Some Thoughts on the SBF / FTX Trial

I’m something of a “crypto skeptic”.  I don’t necessarily accept as valid the idea that cryptocurrency is a natural replacement for state controlled fiat currencies, or that Blockchain and its associated constructs such as crypto “wallets” are in fact as inviolable as claimed.

When FTX collapsed so spectacularly in 2022, my initial reaction was basically “well, what did you expect? - the crypto markets have been crumbling for months”.  I was peripherally aware of FTX, Binance and a few other exchanges, but it wasn’t central to my world, so I more or less ignored it except when it made headlines.  A few of these operations collapsing on themselves wasn’t particularly surprising to me. 

What makes the trial of Sam Bankman-Fried (SBF) so interesting is the scale of the fraud, the youthfulness of the accused, and the seeming cluelessness they all exhibited. 

After listening to summaries of the testimony from Caroline Ellison, Gary Wang, Nishad Singh, and Sam Bankman-Fried for the last few weeks, my thinking on this has evolved considerably. 

My first comment is that Alameda Research and FTX did not start out with the intent to commit fraud.  However, as things grew, none of the “inner circle” players had the experience or wisdom to recognize the risks they were facing and put in place the kinds of financial and business practice controls needed to effectively manage risks.  

They needed to consult more deeply with people experienced in the commodities/futures trading world, legal experts, and accountants before making some of the decisions they ultimately made.  

Just from the timeline of events, it was painfully clear that Alameda was already in deep trouble when the “allow negative”, and unlimited “line of credit” constructs were put in place.  Both of those should have been a giant red flag to the executives that something was becoming very precarious. 

However, the kinds of profitability and growth that FTX had experienced in a few very short years is one hell of a drug for people who aren’t experienced in the rise and fall of boom/bust markets.  That, combined with a naive belief that somehow technology would solve all the problems, led FTX’s leadership to make some very poor decisions. 

Criminality in this case starts to creep into the story when FTX started to allow Alameda to draw funds which ultimately had to be coming from FTX customers.  The minute that FTX allowed that, they not only violated their own terms of service, but in fact took down one of the few “guardrails” that would have served to keep FTX above board.  

Once they started feeling that it was necessary to “fiddle the balance sheets” in order to access loans, that is clearly fraudulent (you’re deceiving the prospective lenders). That act alone serves as solid evidence of mens rea (guilty mind - or intent).

But, by the time summer 2022 had rolled around, the holes in FTX were going to sink it primarily because the company was not hedged adequately outside of the crypto world, so when crypto tanked, there was no way that the company could meet its liquidity requirements (and that's ignoring the hole that Alameda blew in the balance sheets).  Like the "unsinkable" Titanic, once the holes are below the waterline ... the ship is going down. 

This, of course, doesn't absolve the accused of the criminality of their actions.

I don’t think FTX and Alameda Research were set up as scam companies in the first place.  But, I do think that a lack of regulatory guardrails, inadequate legal advice, and youthful poor judgement combined to make them into a scam.  The sequestration of customer funds from FTX resources was allowed to collapse - if it had existed at all.  That, combined with the glass house of doing most in-house business using an internal token with a floating value, created an environment where it was far too easy for greed to rule the day. 

The legal advice was faulty in part because SBF had become very skilled … at giving people part, but not all, of the story.  That guaranteed that any advice he did receive was built on the information that he gave the lawyers - which was probably incomplete at best.  It didn’t help that counsel included a man who was involved in an online betting fraud a decade or so back.  

To be clear, I’m not defending SBF or his inner circle in the least here. None of them stood up and said “wait a second, this looks really questionable” until after the collapse. I don’t think any of them realized that they were engaging in fraud until the collapse was imminent.  That said, the line was crossed when Alameda was allowed special privileges on the FTX platform. 

After hearing about SBF’s performance in testimony (especially on cross-examination), I think he’s going to prison for a very long time indeed.  At the end of the day, he was the person with the full picture and the stake in both companies that meant he had motive to engineer fraud.  Keeping parts of the picture from various members of the executive team is enough to demonstrate an effort to wilfully maintain control. 

As for those who “turned state’s evidence”, they still deserve prison time too.  At the end of the day, their willingness to compromise ethics and honesty in participating in this fraud warrants sanction as well.  Whether that’s for as long as SBF goes to prison, or a lesser period remains to be seen.  At this point in time, SBF seems to be heading for a nice 30+ year stretch in a Federal Penitentiary.  

Speculation: Gaza Outcomes

Recently, articles have begun circulating which state that Israel has no plan for Gaza after their military operations cease. To the extent that Israel hasn’t stated what its plans are beyond the immediate military operations, this is true enough.  I think that this is a horribly naive way of assessing the situation, and it ignores the history of cynical politics that have brought us to this point. 

Up until the last couple of iterations of the Netanyahu regime, Likud has more or less managed to keep the most extreme elements of Israeli politics on the margins of government.  The current coalition has a much different composition, with some highly radicalized players playing significant roles in the cabinet.  These more radicalized people are opposed to any kind of peace arrangements with regards to the Palestinians, and are often active proponents of the Israeli “settlements” programs which clearly are intended to erode Palestinian presence on the lands and replace it with Jewish settlers.  

From an external perspective, this creates a significant problem because these hardline activists generally seem to carry the belief that the only acceptable outcome is a contiguous Jewish State from the West Bank through to the Mediterranean Sea.  This is presumably in part driven by religious beliefs, as well as a now toxic blend of propaganda that has been used to dehumanize the Palestinian people as well. (To be fair, Hamas no doubt does the same propaganda regarding the Israelis)

The stated goal of the current military operations in Gaza is to “destroy Hamas”.  Sounds like a nice clean goal, except Hamas is just as much a part of the culture in Gaza as it is a governing body.  If Israel’s government truly believes that blowing up buildings and rendering tunnel complexes unusable is going to destroy Hamas, they’ve missed the boat.  

Israel might even be able to kill or capture much of Hamas’ organizational leadership, they’ve still missed the boat.  Just as the idea of Israel as a state is a cultural and religious truth among the Jewish peoples, Hamas and its goals of liberating the Palestinian people from what it sees as Israeli oppression is now a cultural and religious truth.  It is this very matter of “truth” that stands in the way of making meaningful progress towards a functional peace.  Destroy the physical parts of Hamas, and a new Hamas will rise up among the people because you will have done nothing to address the issues that gave rise to Hamas in the first place. 

Netanyahu has played a very cynical game with Hamas.  It’s perhaps among the worst kinds of cynical politics, because while he was perfectly aware of what Hamas was, and what it represented, it was convenient to him to use them to drive political division between the Palestinians.  With much of Hamas’ senior leadership living outside Gaza in other countries, flattening Gaza ultimately does very little to “destroy Hamas”.  It may be disrupted for a period of time as a result of the current muscle-flexing by the Israel Defence Force (IDF), but it will re-emerge in a new form sometime after Israel ends its military operations. 

To this point, Israel’s military response in Gaza looks a lot like US Vietnam-era “carpet bombing”.  Drop lots of large explosives in the area and level as much of the city as possible.  While the IDF continues to insist that they are “targeting militants”, that doesn’t exactly stand up to scrutiny when they level entire residential neighbourhood.  It’s a bit like burning down a house because you saw a spider in it.  

The IDF at this point has basically ordered civilians in Gaza to move south towards the Rafah border crossing, including ordering that hospitals be evacuated.  Evacuating a hospital is a whole lot more complex than ordering the residents of an apartment complex to move, and sends a disturbing message about the IDF’s intentions.  Hospitals are, even in wartime, places that you do not bomb deliberately.  

No doubt, the IDF will argue that either Hamas is using the patients of the hospital as “human shields”, or that they have to destroy the facility in order to get at the tunnel complexes Hamas has dug underneath them.  But that’s really no different than declaring that anybody they see in the evacuation area after their deadline will be assumed to be a militant.  It provides easy justification for their actions, while avoiding the necessarily difficult problems of urban warfare.  

So, what does this tell us about Israel’s unstated plans for Gaza?  

It seems as though Israel is gearing up to render it uninhabitable.  In other words, I fully expect that anything resembling a major population centre in Gaza is going to be bombed into rubble, followed by the use of “bunker buster” bombs to render the underground tunnel complexes unusable.  This will effectively render most of the cities in Gaza uninhabitable.  My guess is that Israel will do this with “northern Gaza” (everything northeast of the Wadi Gaza river), whether they move on to do the same towards Egypt depends on how hardline the Israeli government gets.  

Flattening Gaza in the north will be justified by Israel in terms of “further securing Israel from Hamas incursions”,  and would effectively split the Gaza into two pieces, with the bulk of the Palestinian population sandwiched southwest of the Wadi Gaza with Egypt and Israel bordering.  

There have been rumours for a while now that Israel’s plan is basically to push Gaza’s Palestinians into Egypt’s Sinai, and those come from multiple sources. Further, states like Egypt have expressed resistance to taking Palestinian refugees in. So, I’m hardly the only person who sees Israel’s ground strategy as further pressuring the Palestinians to leave Gaza.  I suspect that the discussions within the Israeli government are revolving around depopulating Gaza by making it unlivable for the Palestinians.  

They’ve already effectively doubled the population of southwest Gaza, which will inevitably create much larger problems as civil order breaks down due to the resource pressures that will create. 

So, what does Israel do with Gaza once they declare that they have achieved their military objectives?

They will have a “tiger by the tail” problem at that point.  There are a few options:

1.  Israel undertakes a major military occupation while allowing the Gazans to pick up the pieces and rebuild.  This will be the messy route because Gazans will be angry and IDF troops will rapidly find themselves targets of anything from thrown stones to active sabotage. 

2.  Israel could modify the above scenario by requesting UN or foreign (US?) peacekeeping forces come in and keep order, although one does wonder if that wouldn’t create a whole new set of problems.

3.  If Israel stops at the Wadi Gaza line, it could establish a new “Gaza border” there, and leave Gazans in even more compressed circumstances. I do not think this would be wise, as the resulting pressure cooker in Gaza would quickly descend into a humanitarian disaster.  The Israeli goal in this situation is that Palestinians caught in this pressure cooker will seek the “path of least resistance” and flee into Egypt by bypassing the Rafah border crossing.

4.  It seems highly unlikely that Israel will simply pull out of Gaza at this point.  The military / security perspective would be that doing so opens the door to allowing Hamas to rebuild far too easily.  The minimum stance would be a locked down Gaza border with only “food and fuel” being allowed through.  Again, this returns to the “pressure cooker” analogy, and is very likely to explode in Israel’s face sooner rather than later. 

This is all rather gloomy, because the longer term outcomes of any of these is further suffering for Palestinian civilians, and it could quickly turn the Middle East into a war zone as countries around Israel fight back to either ensure their own political stability (e.g. Egypt), or because they come to perceive that Israel has lost all sanity.  Further, militant “Islamist” groups may see this as an opportunity to further their own goals in the midst of the ensuing chaos.  

All this because a very cynical Netanyahu decided that it was politically advantageous to try dividing the Palestinian peoples against themselves so he could claim that “there was no one to sit down at the table with” while the Palestinians were squabbling with each other.

About That Hospital in Gaza

There’s been a lot of discussion back and forth about the explosion at Al-Ahli Hospital in Gaza.  Hamas claims it was an Israeli bomb or missile attack, Israel claims it’s the result of a failed rocket launched from within Gaza. 

I have thoughts about this.  Certainly, I agree that the site does not look like a typical high explosive device went off.  That is a point that leans away from the standard bombs that Israel has been using.  

The Israeli claim is that the rocket failed, sprayed fuel around which subsequently caught fire after something at or near ground level exploded.  The part about this that doesn’t add up entirely for me with this is twofold: 

1). The alleged rocket appears to have failed at a fairly high altitude, and if it exploded, there should be evidence of  both fuel and rocket debris in the vicinity.  That hasn’t been identified yet. 

2). IF the rocket’s fuel canisters had managed to fall to the ground, and exploded there, that might explain the smaller crater at the site, but where’s the bits of the canister?  

3). The cars - the cars really bother me here.  The pictures I’ve seen show cars that clearly were subjected to intense heat - not the kind of heat that you see when a car catches fire and causes the one adjacent to burn as well.  Assuming that the Gaza rockets use something like Hydrogen Peroxide as a fuel (it’s relatively easily made, and burns plenty hot), I’m not sure that a fuel load would result in a strong enough fire to do what has been observed.  

*For clarity - I am not an explosives or rocket expert, so I will concede that it seems possible that it could have been a failed rocket.

My concern with the failed rocket scenario is it seems just a little too pat, and too specific.  It’s the kind of specificity that I would expect with an actual forensic report of the site itself, and yet Israel trotted it out within hours. 

It also seems that the world is ignoring another line of explanation:  The use of a Thermobaric Weapon.  Those devices are designed to produce exactly the kind of effect that we see at the hospital, and they’re intended to explode above ground level as a rule.  According to Wikipedia (perhaps not the most reliable source), Israel is rumoured to have had these weapons since about 1990, and they could easily have bought them from the US as well.  

Dropping a moderate sized thermobaric weapon in the courtyard of the hospital would produce a considerable amount of damage, and more specifically could explain the damage to the cars, which were clearly subjected to an intense blast of fire.  Further, thermobaric munitions can be delivered in a variety of ways, ranging from aircraft to traditional ground based artillery.  

Even here, we need to go through the site and find any pieces of whatever container held the explosive.  That requires a far more detailed forensic analysis than is likely possible in the heat of active warfare, but it seems necessary.  Both parties in this conflict have too many reasons to assign blame to the other side to be credible. 

[Update Oct 22, 2023]:  Independent reviews by people with more knowledge than I do are lining up on the “errant rocket” hypothesis.  Although I remain somewhat skeptical of that explanation, I have no compelling evidence to the contrary. 

Games Without Frontiers, War With Tears

The pressure cooker that is the Israeli-Palestinian conflict exploded this weekend. 

Normally, I stay out of making comment about anything to do with this particular conflict because quite frankly it appears to be intractable on so many fronts.  Between religious and cultural conflicts that go back not merely years, but arguably centuries; and a plethora of issues around everything from territory to resources, and the fallout from the dissolution of Europe’s colonial era political constructs, it’s just one big ugly mess.  

However, I’m seeing lots of posts on social media that are blindly supporting either the Israeli or the Palestinian “sides” in this dispute.  This is one of those rare times where “both sides are wrong” really does apply.  

Nothing justifies the actions of Hamas - nothing.  Going after civilians and massacring them is just plain wrong.  However, Hamas is a political entity, and like all such entities it represents a portion of the people. Once in power, I suspect that they have used their position to spread propaganda to feed their agenda.  I can only imagine the language at use within Gaza that has been used to desensitize Hamas members to the point that they are willing to engage in these horrors.  

Israel’s response is predictably heavy-handed - although as of this writing they haven’t yet rolled tanks into Gaza, just resorted to aerial bombing / missile attacks - which are frankly just as likely to kill innocent civilians as members of Hamas.  That is an understandable reaction to Hamas’ actions - but that doesn’t make it justified either.   

Since the first Arab-Israeli war, we have watched the Israeli state steadily erode the lands originally allocated to the Palestinian peoples.  In the last 20 years we have watched Israel build walls around Palestinian settlements, and restrict resource access for those settlements.  The border to Gaza is one of the most fortified in the world.  Then, the Israeli government has encouraged the formation of “settlements” on those occupied lands.  

Whatever the political justification for these actions, they serve ultimately to create a pressure cooker environment for the people caught within those walls, and those forcibly removed from their homes and lands.  It’s not hard to understand how that would over time alienate the peoples affected, and make them vulnerable to propaganda. While Hamas is not all Palestinian people, you can be absolutely certain that Hamas leadership has taken full advantage of the opportunity that continued oppression by the State of Israel has created. 

The tragedy here is that cynical political leadership on both sides has chosen to use the situation to justify further entrenchment in the conflict. While Netanyahu continues to talk about a "two state solution", his government's actions have done little to move towards any kind of peace.  Similarly Hamas profits from the stalemate, using it to justify continuing to lash out at Israel with violence while petitioning its allies in states like Iran for more weapons.  

It will take statesmen with bigger visions than the leadership on either side of this conflict currently demonstrates to move in the direction of some kind of peace, and it will also take major steps from the leadership of countries like the US, Iran, and Russia to facilitate a meaningful peace.