became a billionaire. It wasn’t that he became a billionaire and then started to wear funny shorts and T-shirts and behave this way. He has always been this way. He didn’t change. The world did.

What the tech geniuses do, in my experience, is say a lot of words and they don’t make a lot of sense, or to put it more politely, they’re too smart for me to understand. It’s mostly jargon and acronyms. They don’t want me to understand. They want me to be impressed. Sam was not like that. He was very good at explaining and making sure you understood and allowing you to ask the simple questions. He wasn’t off-putting. I’m with you on the tech genius stuff. I’ve dipped into Silicon Valley and I’ve never really wanted to write about that crowd. He wasn’t that way.

Sean Illing

How would you sum up what this guy did to get himself arrested?

Michael Lewis

So this is guy who is not a money person, not a material person, and he’s plucked out of MIT by a high-frequency trading firm, because his aptitudes are exactly those that are required now on Wall Street. Any other time in history, no, but now they are. He sees while he’s at his high-frequency trading firm that the radical efficiencies imposing on say, US stocks, does not exist in this new market called crypto. He realizes he could take what he’s learned and make a fortune in crypto, because you can buy a bitcoin for $100 in the United States and sell it for $120 in Japan. It’s not rocket science, but you can do it with his techniques very fast, and very automated. So he creates a company called Alameda Research and it’s going to be a hedge fund for crypto.

While he’s doing that, he realizes, accidentally, that the exchanges that he’s trading on don’t work very well. There are hundreds of these or dozens of these crypto exchanges and they all have problems. They aren’t well-suited to an institutional caliber crypto trader like himself. So, he creates the software for exchange and that’s FTX and then he’s sitting on a gold mine. The FTX blows up. He goes, “Great.” So he’s got this profitable business, it’s a very simple casino-like business. He’s taking a little bit off of every trade, but at the same time, he still has this old hedge fund that trades on the crypto exchange, and they’re right next to each other in Hong Kong, then they’re right next to each other in the Bahamas.

His girlfriend, Caroline Ellison, is the head of Alameda Research. He’s the head of the exchange. In practice, they live together, all the rest. Obvious conflicts of interest. He’s trading on his own exchange. As it turns out, and this is the alleged crime, when you go trade on FTX, when you, Sean, want to buy bitcoin, you send some dollars to FTX and they’re supposed to just hold your dollars and hold your bitcoin in FTX in cold storage. It turned out the depositor’s money was not in cold storage on FTX, but it was actually inside the hedge fund as a free loan to Sam Bankman-Fried’s hedge fund.

When everybody at once last November wanted their money back from FTX, the money wasn’t there. So, this is the problem. Now everybody agrees on these facts. Most of the money wasn’t there. There was $15 billion that was meant to be inside of FTX. When the dust settles on the run on FTX, there’s like $10 billion missing. The question is, where is it? How much is still there? What happened to it? How did it get from one place to the other? That is what the trial is going to sort out.

Sean Illing

And how do you explain what actually happened with the money?

Michael Lewis

When you, Sean, back in 2019, when you sent your money to FTX, you actually didn’t send your money to FTX, because FTX couldn’t get bank accounts. No one would give them a bank account and you need a bank account to send dollars to. Alameda, on the other hand, the hedge fund, did have bank accounts. So they told customers, “Wire the money into Alameda and it will then be on FTX.” I’ve seen these wire statements. It actually says you’re wiring it to Alameda or to some other entity inside of Alameda. $8.8 billion piles up this way inside of Alameda. So, that’s one mechanism for the money getting in the wrong place.

The second mechanism is that everybody who’s trading on FTX, it’s not just cash for bitcoin. You’re allowed to buy bitcoin futures, which is like they’re giving you a loan to make a bigger bet than your stake. So, you might put up $10 to buy $100 worth of bitcoin and your $10 is the margin. If the minute bitcoin loses that trade, loses $10, they take you out of the trade. You’re not allowed to lose money on FTX. You’re not going to lose their money, you can lose your initial stake.

This is how everyone was managed: You can make bets here, you can make bets with margin, but we’re not going to be exposed to your risk. The exception was Alameda. Alameda could lose unlimited sums trading on FTX. When it all went bad, it looked like they had $2.5 billion dollars or something of losses. So, that was the other way that the money went from one place to the other.

Sean Illing

So he basically built the Mandalay Bay Casino for the crypto world and then started doing what you’re not supposed to do, which is gamble in your own casino, and he doesn’t just gamble in his own casino, he gambles with other people’s money, his customer’s money, in his casino. Is that right?

Michael Lewis

That’s correct. It’s slightly more complicated because you have to imagine that the person who creates Mandalay Bay is sitting there gambling on his own before he creates it. He didn’t start gambling after he created this. He was already gambling when he created his casino, and the casino in the beginning needed him to be there on the other side of people’s trades.

In the very beginning, it was very useful that if Sean came to buy a bitcoin on FTX, Alameda was there to sell it to them. So, at the very beginning, they were on the other side of a huge number of the trades. Over time, they became almost irrelevant to the activity, but in the beginning, they were a big deal. So there was a legitimate reason in the beginning for them to be present, but there was always this conflict.

Sean Illing

Back to SBF, the guy, for a minute. All the altruistic stuff he was spinning on his way to the top — that he was going to take all this cash and he was going to throw it at humanity’s biggest problems — do you think he was really sincere about that?

Michael Lewis

God, yes. You can’t understand the texture and the fun of the story without knowing just how serious he was about this. The first time he finds a crowd that he not only fits in with but can be celebrated by, is this effective altruist crowd. It’s a movement he collided with in college. It’s quantifying philanthropy, quantifying the effect of the goodness you do. Public health movements like, “Okay, you make $100. You can give it to Yale University, your alma mater, or you can give it to Africa for bed nets to prevent people from getting malaria. What is the best way to spend this money?”

They end up saying, “Let’s measure lives saved with the dollars or quality life years created with the dollars.” So it becomes a mathematical exercise, very appealing to him. Not doing it because he feels any real human feeling or cares about people. He just likes the math exercise. He likes the reason behind it. Then you add onto this, when he collides with this movement, the Oxford philosophers who’ve created the movement are pedaling a new idea and the idea is earning to give. The idea is it isn’t just about philanthropy. It’s about going out and making the dollars specifically to give them away. So, you, young man at MIT, you could become a doctor or you could go to Wall Street and become a banker and pay 10 doctors to go to Africa. He finds this appealing and he’s all in on it, it’s his identity.

Sean Illing

We’re sitting here talking, after the whole thing fell apart, and it’s interesting to think about this from your perspective. You had this extraordinary character, whatever we think of him now, and your job as a writer was to tell the story, to tell people what happened. I think all of us, when we’re constructing narratives, can get invested in the story we’re telling and sometimes that makes it harder to see what’s actually going on. Over the course of telling this story, did you find yourself constantly bumping up against your expectations? Did you find yourself bumping up against the narrative you thought you were telling?

Michael Lewis

Not so much that. The problem I had was last November, right before it collapses, I was in a conversation with a friend I used as a sounding board for stories. I said to him, “I want to just bounce this off you because I got a problem. I’ve spent a year with this character and this material. He’s a great character. The material is wild, but I don’t know if I have a book.” I was prepared to walk away from it because I didn’t know what the story was.

But I had this character lighting up the world in various ways because he’s bouncing around different systems in the world, bouncing around American politics, bouncing around global media, global finance. His interactions with these systems are teaching us a lot about these systems, but I don’t know where it goes. My friend said, “Your problem is you don’t have a third act.” He said, “This is never a movie, but you’re a good enough writer. You could probably dance your way out of this and the character’s so good and this other stuff is so good. You ought to just try to write it.” Two days later, FTX collapses. He writes me a note and says, “Can I direct the movie?” It’s incredible what just happened. Life just handed you a third act.

So I didn’t know how to tell it until I knew where it was ending, which is an odd thing to say because if you had asked me there, I could imagine five different possible endings and none of them would’ve been what happened. Once there was an ending and I could see where I was navigating to, I was able to sit down in January and it just wrote itself. I didn’t have any trouble at all.

Sean Illing

If this book was published a year ago, before everything fell apart, would it have read more like a hagiography?

Michael Lewis

No, I wouldn’t have written it. I didn’t write it, right? I didn’t write a word of it. I spent a year gathering stuff, trying to figure out what the story was. The problem is people bring their own predisposition of how they would go about writing a book, and it’s false to me.

I don’t go into it thinking, “Oh, he’s a genius and I’m going to write about a genius.” That was not it. He was interesting and he was going to teach us about the way the world works because he’s interacting with the world in all sorts of bizarre ways. So I regarded him as a tool, like an instrument. I didn’t know the meaning of the instrument except that he was going to light up lots of spaces for us. I’ve done this before with other characters. I don’t know what it is until I get into it.

Sean Illing

Why do you think so many people wanted so badly to believe in this story?

Michael Lewis

One of Sam’s lawyers, who’s in all kinds of trouble, said, “I wanted there to be a Sam.” I think what he meant is that we live in a world of problems. Our institutions suck. Our institutions are enfeebled. The instruments we have to deal with the problems don’t seem up to the task. The idea of someone rolling in and generating so much wealth that he becomes a problem-solving institution is very appealing. That’s how people saw him on the way up, and now they see him in a different light.

If you had sat down with him two years ago, you would have enjoyed his company. You would have said, “Wow, it’s really odd that someone has $22 billion and isn’t a douchebag.” He didn’t have the baggage that often comes with wealth. You just thought, “That’s odd, he’s so normal. As odd as he is, he’s normal. He’s not lording it over me in any way.”

So on the way up, that’s that. On the way down, this is where it gets weird to me. If you try to map the anger toward him, it’s very heavily concentrated in the United States. The rage is here. But the losses are almost all outside the United States. The Americans weren’t allowed on the FTX exchange. They were allowed on the US exchange, but it was pretty small. So, the losses don’t map onto the anger in the way that I would have thought they would. And the people who are really angry are pretending they’re angry because they’re the victims, but they themselves aren’t the victims.

If you’re really angry about the victims, you ought to think a lot harder about how the bankruptcy people are handling the money because the victims could get their money back and that would solve that problem. So there’s something else under the rage that has nothing to do with Sam, nothing to do with the losses, nothing to do with the victims. It’s just a desire to be angry. And that is sort of like the mood of our culture right now.

To hear the rest of the conversation, click here, and be sure to follow The Gray Area on Apple Podcasts, Google Podcasts, Spotify, Stitcher, or wherever you listen to podcasts.