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ReSolve Riffs with Mark Yusko on FTX, Responsible Crypto Innovation and the Future of Finance

Our guest this week was Mark Yusko, founder, chief investment officer and managing director of Morgan Creek Capital Management. With deep experience in both digital assets and traditional finance, Mark took us on a rollercoaster as we dissected the recent turmoil affecting the ‘crypto-verse’. Topics included:

  • A post-mortem of the FTX debacle – an evolving situation with many missing pieces
  • The sequence of events that led to the debacle
  • Why Mark passed on the opportunity to invest… three times
  • Useful idiots? Conspiracy theories versus actual conspiracies
  • You can’t ban a decentralized system, but you ‘assassinate its character’
  • The due diligence failure of high-profile capital allocators
  • Fiduciary responsibility gone awry
  • Parallels with other frauds and characters
  • An analogy between digital assets and the Eurodollar system
  • Bitcoin as the base layer of a future monetary system
  • Displacing trust with truth
  • Innovation – why timing is key
  • Exciting ventures and projects for the coming years
  • With every investment we get richer or wiser… never both
  • And much more

This is “ReSolve’s Riffs” – live on YouTube every Friday afternoon to debate the most relevant investment topics of the day, hosted by Adam Butler, Mike Philbrick and Rodrigo Gordillo of ReSolve Global* and Richard Laterman of ReSolve Asset Management Inc.

Watch this podcast on YouTube

Click here to download transcript in printable format.

You can also read the transcript below


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Mark W. Yusko
CEO & Chief Investment Officer, Morgan Creek
Managing Partner, Morgan Creek Digital

Mark Yusko is the Founder, CEO and Chief Investment Officer of Morgan Creek Capital Management. He is also the Managing Partner of Morgan Creek Digital. Morgan Creek Capital Management was founded in 2004 and currently manages close to $2 billion in discretionary and non-discretionary assets. Prior to founding Morgan Creek, Mr. Yusko was CIO and Founder of UNC Management Company (UNCMC), the Endowment investment office for the University of North Carolina at Chapel Hill. Before that, he was Senior Investment Director for the University of Notre Dame Investment Office.

Mr. Yusko has been at the forefront of institutional investing throughout his career. An early investor in alternative asset classes at Notre Dame, he brought the Endowment Model of investing to UNC, which contributed to significant performance gains for the Endowment. The Endowment Model is the cornerstone philosophy of Morgan Creek, as is the mandate to Invest in Innovation. Mr. Yusko is again at the forefront of institutional investing through Morgan Creek Digital Assets, which was formed in 2018. Morgan Creek Digital is an early stage investor in blockchain technology, digital currency and digital assets.

Mr. Yusko received a BA with Honors from the University of Notre Dame and an MBA in Accounting and Finance from the University of Chicago.


Rodrigo:00:01:49All right, all right.

Adam:00:01:50Happy Friday.

Rodrigo:00:01:51Happy Friday.

Richard:00:01:52Happy Friday. Welcome, Mark.

Mark:00:01:54Thank you. Happy Friday, and great to see you all again. And I actually enjoyed that little promo there. And I always love that we have to pause for so long on the legal disclaimers. But…

Adam:00:02:08Yeah. Well, that’s the most exciting part isn’t it?


Adam:00:02:14Am I missing something?

Mark:00:02:15Whenever I show mine, so I was — I did a couple events this week. I did a high net worth event in Dallas. And then yesterday I did the Catholic Crypto Conference, which was very cool. And whenever I pause on that, am like you know, I have to show you this. It’s because in China, for every engineer we graduate in the United States, they graduate 35. For every lawyer they graduate, we graduate 40. They’re a country of wealth creation, we’re a country of wealth redistribution. So, lots of lawyers.

Rodrigo:00:02:49Yeah, yeah. I remember the stat …

Richard:00:02:55Rod, before we jump in, let’s just remind everybody that nothing we discuss today …

Adam:00:02:59Lest you leak Alpha accidentally Rodrigo, before we disclaim away.

Richard:00:03:03Exactly. Exactly. Should not be construed as investment advice. And this conversation is for entertainment and information purposes only. Sorry, Rod. Go back.

Rodrigo:00:03:12You’re a good man, Richard. You’re a good man. I just remember …

Mark:00:03:13Excellent. More disclaimers. I love it.

Rodrigo:00:03:15Oh, yeah. Now that was separate. That was for the fund. This is for the podcast. I remember the stat 10 years ago was 75% of the world’s lawyers reside in the United States, the most litigious nation in the world.

Mark:00:03:29Yeah, it’s crazy. And look, they’re paid by the word and we all know the joke, right? What’s 40 lawyers on the bottom of the ocean? A good start, right? I got it. But they’re very useful and they’re going to be busy. They’re going to be busy with this FTX debacle. There’s no other word for it. Complete debacle. I mean, we can go as deep as you want.

The FTX Debacle

Adam:00:03:55Well, Mark, actually, that’s — I mean, we’ve now had about 10 days or so to digest this. How would you characterize this debacle now that you’ve had a chance to digest and ruminate and peel back the onion a little bit?

Mark:00:04:13Criminal activity, okay. So, that’s first and foremost, completely criminal activity. Premeditated, second. Complete fabrication and intentional, right. I mean, this was an intentional act by a group of people and my personal opinion, right. I’ve been tweeting about this. I believe SBF and Fair Caroline, Queen Carolina as she was called today by Forbes are useful idiots. They are not the brains in any way, shape or form.

Rodrigo:00:04:58Oh, I see. So, neither SBF nor Caroline are the brains?

Mark:00:05:02Oh, no, no, no.

Rodrigo:00:05:03We’re going to be on that because… the charitable view of all of this is that this is a kind of a classic, one mistake at a time, right? Like, Madoff was a real hedge fund manager, made a mistake, wanted to cover up and said I’ll get the money back, and then we’re back in the good books, and you just never get there, right? So, is there any aspect of this where you can say, these were kids that were doing too much, too fast, willing to break things, willing to take the biggest and wildest edgiest bets in order to grow their wealth with that, but thinking that they were going to do good and all this was… you actually — there’s no part of that, that maybe, that comes into your …

Mark:00:05:52]None. Zero.

Rodrigo:00:05:53All right. So, talk more about that.

Richard:00:05:54Would the trades Alameda was allegedly doing, not really taking place at all; the whole arbitrage across the different …

Mark:00:06:01There were a few. Right. I make the joke all the time that they called Madoff a hedge fund scandal. The only problem about it, there was no hedge and there was no fund. I mean, literally, they had not made a trade in 13 years. Think about that.

Richard:00:06:22It’s the classic pyramid scheme.

Mark:00:06:23They had not made a trade in 13 years. To Rodrigo’s point there was a time when they were a real firm doing index arbitrage. But that ended and I don’t believe in the Madoff case that it was the accident. I mean, there’s the story of the big money market fund that all the endowments were invested in 20 years ago, where the guy was doing index arbitrage. And he got 495 of the 500 names short and lost 30 grand one day. Girlfriend runs the back office, like just cover up for me honey, tries to trade his way out of it. Two years go by, $130 million, okay, multiple audits. Think about this. People came in and audited the books for money, didn’t find it, she hid it. Unfortunately, he broke up with her and she turned him in. And you know, the universities all lost money. That was exactly as Rodrigo described. Right? Mistake, mistake, mistake. Madoff, bad guy. Bad guy doing bad things.

Maybe smart, probably a little bit smart. Masterful. I watched him once in action. The way he set up, kind of like I’m sitting here you have the table in the corner, he would sit in the corner, three empty chairs at the Palm Beach Country Club. And in order to get into the club, a member had to bring you to the table. So, one empty chair, three people. And while I’m having lunch this one day with some friends down there this guy gets up from the table and says, “Don’t you know who I am? You can’t tell me I can’t invest?” He said, “Well, you asked to see our operation and that’s just not allowed. You’re out.” And made this big — and everyone’s like, oh, ah, he just told that really rich guy that he can’t come in and created this illusion of… and his brother-in-law was literally — when I say there was no hedge, no trades and no fund. Right? The brother was literally transferring money into a personal bank account. And if you look at all the frauds, the big frauds in history, they’re all family. Right? They’re all family relations because you can make people do stuff. And that’s it, right? SBF and ex-girlfriend, and look, this is my opinion and I don’t have like insider knowledge on this, but it’s my opinion.

And I believed this since minute one, zero probability in my mind, that those two children were the masterminds of this criminal enterprise. I mean, if you look up the term money laundering on Wikipedia, you’ll see a picture that looks like the FTX network. I mean, couldn’t make this stuff up, right? Shell companies owned solely by SBF, loans, personal loans from Alameda to SBF, donations to political parties. Money from Ukraine into, FTX loaned to Alameda. I mean, the mind just blows with what actually… and the thing is, in the old days, I’d come have lunch with y’all and I bring my briefcase and I’d leave it under the table. And you’re like, “Mark! Mark! You left…” And you look and… Oh, full of cash. “Oh, oh. Mark, okay, got it.” Because bag o’ money, not traceable. You do it all on chain? Are you joking? It’s observable.

Rodrigo:00:10:18But what’s the point of that and also becoming the most or the second most well-known public-facing organization that look, I mean, that piece of software is pretty fantastic, right. And if you’re a trader, if you wanted to get the type of leverage that you needed, if you’re producing any sort of Bitcoin, or any sort of crypto where you need to hedge out your risk, you need kind of entities like that in order to be able to be useful, so he created something useful. So, why — There’s so many ways to do what you just described in crypto. Why make it that very powerful brand and then start buying things in the United States and so on?

Mark:00:11:01You know, I said, in situations like this, questions are way more important than answers, you know. I or anybody else can spew an answer if we have, you know. But it’s mostly opinion, as opposed to fact. And there’s very few people who really have the knowledge and what do they say? Knowledge is when you can give an answer.Genius is when you can ask good questions, and wisdom is when you can ask good questions at the right time. And I think that’s kind of where we are is, you, do you say, well, wait a second, if this was simply a money laundering enterprise to cleanse money going to foreign countries back into the US and into political candidates pockets, there are other ways to do that and a lot of other ways to do it where you wouldn’t necessarily get caught. So, why create this whole other thing?

But the question of, were they actually doing the trading? It’s coming out that they weren’t, that Alameda was supposedly this big trading company, wasn’t. And it reminds me a little bit, and I don’t want to go down this rabbit hole. But Bridgewater, arguably the largest hedge fund in the world, if you were the largest hedge fund in the world, you think you would have to be in the top five customers of Goldman Sachs, Morgan Stanley, JP Morgan, all these firms, right; just mathematically that that should be the case. But whenever I would go ask these people, “Hey, do you trade with these guys?” Like, not really. Like, how can you have a firm with hundreds of billions of dollars of equity levered multiple times in the futures market, not showing up? So, that always worried me a little bit.

And I think the same thing is true here is, you know, trading, exchange arbitrage, cross border exchange arbitrage, that’s not rocket science. Anyone could do that. But your point, there was some good software and there were some real people using it. The part that’s just so hard to fathom is how many legitimate organizations lent this other organization billions with an S, on not much, it appears diligence.

Adam:00:13:52I think that’s actually just as big a story, Mark is the names on the cap table are just remarkable. These are the who’s who of VCs, and growth investors and large pension funds. And it just defies belief to think that not one of them conducted sufficient due diligence to uncover something suspicious that required further investigation.

Rodrigo:00:14:19Well, Chamath Palihapitiya had, I don’t know if you saw the interview on the All-In Podcast, but he goes on about his team being asked for some money by FTX. And he asks, he says, “Look, what we recommend that you do is first of all, give us some more information. Secondly, we recommend that you put a board together and once you get a board together then we can, you know, maybe see about giving you some money.” And the response from FTX was “Go fuck yourself.” Like apparently verbatim, why don’t you just go and fuck yourself? And the other thing — so, that was, I’m not sure whether that is the epitome of institutional due diligence, right. But there is a company called Copper that is trying and attempting to be a custodian in the crypto space, right.

So, this idea of being responsible, making sure that you can trade outside of the ecosystem so that your money doesn’t get caught. And they have these processes called clear loop and …

Richard:00:15:17Walled Gardens.

Rodrigo:00:15:19And the walled garden. And they have a list of all the crypto exchanges that have integrated with them. And at the time, when I was looking at it, I thought it very odd that out of all the exchanges, FTX would have, was not integrated, right.  And I guess Copper was asking some tough questions that FTX may not have been willing to answer.

Mark:00:15:38No. Look, I mean, we just got lucky, right? I mean, we passed on this deal three times. Not because we’re smart, just because we couldn’t make the math, just of the valuation, work. Like the first round at 8 billion we’re, I think at the time, revenues were 40 million. We’re like, “On what planet? No.” So, we didn’t even, like I never met him. I mean, I’ve met pretty much most people in crypto. Not every single person but a lot of people in crypto, been around a decent number of years. But never met him and clearly never met her, because I’m confident in this, after seeing the video and the blog posts and the Twitter stuff. Had I met that young woman, run. I believe I would have run away. No chance. No chance.

Rodrigo:00:16:35I think VCs love that personality though. You know? I don’t know.

Mark:00:16:38Yeah. I have known people that do the idiots …. No, no, no, no, no, no, no, no, no. The interview she did where she was trying to explain high school math or elementary school math, nope. No, no, no. But so — and the last round at 32 billion was really a head scratcher. But that’s the one that the really smart people put a lot of money in.

Rodrigo:00:17:04When was that? When was that raised?

Mark:00:17:07November of last year, January this year, something like that.

Rodrigo:00:17:11So, this is like the peak of the mania where you really were like, here’s a term sheet. You have until tomorrow to say yes. Yeah.

Mark:00:17:20It was like right around the same time as the open seed 13 and a half billion where I was like, what? And I remember some of the guys calling me and saying, “Hey, we’ll sell you some of ours.” In a second I’m like, “No. I mean, 50 cents on the dollar, 40 cents on the dollar. No, not at that value.” And actually, 10 was the right number, 10 cents on the dollar. But here’s the weird thing. They’re two really weird things. I’ve been doing this a long time. That’s just a nice way of saying I’m old. I mean, I’m old. And I’ve never, and this doesn’t mean I’ve seen every transaction, but I’ve never seen and I’ve done, I don’t know, 300, 350 venture fund, buy-out fund investments in my career, easy, probably more than that. Not once have I ever seen an individual commit hundreds, plural, of millions of dollars to a fund, and then have that fund invest hundreds of millions in that company. Never seen that.

Rodrigo:00:18:31Oh, I see what you mean, the SBF buying a … fund and then…

Mark:00:18:33SBF put 500 million into a couple of the firms including Sequoia. And then Sequoia, I shouldn’t name names, but then they — I’ve just never seen that. And so that’s one weird thing. But the second thing is that it does remind me and we are, we meaning, because remember I was an allocator. I worked for Notre Dame, I worked for UNC. And I was part of this university group and there was an example in the 2000 period where there was this — and again, I don’t mean this in a politically incorrect way. But it was a very attractive woman just like Elizabeth, I guess, today said, they don’t put attractive people like me in jail. Like she actually said that during the deliberation on her sentence. So, and people say … Mark, you’re being shallow or you’re being — no, no, no. My point is that we all know attractive people rise, right? Whether you’re a model or a salesperson or a CEO, people who are tall do better than people…. So, it’s real.

But my point was she was an attractive woman and she was smart, well educated, and Sutter Hill backed her. And basically, Yale assumed Harvard did the diligence and Harvard assumed Stanford did the diligence and Stanford assumed Duke did the diligence and we assumed — and Duke assumed we did the diligence and we assumed Yale did the diligence. No one did the work. I mean, literally, no one did work. And when it crashed, we’re all like, how did that happen? Like, well, because literally no one called a reference, I mean, did any work. And so there’s a little bit of that that does happen. If someone you admire invests, you’re like, “Oh. Well, I want to be in that group. I want to be one of the cool kids.” And that FOMO stuff, plus you had FOMO, right. It was the peak of the FOMO. And the one that just kills, and look, I actually like, Mr. Wonderful. I mean, I actually think he’s a decent guy. But the other day, because he got in on the FOMO, and someone asked him, “Well, would you back him again?” And he kind of hemmed and awed and said yes. Ah, no, Kevin, come on.

Rodrigo:00:21:05You do not have to tell me about Kevin. I’ve seen him, so fellow Canadians, right. I’ve seen him do this over and over again. I mean, my God.

Mark:00:21:14Yeah. And so look, I don’t, I really don’t understand because one, there wasn’t any there. So, the whole thing about if you just went and asked for trade tickets, you wouldn’t have seen them. But look, I didn’t uncover it, you know. I’m not saying that I knew that it was a fraud. I will say the one thing I never did understand is, because we have invested in other exchanges, and I knew the cash flow of those exchanges. I don’t understand even if he is the second largest, that doesn’t generate enough to pay $135 million dollars for the naming rights of the stadium. Right? I mean, it just doesn’t

Richard:00:22:09Or $40 million to Biden’s campaign or to the Democratic Party. At the risk of asking you a leading question, Mark. Sorry. At the risk of asking you a leading question Mark. What do you make of the mainstream media’s kind of softball …

Mark:00:22:28Yeah. Look, you’re going to make me do it and I’m going to get grief about it and that’s fine. I will go there and you can pull me by the nose in here. I actually do believe and everybody says Mark you’re such a conspiracy theorist, your tinfoil hat. Like guys, it’s only a conspiracy theory if it isn’t true. Okay. That’s true about everything in life, right? It’s only a conspiracy theory if it isn’t true. Truth is an absolute defense. So, we learned that about COVID, we learned it about Madoff, we learned it about all kinds of… So, I will answer your question. It’s funny, my media, I had media training one time and I go in and he says, all right, here’s … So, ask me a question, start answering, he says “What are you doing?” I said, “What do you mean? I’m just answering the question.” He says, “You never answered the question. You deflect and redirect and talk about what you want to talk about. Never ever answer a question.” But I’m a dutiful firstborn so I will answer your question.

Rodrigo:00:23:38What have you done to Mark, Richard? All right, go ahead.

Mark:00:23:41So, I believe that SBF and Caroline are useful idiots, Manchurian candidates, not with the chip, right, but useful idiots for much smarter people, including his parents. I don’t think it’s a coincidence that his dad is an adviser to the regulatory agencies in the United States, graduated from Yale with all the Clinton mafia. I don’t think it’s a coincidence that his mom leads the mysterious Super Pac that the Silicon Valley VCs used to get around campaign finance laws. I don’t think it’s a coincidence that Caroline’s father is the head of the economics department at MIT, where they both went to school. I don’t think it’s a coincidence that Gary Gensler worked for the guy at MIT, and then was appointed by Biden after SBF was the largest contributor personally to the Biden election campaign. I don’t think those are coincidences.

And so my belief and again, maybe I’ll be proven wrong, but my belief is we live in a, we all live in this world and we’re working in this world where there’s been an innovation, blockchain technology, that has the potential and I believe will disrupt the traditional financial system, right, the same way the internet disrupted media and commerce. I believe blockchain replaces trust with truth. We don’t need trusted third parties to mediate the exchange of value in the future, like we have for the last 800 plus years. Because of that, everyone always said, well, as soon as this become successful, then the government will just ban it. Turns out, you can’t ban a decentralized or distributed network, right? If you squeeze it here, it just pops up someplace else.

So, what can you do? A couple of things. Well, you could make it illegal, right? They tried that with gold in 1933. And it was illegal in the United States from 1933 to 1975 to own gold, and people still owned gold, but it was technically illegal, and allowed them to go off the gold standard and convert to a fiat standard and destroy the value of the currency and make the rich people really, really rich and the poor people less rich through inflation, theft. So, you could do that. Or you could make the on-ramps and off-ramps illegal, like China kind of does with the internet, right? You’re not allowed to have Google or Twitter unless you use a VPN. So, you can’t use the on-ramps and the off-ramps unless you kind of have a workaround. That’s what I think kind of is happening here.

So, it appears that by systematically taking down the infrastructure, the lending infrastructure and the exchange infrastructure, that allows people to move into digital assets and move money out of the traditional financial system. Because it’s, I use this example of the Gandhi quote that I guess Gandhi didn’t say, right? First, they ignore you, then they laugh at you, then they fight you, then you win. So, 09 to 15, first they ignore you. It’s a nerds and geeks playing through magic internet money. Teeny, tiny, not meaningful, doesn’t bother us. Then they laugh at you. 16 to 21, ha, ha, ha, it’s a billion dollars, a couple of billion dollars, oh, it’s $100 billion. Ha, ha, ha. Then they fight you. 2022 Bitcoin’s a trillion dollar asset, whole industry is at 3 trillion. Okay, 10s of billions of dollars are leaving the banks and going into these lending things making 6% instead of zero. Timeout, now they fight you. So, 2020 or 2027, then the fight you phase. That’s a long time.

And so my belief is that the FTX entity was created to do what it did to discredit and cause doubt, sow the seeds of doubt and also to depress price. Because a part of the allure of crypto, whether we like it or not, is the numbers go up. Right? That’s what draws people to it, is the fact that the market value kept going up. But if you can depress that price to the level where people just, I’m done. So, that’s a long answer to your question that. Again, I’m not accusing any particular person or persons. I’m simply saying it seems odd, to me. It seems odd that the firm was founded eight days after the guy who was the person who was elected, based on the person who’s the largest donor to that person, eight days later they formed this firm. Seems odd to me that so much money that was coming out of governments, I mean, WEF, NFTX, I mean they’ve taken it down on the website now but FTX sponsored WEF. SBF was up there in his gym shorts and T-shirt with Clinton and…

Rodrigo:00:29:49The thing with all this is that like a good story and a good conspiracy theory, is full of coincidences. So, it could just, it could well be. You know, I try to — I just have a hard time thinking that something that complex and that abstract was coordinated by any one thing or not. In fact, when I see a lot of this, I think that the vein of this theory that you expounded could be in lockstep, but kind of coincidental. Right. For example, SBF, how he was raised, what his values were, what he believed to be important in life, possibly power, rather than money and money leading to power, and how do you maximize your opportunity sets in one lifetime? What do you do? What type of bet are you going to play? Are you going to play the edge, are you going to do the full Kelly criterion, and betting approach in order to maximize that belief system and the people that you’ve known your whole life, and try to —

If you want to influence the system, that’s the only way to do it. And it kind of — I can see that happening where he actually went for it, and it worked for him in a dispassionate way, where he’s playing the … language, because he knows that that’s what, that’s the game. But ultimately, what he wants to create is enough value for him to be powerful enough to get government to do what is right for FTX, so he can continue his perpetual motion machine, right? And then everything that you said, as kind of like everybody else, nudging them in the right direction, and without a … That’s as close as I can get to that, like — …

Mark:00:31:24A 100% agree with you that like I said, I don’t have any special knowledge. I’m observing fact patterns. I’m observing flows of capital. Again, they did it on chain so it’s actually easy to analyze, as opposed to sacks of money under the table. But I think your point is well taken. But I had the same problem, and again, this is going to make me unpopular with a whole bunch of people. I have the same problem with that argument that I do when people say, “Oh, Trump’s playing 4D chess, and the rest of y’all are just too stupid to understand it.” Like, I don’t see it, right. I just don’t. So, I’ve listened to Sam in hours and hours of interviews. I’ve watched his actions on the internet and his engagement with people and like you say the F-off to the — I’ve seen all and I look at that.

And the flip side is Mark, he went to MIT you didn’t. Truth, true, he did go to MIT. But did he go to MIT because of this or because mom and dad are really well connected– I don’t know, I don’t. But I have a hard time believing that this guy, that I don’t know if you’ve seen the recent video of him where he’s holding the $100 bill and showing his Toyota Corolla. I watched that and no way I’m thinking mastermind. Just no way. But you absolutely …

Rodrigo:00:33:10Fooled a lot of those VCs. What was that, … that was shared, that transcript that was shared about meeting with SBF and everybody’s like, I’m 100%. I’m at 10 out of 10 on this guy, because he’s such a genius. So, other people might not think that way.

Adam:00:33:25Where do we go, Mark? I mean, in a couple of different ways, right? So, you’ve got all these top drawer growth allocators, VCs and institutions, who utterly failed at basic due diligence in their role as fiduciaries and capital allocators. What does that say to end investors, and how does that slow the gears of allocation going forward? Right. What new processes and checks and balances are going to be added to the list as people with money go to allocators and trust them with the allocation of their capital? That’s the …

Mark:00:34:13Oh, Adam. I mean, such again, it’s a brilliant, brilliant insight. And that’s exactly the issue, right? It’s like the snail crawling up the pole, crawls up three and then slides down two at night. He’s still making progress. But geez, if you backslide, I feel like this back slides us four, right. So, we lost two whole days of progress because financial services is all about trust. Right?

Adam:00:34:47Yeah. This is like a you had one job situation. Right?

Mark:00:34:51Yes. Yes. And look, do bad people do bad things? Yes. Do bad people who are really smart do really bad things? Oh, yeah. In fact, if you think about, I can’t remember the three things, but it’s like, competence — yeah, it’s competence — It’s like technical skill, competence and integrity. And the worst possible combination is someone with like intelligence, technical competence, but no integrity, like, most dangerous person on the planet, and Howard Marks used to talk about this in our world. And he says the problem is when you’re trying to allocate capital, you have to decide between the good person who sounds good, and the bad person who sounds good, because they don’t want the people who sound bad to make the presentation.

And so, yes, this definitely sets back adoption, embracing the industry. It also probably sets back to some of the firm’s you know, self-inflicted wounds. But I struggle with laying all the blame on them, because fraud happens, right? And people, they maybe showed a balance sheet. It’s possible, right, that Sequoia went in there and they showed them a balance sheet that footed and looked normal. Now, could you have said, well, I need to see the trade tickets, or I need to see the bank balance or whatever. It’s kind of like, we have this investment in this company called Figure Technologies, Blockchain company and they bank, home equity lines of credit.

In the old days, what’d you do? You filled out a paper application, you could lie your ass off, right? You could make up all kinds of stuff, you give that paper application, the person, the human being reads it and says, oh, it looks trustworthy. And maybe, maybe they’d ask you for a pay stub, which you could forge that too if you wanted to. But that was about it. And people got their loan and some people defaulted, some people didn’t. What does Figure do? They literally, using Plaid, go into your bank account and look, are you getting paid every two weeks, who is paying you, how much is going out every month, and then do the calculation and in five minutes, you’re either up or down? Okay. That’s superior.

And there was an instance, I don’t know if you remember this global financial crisis? There was this hedge fund that was basically doing trade financing. And there was this big firm, public company up in Minnesota that supposedly was funding Best Buy and Target and basically helping them buy computers and other gizmos. And all these hedge funds put money in it and it was a goose egg. Because literally, this guy who was a pillar of the Minneapolis Community, like won all kinds of awards, and man of the people, had a woman in a warehouse who printed out on a dot matrix printer, fake invoices from Walmart and Target. And for eight years, billions of dollars, just fake. And so should anybody have caught that? Sure. But how did you — the only way to catch it, because you looked at the invoice that looked like a real invoice. But you had to know the difference between the type of paper or the ink or I don’t even …

Adam:00:38:39No, no. And Mark, I’m sympathetic of people making mistakes and I understand the momentum of FOMO and I can get behind a lot of that. What really strikes me is just the number of reputable institutions … multiple rounds. And I’m not, I’m not asking for you to give an answer. But I can’t help but think that this doesn’t just set back investment in the digital asset space, but it just sets back investment in growth and innovation and tech in general. Right? Because these are all institutions that had been well-known for being — writing the biggest tickets and recognizing that the up and comers in Silicon Valley and in crypto and that whole spectrum of growth assets.

Mark:00:39:30It’s not the first time and it won’t be the last time unfortunately.,

Adam:00:39:38I was there. You and I were there, I get it.

Mark:00:39:39Big black guy, real smart people put money in that, wiped it out, you know.

Rodrigo:00:39:47Look, WeWork. WeWork with Adam Neuman, right and not only — what’s crazy about that story is that he blows up, First of all, he’s the same type of guy, walks into a boardroom, says some word, impresses the board, no due diligence necessary. That’s the type of founder that’s going to win. And if you’re in the game of investing in 100 things knowing that only 10 of those are going to actually be unicorns, then it really doesn’t matter. You’ve seen the unicorns in the past, they have that personality type. That’s what we’re going to invest in. So much so that Neuman, there’s a Netflix documentary that comes out, documentary film, a mockumentary film that comes out. And then three months later, he raises a new venture and they all give him money again.

Mark:00:40:29But okay, here’s the difference. Here’s the difference. I actually have met Neuman and I hate to say this, I would back him. He is smart. He is charismatic, charming, attractive, but he is smart. And in WeWork, he made a mistake, right, by thinking that you could turn a bricks and mortar business into a tech company. Okay. You can’t. It’s still bricks and mortar. And leverage always will kill a real estate business if you get overly leveraged.

Rodrigo:00:41:10Especially leverage that resets in short order.

Richard:00:41:13And the difference between megalomania and Ponzi scheme, right. I think that’s …

Mark:00:41:17Exactly. And I don’t believe…

Rodrigo:00:41:19It was still poorly managed, right. Ultimately, it’s poorly managed.

Mark:00:41:23Incredibly poorly managed, but that’s a tragic flaw of a really, really smart, narcissistic person. Right? And really, really smart, narcissistic people get burned that way. Right? They think they’re invincible. They think, oh, they’ll be able to talk their way out of it. And that’s the one thing with SBF, like, get off the internet, dude. Stop talking. I mean, he’s getting bad legal advice. Either that or he’s completely immune because he’s got so many friends in low places that he’s feeling smug. But you know, and Neuman’s new idea is actually again, it’s a good idea. And so that one is okay with me. Like, Theranos, she’s a liar. I mean, she lied, right. There was not one drop blood. That was all fake, 100%. And with Alameda, fake. Just fake. So, I do agree …

Richard:00:42:35Do we know that for a fact? Mark, do we know for a fact that the trades were not taking place at all?

Mark:00:42:40Yeah, yeah. What we know is there’s $600 million of assets and 10 billion in liabilities. So, that’s what I mean by fake. I mean, it’s kind of like with Three Arrows Capital, right? They told everybody, they had more equity than they did. So, they got 6 billion in loans on 2 billion of equity. That’s just fraud. Right? That’s — they’re lying. They’re liars. And Adam Neuman didn’t lie. He just over extended and it came collapsing down. I mean, I remember he invented community adjusted EBITDA. I’m, like, well, what is that? What is that, Adam? Well …

Adam:00:43:27Yeah, no, an abundant — I think what you’re doing is an abundance of hubris is not fraud. Right? Like…

Mark:00:43:32Right, but and to your point, Adam, the people I blame there were the people that bought it. Right? He got up and said community adjusted EBITA. Well, what’s that? Well, all the money we’re spending on our buildings and maintenance to build the community isn’t really an expense. It’s an investment.

Rodrigo:00:43:57Intangible assets.

Mark:00:43:58No, it’s not. And it’s as crazy as you know, Shopify and all these tech companies using — …

Adam:00:44:09Absolutely, market cap per click.

Mark:00:44:11— stock based compensation. Stock based compensation is revenue, somehow? Like, on what planet is paying people money, revenue? Well, in this generally accepted accounting principle. Like, no. And so the fact that they’re down 90 and 95% shouldn’t surprise people, but it does. And so, what I think is always interesting in these situations is, it’s a kid, right? The emperor has no clothes. All the adults are like, “Oh, look at those beautiful clothes.” And the kids like, “The dude’s naked.” I mean, and I don’t want to see that and I’m sorry to put the SBF image of naked in your brain for the weekend. I’m sorry.

Rodrigo:00:44:53I hadn’t until you asked me to.

Mark:00:44:54I know. And I don’t — I can’t unsee it, right. But here’s — Look, Rodrigo, I want you to be right. I don’t want to be right. I don’t want this to be a government controlled hit on an industry that I care about. That I believe is the future of financial service, that I believe does make mankind better. I don’t want that to be the case. I mean, I really don’t. But I just have such a hard time when I look at the players and when you read the report from the Enron guy, or he wasn’t an Enron guy. He’s the guy that came in to clean up the Enron mess, and now he’s coming in to clean up this mess. And he says, “Look, this is worse in terms of controls, or lack thereof and fraud, than Enron.” I’m like, okay, well that argues that, either they’re incompetent, pretty sure they were, or they’re evil. Which there’s no, we can’t be sure yet. We can’t be sure yet. I mean, it’s pretty clear they’re incompetent, right? I mean, 9, 10 billion …

Adam:00:46:15Well they don’t need be evil. They could just be sociopathic and not really care.

Mark:00:46:19Okay. And I don’t want that to be true. Like, I lived through it in the summer. So, we’re invested in BlockFi and BlockFi suddenly is under attack. Well, let’s just do the whole sequence of events, because people forget this part. The FTX bid for BlockFi was not the first one. This goes back all the way to May 15th. Actually, to May 9th , my birthday of all days. May 9th, Luna collapses. Okay. Everybody freaking out. Now, who did the Luna attack? Because we know exactly how it happened. Someone had to go short two bills of Bitcoin against the four bill collateral fund that was backing the peg in the algorithmic stable coin, like military intelligence, oxymoron. And so sequence of events that caused this thing to collapse, you know, people accuse Citadel, they accuse JP Morgan, BlackRock, they all denied it. Someone did it. I’m not saying who. Someone did it. Someone made that attack. Turns out Alameda lost a shit ton of money on that collapse. Okay. Super leveraged into that trade….

Rodrigo:00:47:49That’s when most people think it became insolvent.

Mark:00:47:52Exactly. So, then what happens next? He goes to Celsius who he owes a lot of money and says “I’ll rescue you.” And they’re like, “Oh, awesome. Here, look at the balance sheet.” “Oh shit. No. Okay. We don’t have enough money to rescue you. No. He, he’s a bad guy. Everyone, look at Alex, look at Alex. Look at Alex.” Amazing job making Alex the criminal. Okay. Then a month later, middle of June, BlockFi minding their own business. They’ve settled at the SEC. Everything’s going fine. And this stupid little anonymous Twitter account, …, which had systematically exposed Celsius, leaked confidential documents that you could not have, unless you were in their data room. Who is in the data room? Sam. Hmm. So, is there a link? I don’t know.

So, this … guy leaks documents that you could only have if you were in the BlockFi data room on Thursday. So, the way it went down is Tuesday, Three Arrows defaults. Okay. Celsius that morning, that was Tuesday, Singapore time. Tuesday morning. No, Wednesday, Wednesday morning, Celsius closed their doors. Up until that point, money was flowing out of Celsius into BlockFi, because people were like Celsius bad, BlockFi okay. Celsius closed their doors, now it’s a bank run, right? Soon as you close the doors it’s like it’s a wonderful life. Don’t close your doors, you won’t reopen. Okay, Mama dollar, Papa dollar, the whole thing.

So, we’re trying to raise this equity and we get to Thursday night, and this fucker, releases this document showing that the collateral backing the Three Arrows Capital loan, because people forget Celsius lost a bunch of money to Three Arrows, Voyager, ton of money to Three Arrows, BlockFi got it all. They were over collateralized, but a piece of the collateral is GBTC. And they released that and in 12 hours the spread went from 23, the discount went from 23 to 34 and the price fell 50%. So, it just blew, and call it a $100 million hole in the balance sheet. So, the largest investor in the Syndicate, Friday morning, pulls out. What are you doing? You have $300 million in this company? What are you thinking? Like, we’re out. So, now I’m scrambling to find other investors. Sam magically shows up over the Father’s Day weekend, and says, “I’ll give you this line of credit. One little caveat, I get to buy the company for nothing, literally nothing.” Why? Why did he do that? Because he owed them $700 million that he couldn’t pay because it was all fake. Same thing at Voyager.

And so now you start going whoa, whoa, whoa wait a second. The trigger was the losses at Luna. He owes all these lenders money that he doesn’t have because it’s been stolen. So, I’ll just pretend that I can buy them with money that I don’t have. I’ll just steal it from, you know, customer assets, because no one’s actually looking at the books, and he almost got away with it. Think about this. He almost got away with it. And what took him down? Hubris. He tries to get this law through, passed. And look, this has been going on forever. Right. Do you know why? We all have mutual funds in our 401K’s? Because BlackRock and Vanguard wrote the law. They literally sit on the committee that wrote the law in the Tax Act of 86 that when we went from defined benefit to defined contribution. And but for Mooch, it would be worse. They wrote another law, remember the fiduciary act right when Trump got elected?


Mark:00:52:39That Mooch got killed in his 11 days in office. And that was going to mandate, unless you put the money in the lowest fee, meaning ETF, you were not a good fiduciary.

Adam:00:52:52I remember. Yeah.

Mark:00:52:53Who wrote the law? The guy from BlackRock and the guy from Vanguard. I mean, …

Adam:00:53:00Those who stand to benefit the most from that, the execution of that — …

Mark:00:53:02Of course. But they actually sit on the committee writing the law because they pay the most money. So, here’s the thing. Sam …

Rodrigo:00:53:10You caught me in a conspiracy theory I really believe in, Mark. Eventually you were going to catch me. You got me.

Mark:00:53:15I know. So, here’s the thing. It’s always follow the money. Right? I tell the story all the time. 2014 ExxonMobil made $40 billion. That’s when oil prices were really high, right, before they collapse. The corporate rate was still 40% back then. So, what should they have paid? 16 Bill. What did they pay?  Minus 1.7. They got a $1.7 billion tax refund. How? They were the largest lobbyist firm that year. They paid $327 million and turned it into 17.7 billion. I would do that all day long. That is a great investment. So, …

Adam:00:53:57One day I’ll give you the inside information on what happens at the Canadian banks, and then you’ll be really excited.

Mark:00:54:02Oh, God. Yeah, yeah, yeah.

Rodrigo:00:54:04That one, again, well, that’s when conspiracy theories turn into actual reality.

Mark:00:54:10But real quickly. So, Sam’s trying to get this bill passed that basically would make FTX legal and DeFi illegal. Just let that sink in for a second. Because even in all of this, it wasn’t the technology that broke. It wasn’t the promise of blockchain and decentralization that broke. It was the CFi version of TradFi that broke, because trust was violated and we had a run on the bank. Right? History is replete with lots of those examples. So, what happens? In trying to get that law passed, he said some bad stuff about Binance and CZ. And here’s the crazy part, like about CZ’s, kids. Like, what? Why would you do that? Because the world in which we live you can’t say anything without it getting back to that other person. So, it gets back to CZ that you’re dissing on my family, man. And so what does he do? He outs him. And had it not been for that event, had CZ not outed him…

Rodrigo:00:55:33Yeah, he wanted to give him a little slap on the hand. I don’t know if he wanted to end him.

Mark:00:55:40No, no, no, no. I don’t think — I don’t even think CZ knew the extent of the fraud.

Rodrigo:00:55:48Yeah, I don’t either, no. But what was the other thing that happened? Didn’t Caroline say what the…

Mark:00:55:52… he knew about the stuff, and he was trying to out that. Meh, maybe. I think it was simply, I own half a billion of FTT. There’s only a couple billion free-float and you have five. So, I own you. Still, even though I sold you the business, I still own you. And look, he threatened, Caroline countered, and it was over in 12 hours.

Adam:00:56:25Well, I think Mike Harris asked the question, right? Is the government attacking these firms or

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