Coffeezilla is a journalist and investigator on YouTube who exposes financial frauds, scams, and fake gurus. Please support this podcast by checking out our sponsors:
- Eight Sleep: https://www.eightsleep.com/lex to get special savings
- MasterClass: https://masterclass.com/lex to get 15% off
- BetterHelp: https://betterhelp.com/lex to get 10% off
- Rocket Money: https://rocketmoney.com/lex

EPISODE LINKS:
Coffeezilla's YouTube: https://www.youtube.com/Coffeezilla
Coffeezilla's Twitter: https://twitter.com/coffeebreak_YT
Coffeezilla's Instagram: https://www.instagram.com/coffeebreak_yt

PODCAST INFO:
Podcast website: https://lexfridman.com/podcast
Apple Podcasts: https://apple.co/2lwqZIr
Spotify: https://spoti.fi/2nEwCF8
RSS: https://lexfridman.com/feed/podcast/
Full episodes playlist: https://www.youtube.com/playlist?list=PLrAXtmErZgOdP_8GztsuKi9nrraNbKKp4
Clips playlist: https://www.youtube.com/playlist?list=PLrAXtmErZgOeciFP3CBCIEElOJeitOr41

OUTLINE:
0:00 - Introduction
0:38 - Coffee
2:48 - SBF and FTX
17:28 - $8 billion
26:36 - Evil vs incompetence
36:32 - Key lessons from FTX collapse
49:50 - Should SBF go to jail?
57:36 - Role of influencers and celebrities
1:02:04 - How FTX covered up fraud
1:06:00 - Interview with SBF
1:21:03 - SafeMoon fraud
1:27:16 - Bitcoin
1:37:54 - Psychology of investigating fraud
1:47:01 - Investigating politics and corruption
1:54:13 - Coffeezilla origin story
1:58:53 - MLM marketing scams
2:06:32 - Andrew Tate and Hustlers University
2:24:15 - Save the Kids crypto scandal
2:31:34 - Money and fame
2:38:38 - MrBeast
2:45:00 - Fake gurus and Get-Rich-Quick schemes
3:04:20 - Process of investigation
3:17:05 - Twitter Files release
3:26:11 - Time management and productivity
3:38:11 - Advice for young people

SOCIAL:
- Twitter: https://twitter.com/lexfridman
- LinkedIn: https://www.linkedin.com/in/lexfridman
- Facebook: https://www.facebook.com/lexfridman
- Instagram: https://www.instagram.com/lexfridman
- Medium: https://medium.com/@lexfridman
- Reddit: https://reddit.com/r/lexfridman
- Support on Patreon: https://www.patreon.com/lexfridman

Do you think he is incompetent, insane, or evil?

The following is a conversation with Coffee Zilla, an investigator and journalist exposing frauds, scams, and fake gurus.

He's 1 of the most important journalistic voices we have working today, both in terms of his integrity and fearlessness in the pursuit of truth.

Please follow, watch, and support his work at youtube.com slash CoffeeZilla.

To support it, please check out our sponsors in the description.

And now, dear friends, here's Coffee Zilla.

That was the number 1 question on the internet.

Do you like your coffee to reverberate deeply through the worst of human nature?

I've gone through a lot of phases on coffee.

I used to, in college, I would go super deep into grinding fresh beans, all of that kind of stuff, water temperature exactly right.

And then I hit a phase where I was just, it was the maintenance dose.

Then I went to like espresso because I could get a lot more in.

And now I go through phases of like, sometimes I like it with a little oat milk, sometimes a little half and half and sugar.

feeling- Oh, you've gotten soft in your old age.

But hey, if I'm doing a SBF interview, it's black that day, nothing less.

What do you actually do in those situations, like leading up to a show?

Like how do you put yourself in the right mind space to explore some of these really difficult topics?

I think a lot of it's preparation, and then once it happens, it's mostly fueled by sort of adrenaline, I would say.

I really deeply care about getting to like the root cause of some of these issues because I think so often people in positions of power are let off the hook.

So I really care about holding their feet to the fire and it translates into like a lot of energy the day of.

So I never find myself like, funny enough, I usually drink a lot of caffeine leading up to the interview.

And then I try to drink like minimum the day of because I have so much adrenaline.

I don't want to be like hyper stimulated.

I have to say of all the recent guests I've had, the energy you had when you walked into the door was pretty intense.

gonna knock down the door or something, you were very excited.

Like that just energy, it was terrifying because I'm terrified of social interaction.

You chose a good living of interviewing people.

Can you tell the story from the beginning as you understand it?

Yeah, so Sam Bankman-Fried is a kid who grew up sort of from a position of huge privilege, both his parents are lawyers, I believe both of them were from Harvard.

He went to MIT, went to like, or sorry, backing up a bit more, he went to like this top prep high school, then to MIT, then he went to Jane Street, and after that he started a trading firm in I think 2017 called Alameda Research with a few friends.

Some of them were from Jane Street, some of them worked at Google, and they were sort of the smartest kids on the block or that's what everyone thought.

They made a lot of their money on something called the kimchi premium, or at least the story goes, which just to explain that, the price of Bitcoin in Korea was substantially higher than in the rest of the world.

And so you could arbitrage that by buying Bitcoin elsewhere and selling it on a Korean exchange.

So they made their money early doing kind of smart trades like that.

They flip that into market making, which they were pretty early on that, just providing liquidity to an exchange.

And it's what it's a strategy that is considered delta neutral, which means basically, if you take kind of both sides of the trade and you're making a spread, like a fee on that, you make money whether it goes up or down.

So in theory, there shouldn't be that much risk associated with it.

So Alameda kind of blew up because they would offer these people, you know, people who are giving out loans, they'd say, hey, we'll give you this really attractive rate of return.

And we're doing strategies that seemingly are low risk.

So we're a low risk bet where these smart kids from Jane Street and you can kind of trust us to be this smarter than everyone else kind of thing.

Around 2019, Sam started FTX, which is an exchange.

Specifically it specialized in derivatives.

So like margins, kind of more sophisticated crypto products.

So Binance actually has a prior relationship to FTX, which we'll explore in a second, because they're going to play a role in FTX's collapse, actually.

Binance is the number 1 crypto exchange, and they're led by, he's called CZ on Twitter.

But really smart guy has played his hand really well and built up a quite large exchange.

And Binance was funding a bunch of different startups.

So they funded, they helped invest into FTX.

Early on, they invested a hundred million.

So these guys were kind of like teammates early on, SBF and CZ.

They got a lot of credibility in the space.

And eventually FTX actually bought out Binance.

So pretty good investment for CZ in a couple of years.

And now, lead that up to 2022, what happens?

Luna collapse, 3 arrows capital collapse, which if you don't know, there's just these kind of cataclysmic events in crypto led by some pretty risky behavior, whether Luna was a token that promised really attractive returns that were unsustainable ultimately, and it just kind of spiraled.

It did what's called a stable coin death spiral, which we can talk about if we need to.

I can't wait till that like actually enters the lexicon like

a Wikipedia page on it like economic students are learning in a school.

Anyway, I mean this is the reality of our world.

This is a really big part of our of the economic system is cryptocurrency and stablecoin is part of that.

Yeah, it's weird because on the 1 hand, cryptocurrency is supposed to somewhat simplify or add transparency to the financial markets.

The idea is for the first time, you don't have to wait for an SEC filing from some corporate business.

You can look at what they're doing on chain, right?

So that's good because a lot of big financial problems are caused by lack of transparency and lack of understanding risk.

But ironically, you get some people creating these arbitrarily complicated financial products like algorithmic stable coins, which then introduce more risk and blow everything up.

And all of a sudden, this crypto industry, which everyone thought was going to the moon, Bitcoin to 100,000 is in some trouble.

And FTX seems like the only people who, besides like Binance, who's also really big and stable, and Coinbase, they seemed like they were doing fine.

In fact, they were bailing out companies in the summer.

I don't know if you remember that, SBF was likened to like Jamie Diamond, who's the CEO of Chase, who like kind of was like the buck stops here.

So come to like around October and November, there's all this talk about regulation.

And CZ, the CEO of Binance, gets word that maybe SBF is kind of like cutting him out or making regulation that would maybe impact his business.

They start kind of feuding a little bit on Twitter.

So when it comes out, a CoinDesk report came out that FTX's balance sheet wasn't looking that good.

They had a lot of coins that, in theory, had value if you looked at their market price.

But for a variety of reasons, if you tried to sell them, they'd collapse in value.

So it was sort of like this thing, a house built on sand.

And a friend of mine on Twitter, he goes by Dirty Bubble Media.

He released a report and he basically said, I think these guys are insolvent.

Well, CZ saw that and he retweeted it and started adding fuel to the fire of like the speculation, because up to this point, everyone thought FTX is super safe, super secure.

There's no reason to not keep your money there.

Tom Brady keeps his money there, whatever.

And CZ kind of adds fuel to the fire by saying, not only am I retweeting this, adding kind of like validity to this speculation.

But also I'm going to take the FTT that I got, which part of their balance sheet was this FTT token, which is FTX's like proprietary token.

They were using this token to basically be a large amount of collateral for their whole balance sheet.

So it accounted for this huge amount of their value.

And the CEO of Binance had a huge chunk of it as well.

And the fuel that that introduced to the market is, if he sells all this FTT, and this FTT is underwriting a lot of the value of FTX.

Does FTT almost approximate like similar things if you were to buy a stock in a public company?

It sort of was this proxy because what FTX was committed to doing was sort of like buying back FTT tokens.

They would do this thing called the buy and burn.

I think there was some amount of sharing in the revenue fees of FTX.

In my opinion, the exact value of FTT was speculated from the beginning.

And it was clear that it was very tied to the performance of FTX, which is important because we'll get to later, FTX sort of built their whole scaffold on FTT, which meant that this scaffold was very wobbly because if FTX loses a little bit of confidence, then your value goes down.

When your value goes down, you lose more confidence and this goes down.

So it was kind of like this thing that, this flywheel that when it was going well, you got huge amounts of growth.

When it's going bad, you get a exchange death spiral, so to speak.

Actually, this structure, it's a pretty non-standard structure, did the architects of its initial design anticipate the wobbliness of the whole system?

So, putting fraud and all those things that happen later aside, do you think it was difficult to anticipate this kind of FTT, FTX, Alameda Research, weird dynamic?

No, because I think sophisticated traders always think in terms of diversification and correlation.

So if you're trying to, the way to think about risk in investing is like, if I invest in you, Lex Friedman, and then I also invest in some product you produce, the performance of those 2 things will be pretty correlated.

So whether I invest in you or I invest in this product that you like are completely behind, I'm not de-risking.

I'm basically counting all on you doing well, right?

And if you do bad, my investments do very bad.

So if I'm trying to build a stable thing.

I shouldn't put all my eggs in the Lex Friedman basket unless I'm positive that you're going to do well, right?

As your financial advisor, I would definitely recommend you do not put all your eggs in this basket.

Right, and so you can think about it like, if I know that, these people were trained to think like this.

And so the idea that you could start this exchange, you're worth billions of dollars, and you underwrite your whole system by betting, putting most of it on your own token is, is insane.

And what's crazy is we'll later find out that they were basically taking customer assets, which were real things like Bitcoin and Ethereum with risks that were not so correlated to FTX, and they were swapping them out.

They were using to go basically gamble those and putting FTT in its place as quote value.

So they were increasing the risk of the system in order to bet big with the idea that if they bet big and won, we'd all be singing their praises.

If they bet big and lost, I don't know if they had a plan, but I think they were being extremely risky and there's no way to avoid their knowledge of that.

So when you say customer assets, I come to this crypto exchange, I have Bitcoin or some other cryptocurrency, and this is a thing that has pretty stable value over time.

I mean, as crypto relatively so, and I'm going to store it on this crypto exchange.

So this thing, to the degree that crypto holds value, it's supposed to continue holding value.

There's not supposed to be an extra risk inserted into the thing.

Right, and FTX was pretty clear from the beginning that they wouldn't invest your assets in anything else.

That's what made FTX such a horror story for investor confidence is basically they made every signal that they would not do anything nefarious with your tokens.

They would just put them to the side, put them in a separate account that they don't have access to, and they just kind of wait there until the day that you're ready to withdraw them.

That's explicitly what they told their customers.

So going back to the story a little bit, CZ then says, hey, I'm selling this token that underwrites the value of FTX.

SBF during this time says several lies, such as FTX assets are fine, we have enough money to cover all withdrawals.

And a day later, he basically admits that that wasn't the case.

They don't have the money, they're shutting down.

And then a few days later after that, they declared bankruptcy.

I should be clear, there's Alameda Research, FTX International, and FTX US, which is the US side of things.

All of them are in bankruptcy, and it's not clear to the extent that they were commingling funds, but it's clear that they were commingling funds to some extent.

So they kind of were taking from each other.

And that is where the fraud happens, right?

Because if going back to our earlier analogy, if you're supposed to set funds aside and I find out you were using it to go make all these arbitrage trades or do market making or all these activities you were known for, for your like hedge fund trading firm thing, that's a huge problem because he basically lied about this.

And especially when he's saying explicitly that we have these things, we have these funds, and these things turn out to be lies, well, again, the question of fraud comes in, and it's just like, there's no way he didn't know.

So the obvious question might be, well, why isn't he locked up?

And it's because really his story is that he didn't know any of it.

He found out that they had to steal Mana's position.

He would say he was totally disconnected from what Alameda was doing.

He had no idea that they had such a large margin position, that they'd had an accounting quirk, and that accounting quirk hit $8 billion from his view.

And so when he was saying that they had money to cover it, he was saying that truthfully to the best of his ability, and he just was so distracted at the time that he made a series of increasingly embarrassing mistakes, and now he owes it to the people to right those wrongs by publicly making this huge apology tour.

So you might have seen him on, I mean, he's been talking to nearly everyone about basically how he's just didn't know what he's doing.

So what are some interesting things you've learned from those interviews?

I think I've appreciated why you don't talk in that position.

Most people would listen to their legal counsel and not talk.

I do not think he's, any lawyer worth their salt would tell him to talk because right now I think the danger of what he's doing is he's locking himself into a story of how things happened and I don't think that story is going to hold up in the coming months because I think it's impossible from the insider conversations I've had with Alameda Research employees, with FTX employees, it's impossible to square what they are telling me with no incentive to lie with what SBF is telling me with every incentive to lie, which is fundamentally that he didn't know they were commingling funds, he didn't know they were gambling with customer money, and it was basically this huge mistake, and it's Alameda's fault, but he wasn't involved in Alameda, a company he owned.

So like a compassionate but hard-hitting gangster that you are, very recently you interacted with SBF on, I like how you adjust the suspenders as you're saying this.

You interacted on Twitter Spaces with SBF and really put his feet to the fire with some hard hitting questions.

What did you ask and what did you learn from that interaction?

Sure, I should say first, this was not a willing interaction.

I mean, I thought that was kind of the funny part of it.

Cause I've been asking him for an interview for a while.

He's been giving interviews to nearly everyone who wants 1, big channels, small channels.

He didn't give me 1, but I managed to get some by sneaking up on some Twitter spaces and DMing the people and like being Like, hey, can I come up?

So I didn't get him to ask everything that I wanted because he like would leave sometimes, you know, after I asked some of the questions.

But really what I asked was about this 8 billion and zooming in on the improbability of his lack of knowledge.

It's sort of like if you run a company and you know the insides and outs and you're the top of your field, top in class, and all of a sudden it all goes bust and you say, I had no idea how any of this worked.

I didn't know, it's like the guy who runs Whataburger saying, I didn't know where we sourced our beef.

I didn't know where we, that's a Texas example actually.

Like, I didn't know we used Chinese manufacturers.

To become Walmart, you have to know how your supply chain works.

You have to know, even if you're at a high level, you know how this stuff works.

Can I do a hard turn on that and go as 1 must to Hitler?

Hitler's writing is not on any of the documents around as far as I know on the final solution.

So in some crazy world, he could theoretically say, I knew, I didn't know anything about the death camps.

So there's this plausible deniability in theory.

So that's, but that most people would look at that and say, it's very unlikely, you don't know.

Especially if all the insiders are coming out and saying, no, no, no, of course he knew.

I mean, what was clear, what's interesting about the structure, and like, I love the nitty gritty.

I wanted to turn us as fast as possible away from Hitler.

So the insiders in what, Alameda Research?

What was interesting is that there was this sort of one-way window going on between Alameda and FTX, where FTX employees didn't know a lot of what was going on.

Alameda insiders, and I would say by design, knew almost everything that was going on at FTX.

And so I think that was really interesting from the perspective of a lot of the so-called, like what you could, what he's trying to ascribe to as like failures or mistakes or ignorance and negligence, when looked at closely, are much more designed and they sort of don't arise spontaneously.

like let's say, so there's this thing in banking and like trading where if I run a bank and you run like a trading firm, we need to have informational walls between us because there's huge conflicts of interest that can arise, right?

So the negligent argument might be that like, oh we just didn't know, we're sort of these dumb kids in the Bahamas, so we shared information equally.

But when you see a one-way wall, that starts to look a lot different, right?

If I have a backend source of looking at, or sorry, you're the trading firm, so you have a backend way to look at all my accounts, and I have no idea that you're doing that, that all of a sudden looks like a much more designed thing.

When it would be plausible, let's say going to use another analogy too, if you're saying, look, I commingled funds because I was so bad at corporate structures.

You would expect those companies to have a very simple corporate structure, because you didn't know what you were doing.

But what we see with FTX and Alameda is they had something like 50 companies and subsidiaries.

And this impossibly complicated web of corporate activity.

You don't wake up and go, oh, I designed like this watch that ticked a very specific way, but it was all accidental.

If you really didn't know what you were doing, you'd end up with a simple structure.

So even just like from a fundamental perspective, what SBF was doing and like the activities they were engaging in were so complicated and purposely designed to obfuscate what they were doing, it's impossible to subscribe to the negligence argument.

And I want to quickly say too, like, I don't think a lot of people have honed in on this.

There was insider trading going on from Alameda's perspective where they would know what coins FTX was going to list on their exchange.

There's a famous effect where, let's say you're this legitimate exchange, you list a coin, the price spikes.

Insiders told me it was a regular practice for Alameda insiders to know that FTX was going to list a coin and as a company buy up that coin so they could sell it after it listed.

So that's illegal from like and if an individual does it, it's illegal, it's fraud.

What if a company is systematically doing it?

And you can't tell me that FTX, or someone at FTX wasn't feeding that information about to Alameda, or somehow giving them keys to know that.

And that would happen at the highest level.

And this is why his arguments of, I was dumb, I was naive, I was sort of ignorant are so preposterous because he's dumb and ignorant.

The second it becomes criminal to be smart and sophisticated, right?

But then also coming out and talking about it, which is a- It's a bizarre move.

Can you tell the story of the 8000000000?

Yeah, so it's really interesting because it's sort of like wire fraud.

You sort of, he's sort of copping to like smaller crimes to avoid the big crime.

The big crime is you knew everything and you were behind it, Right?

The smaller crimes are like a little wire fraud here, little wire fraud there.

So what the 8 billion is, is that FTX didn't always have banking.

It's hard to get banking as a crypto exchange.

There's all these questions of like, where's the money coming from?

See all Lex Fridman transcripts on Youtube

Coffeezilla: SBF, FTX, Fraud, Scams, Fake Gurus, Money, Fame, and Power | Lex Fridman Podcast #345