Party Time: Nuke Deal, Crypto Bomb and Digital Dollars

Something historic and dramatic has happened in the last two weeks. First, the US seems to have quietly agreed to engage directly with Russia in talks over nuclear weapons (while denying it, which is how these things happen). China is encouraging this process, nudging Putin to the negotiating table and away from the nuclear launch codes. This is winning China global support. Why? It’s impossible to confirm, but various press reports add up to the real possibility that President Putin and the Russian military tried to launch live nuclear weapons more than once in the last few weeks. A few non-nuclear launches happened, one just in the last 48 hours, but it’s the nuclear missile launches that failed that matter more. Given the threats Putin has made, a live nuclear “test” by Russia would have to have been treated as an outright first-strike launch. Luckily for us all, the efforts failed. Was it a technical failure? Sabotage? Was it an inside job? We won’t know for years. What we do know is that these events caused a cascade of reactions, including the US agreeing to meet Putin at the negotiating table to discuss nukes (not Ukraine, but nukes and WMD). Xi met with Biden. Putin pulled out of Kherson. General Milley, the Head of the US Armed Forces, begged the White House to engage in diplomacy with Russia over Ukraine and is begging Ukraine to agree to talks with Russia as well. He basically said Ukraine may have won back some territory, but it can’t win the bigger fight, especially since Americans and NATO members are all getting quite exhausted with supporting Ukraine. Biden seems to have pressured Zelensky to the negotiating table, though denies this. All the while, President Putin’s closest allies keep committing suicide in extraordinary ways, and he himself appears to be missing (again).

Meanwhile, the market was totally distracted by a bomb called FTX, which has blown a huge hole in the balance sheets of pension funds and private equity firms. The hole may even be large enough to force the wholesale repricing of illiquid private equity assets altogether. Was it a technical failure? Was it sabotage? Was it an inside job? This explosion has totally distracted attention from extraordinary developments in geopolitics, a series of non-explosions. The tricky bit is that these two events may be connected.

The idea that Sam Bankman-Fried’s (SBF) FTX and Alameda were money laundering operations that, amongst other things, may have funneled money meant for Ukraine back into the pockets of American politicians is currently nothing but a conspiracy theory. Although, it’s hard to dismiss the possibility when we see that the whole Bankman-Fried empire was run like a typical organized crime racquet with the façade of a college dorm living in “Friends-style” in an expensive penthouse in the Bahamas where these unqualified and undisciplined mates and polyamorous lovers, apparently jacked up on Adderall and maybe more, hung out brazenly lifting $16b out of the businesses they ran and destroying what seemed to be $32b in value. As John Jay, the new CEO who cleaned up Enron, put it in the shocking deposition (which is worth perusing), “Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here. From compromised systems integrity and faulty regulatory oversight abroad to the concentration of control in the hands of a very small group of inexperienced, unsophisticated, and potentially compromised individuals, this situation is unprecedented.” That was before SBF “gained unauthorized access” to the funds in FTX and transferred money to the Bahamian Government.

So, let’s not jump to any conclusions before we even understand how the hell someone so young manages to make and lose that much money while becoming one of the biggest political campaign contributors in American history at the same time.

In both cases, a key source of information comes from flight paths. In the case of the SBF, it will be very interesting to see who flew into The Bahamas to hang out with them. If pension fund officers and private equity house representatives were there and then signed off on capital allocations, we may get yet another glimpse of the dark side of the investor world. I have argued before that capital is not always allocated based on the business plan but on the basis that a business will also deliver cool parties with beautiful people and drugs as hors-oeuvres. That’s what Bloomberg reporter Emily Chang witnessed and described in her book: Brotopia: Breaking Up the Boys' Club of Silicon Valley. We’ll know more once Michael Lewis releases his book/film/etc on the situation. What foresight to have been embedded with SBF for six months before the roof blew off the party. Or, maybe Michael Lewis, like many others, smelled a bad situation and knew there was an incredible story there? Just saying let’s not leap to conclusions.

It’s too early to tell what went awry with FTX, but I believe that the biggest investors in the financial market have a special system for choosing winners. It’s simple and easy. They invest based on pedigree. If you studied with the right professor at Stanford, you get capital allocated to you. If both your parents teach at Stanford, as is the case with Bankman-Fried, you are a safe bet. It’s like everybody stops doing due diligence as soon as the brand name “Stanford” or some other major university is stamped across the founder’s file. The PE funds and VC funds have been on autopilot. Note that this is one reason that women and diversity-led start-ups don’t get so much capital. They would ask questions at such parties and not have the needed pedigree.

Speaking of autopilot, the flight path of a missile that landed on a farm in Poland, killing two innocent civilians, may turn out to be telling. The Russians had been shelling Ukraine from the Caspian Sea and the Black Sea. But two missiles went 500 miles astray into Poland. NATO and the US scrambled to come up with a plausible explanation. They concluded that the event would not trigger Article 5 or the onset of a formally recognized WWII because the missiles had been fired by the Ukrainians. That worked fine until President Zelensky vehemently objected and argued they were Russian. Somebody obviously chatted to him, and he reversed his position to “we don’t know” which was a great relief to everyone wanting to avoid WWII (though all these events tell us we are already in WWII, as I have long argued).

An amateur observer from Ukraine on Youtube pointed out something intriguing. If you reverse the coordinates of the missile targets, you don’t get a Polish farm but the center of Kyiv instead. Did somebody juxtapose the missile coordinates? Was it a technical failure? Was it sabotage? Was it an inside job?

Sometimes nobody wants to answer the key questions.

Back to FTX. Nobody seems to be asking whether the private equity firms were working with SBF or facilitating what his businesses were getting up to. It strikes me as odd that SBF put $500m into well-established Silicon Valley PE firms like Sequoia. It seems a little off that Bankman-Fried needed their money if he could have funded it himself. Might paybacks have been involved? Anthony Scaramucci has revealed that his firm got $45m from Bankman-Fried, but he had to agree to spend $10m on FTX tokens. Was that part of the deal? You support my market, and I’ll give you cash? Sadly, writing off the investment will not stop questions from being raised. Is it possible that the whole PE industry has been pumping up their start-ups on a similar argument as used by SBF? Adam Cochran spelled it out beautifully on a Twitter thread. He said:

Have PE firms been valuing their assets the same way? Were the sloppy practices at FTX missed precisely because they are so commonplace? Did all the PE funds not only know that everybody does deals and expenses and everything else on chat platforms? Yes. Look at Elon Musk. Merrick Cai from Forbes covers venture capital and start-ups. He recently wrote, “Closing Deals Over Text Isn’t Just and Elon Thing, VCs and Founders Say”. He wrote:

“If you are considering equity partners, my growth fund is in for $250M with no additional work required,” Andreessen wrote. “Thanks!” Musk replied. (Andreessen corresponded with Musk on the encrypted messaging app Signal, but took a screenshot of the conversation and attached it to an email, which was revealed in the court documents.)

The exchange between the two billionaires provided a rare look under the hood of how dealmaking can be conducted at Silicon Valley’s highest level: through brief text messages, rather than intensive deliberations in a boardroom. Twitter’s status as a public company means that prospective investors can review its financials through public disclosures instead of having to meet with the company’s executives. But even for VC-backed startups that are still private, some founders and investors say the brevity and informality of the negotiation is more common than the public may realize.”

Is that one reason why Elon might have bought Twitter and why the VCs backed him in that endeavor? Do you get access to everybody’s deals via their Direct Messaging? Maybe you get access to their personal lives as well. Is Twitter to VC what Tik Tok is to China?

Back to WWIII. Is it possible that SBF and Putin end up in the same way? Could it be that after wreaking havoc in their respective domains, each is kindly invited to sit down at the negotiating table? SBF is going to meet Congress, and Putin is going to meet the President. It’s the old rule. If you wreak enough havoc and cause enough losses, you stop being a problem and become a partner.

I suspect that these two stories will continue to interweave in unexpected ways. The hit to balance sheets from both Russia’s warring and SBF’s games will continue to reveal holes in balance sheets that have to be filled by some sort of government largesse. But how to do it when the Fed is now sounding even more hawkish? Expect governments to speed up the launch of CBDC. It’s ironic. The FTX failure may have set the stage for the total centralization of crypto in the hands of governments. The Russian failure may have set the stage for the total de-centralization of power in Russia. We may have averted a nuclear bomb, but we may get hit by things we were not expecting after all. It’s one big hairy mess.

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