Malt Liquidity 64

Control the Narrative

First, a rant

“Every day, the New York Times carries a motto in a box on its front page. "All the News That's Fit to Print," it says. It's been saying it for decades, day in and day out. I imagine most readers of the canonical sheet have long ceased to notice this bannered and flaunted symbol of its mental furniture. I myself check every day to make sure that the bright, smug, pompous, idiotic claim is still there. Then I check to make sure that it still irritates me. If I can still exclaim, under my breath, why do they insult me and what do they take me for and what the hell is it supposed to mean unless it's as obviously complacent and conceited and censorious as it seems to be, then at least I know I still have a pulse. You may wish to choose a more rigorous mental workout but I credit this daily infusion of annoyance with extending my lifespan.” — Christopher Hitchens

Anyone who knows me knows that I’ve always despised the New York Times, a publication whose condescension emanates viscerally through every sentence as they “tell you how it is.” At least Hollywood had the decency to get Margot Robbie to patronize me the last time I received an explanation about finance I didn’t need.

In the rush to get an exclusive piece, journalists sometimes have to compromise an objective view due to sheer lack of time and exposure to “both sides” and instead report on “what they’re told.” It’s long been documented that short sellers like to use journalists as conduits to get attention to their research. What results is an article and softball interview so embarrassingly devoid of context as to what actually happened with regards to FTX that calling it a “puff piece” is a gross understatement.

Alameda had accumulated a large “margin position” on FTX, essentially meaning it had borrowed funds from the exchange, Mr. Bankman-Fried said. “It was substantially larger than I had thought it was,” he said. “And in fact the downside risk was very significant.” He said the size of the position was in the billions of dollars but declined to provide further details.

No details are provided as to how this “margin position” was acquired, of course. Perhaps it would be useful to mention that, I don’t know, they issued their own token, fudged the mark-to-market, and levered off of that? That they used client funds to prop up this leverage?

He said his other commitments had led him to miss signs that FTX was running into trouble.

“Had I been a bit more concentrated on what I was doing, I would have been able to be more thorough,” he said. “That would have allowed me to catch what was going on on the risk side.”

To paraphrase a great man, “Let’s dispel with this fiction that [SBF] doesn’t know what he’s doing. He knows exactly what he’s doing.” The statements made by Alameda’s traders and SBF himself are littered throughout twitter with regards to how their “personal utility functions” and “outlook on risk” essentially incentivized them to continue to bet bigger and bigger, ignoring risk of ruin. Indeed, the entire “FTX edge” was their ability to “manage risk” better than everyone else.

And in Washington, he was pushing an ambitious regulatory agenda while speaking critically about Changpeng Zhao, the chief executive of the rival exchange Binance, who eventually mobilized his extensive Twitter following to set off the run on FTX.

The narrative of this piece revolves around how “poor Sam” was “overextended” trying to “reshape the world to his vision.” As such, it’s not FTX’s own self-dealing and ridiculously irresponsible balance sheet that caused their failure — it was clearly a bank run caused by CZ! If you put yourself in a situation where you amplify your probability of realizing tail risk, it’s your fault if it gets hit, not whatever event knocks you out. Short of CZ looting the coffers of FTX (which were conveniently “hacked”), I don’t see how you could phrase it as “setting off” the run.

FTX and Alameda were closely linked. Alameda traded heavily on the FTX platform, meaning it sometimes benefited when FTX’s other customers lost money, a dynamic that critics called a conflict of interest. In the past, Mr. Bankman-Fried has defended the arrangement, saying Alameda provided crucial liquidity — injections of capital that enabled other customers to complete transactions on the exchange.

Again, there are no more details as to how closely they were linked, nor the fact that billions of dollars were taken from FTX to hand to Alameda. This is all confirmed at this point! The WSJ has reported extensively on this! There’s no excuse for not including these details - instead, the article pivots to talking about SBF’s “philanthropic efforts” and various charitable contributions.

In the interview, Mr. Bankman-Fried declined to discuss the prospect of prison time.

“People can say all the mean things they want about me online,” he said. “In the end, what’s going to matter to me is what I’ve done and what I can do.”

He has also found other ways to occupy his time in recent days, playing the video game Storybook Brawl, though less than he usually does, he said. “It helps me unwind a bit,” he said. “It clears my mind.”

I’m amazed there’s no comment at all from the writer about how laissez-faire these quotes about playing video games and getting sleep at night are. It certainly doesn’t reflect that the interview subject is a man who is overwhelmingly likely to have stolen 11 figures and punted it into levered trades and nonsense investments, and who is abusing bankruptcy protection to try and fundraise more. (Even more embarrassing is how they’re phrasing their fundraising requests.) He doesn’t even seem to grasp what exactly he’s done — this dude is delusional.

Haram Capital

I promise, other in-depth, non-FTX content is coming soon. In the meantime, here’s this mildly amusing complaint:

According to the SEC’s complaint filed in federal court in Brooklyn, Igbara (a.k.a. Jay Mazini) started Halal Capital in October 2019 with the goal of sharing his purported investment expertise with members of his Muslim community. As part of his alleged scheme, Igbara offered investors promissory notes that claimed to offer guaranteed, significant returns on investments in Halal Capital. The complaint alleges that Igbara obtained about $8 million from investors and promised to invest the funds in Quran-compliant investments, such as being pooled for the purchase of wholesale goods for resale, including electronics and personal protective equipment (“PPE”). However, Igbara misappropriated all of the investor’s funds to make Ponzi-like payments to Halal Capital investors or for his personal use, including to purchase luxury vehicles and expensive jewelry or to pay off gambling debts. 

It’s always funny to me how short-sighted these kind of schemes are. If you promise high returns on investment, you kinda should have at least an idea of what you’re going to do when people ask for their money back. Otherwise, you’re basically guaranteeing yourself jail time for a little bit of fun. These purchases are just appalling too. Vehicles and jewelry generally don’t hold value well. If you show some size at a sports book or a casino, though, you do get comped pretty well and you have a slim chance to pay off whatever debt you’ve accrued. I dunno, this isn’t advice, I’m obviously not recommending you go out and do this, but people have done this before and come out on top (before getting arrested) — namely, a certain Martin Shkreli, who lost >90% of his investors’ money, falsified the returns he made, and paid them off with Retrophin stock, which appreciated enough to make all his investors whole. For fraud, that’s surprisingly good! Nevertheless, this is illegal and we all know what happened to him in the end. To echo yesterday’s post, you need liquidity to exit fraud as well.

Shareholder perks

I’m honestly surprised companies don’t do this more:

Lions Gate Entertainment Corp. … is partnering with Tiicker Inc., which specializes in stockholder perks, to debut Shareholder Red Carpet Rewards, an initiative aimed at attracting small investors.

The rewards program will include commemorative shareholder certificates branded with films such as Dirty Dancing and Reservoir Dogs. The certificates are meant to be collectibles, according to the company. Investors will get other perks, like a 50% discount on the company’s Starz streaming service, and a sweepstakes to win tickets to Lions Gate movie premieres.

Shareholder rewards have precedent — my parents would occasionally receive a Starbucks gift card for holding shares, for example. In corporate finance 101 land, holding a share already has incentives; you have a “right” to your “share” of the company’s future forward earnings, and depending on the corporate structure, you might have a vote on corporate matters as well. But these incentives don’t get regular retail investors excited. As we noticed with DWAC, even when shareholders are heavily incentivized to vote, they simply don’t.

Stocks drop due to lack of bid. For thinly traded stocks like Lions Gate, it’s sort of doomed to float along with the ETFs, waxing and waning with the inflows and outflows of the products that hold it and the performance of the overall market. Occasionally, whether due to news or a size trade, it will realize its own vol, but in the meantime, why not try to drum up some interest in the stock? Who knows, in the post-Gamestop market, anything can happen. People have tried to meme stocks into Valhalla, and they’ve tried to meme banks into bankruptcy. In all my years, I’ve never thought the stock market behaved in a GTA-like manner, where you can murder a competitor company’s CEO to pump your own stock. But truthfully, the market might be a little closer to that than previously thought, as we further question what “value” comprises.