Marc Cohodes is Fired Up - Vol. 1

A newsletter series on the famed short seller

This post is part of a series on the famed short seller, Marc Cohodes. It is in part focused on Marc’s short of Silvergate Bank, which is still ongoing. For that reason it’s impossible to say exactly when the series will conclude. Once the saga is over I’ll package everything up into one podcast episode.

Also, none of this is financial advice. Shorting shady companies is a dangerous game and better left to professionals.

Note that if you haven’t already listened to the podcast episode about Marc titled “Life’s Too Short” then I recommend you do that before reading this post.

Who cares about short sellers?

A reasonable question to ask is: who cares?

That’s actually always a good place to start.

Who cares about Marc Cohodes, or Jim Chanos, or Nate Anderson, or John Hempton?

The market tends to go up over time, and shorting stocks is like trying to paddle a canoe against the current.

So why does this podcast have multiple episodes about short sellers?

I think the answer is: We care about all methods of taking risk where there is edge to be had. Another reason is that I have described edges as the valuable information you have, which is uniquely yours. Short sellers have only one way to make money, and that’s by being right. So their stories offer a view of what it means to be certain, and what it looks like to have information that everyone else is ignoring.

And lastly, but perhaps most importantly, short sellers have the best stories.

The SBF Prologue

Let’s start off by taking a trip down memory lane to the recent past. Here are a few screenshots which are roughly typical for the media coverage that Sam Bankman-Fried enjoyed prior to November of 2022.

If it seems like I am having an easy laugh over the stupid media, gullible enough to believe that SBF was an all time great investor, I’m not.

He ran a business headquartered in the Bahamas, involved in the murky world of cryptocurrency. The business, FTX, had the support of an incredible list of celebrities, politicians, and athletes. That list included Tom Brady, Steph Curry, Kevin O’Leary, and Gisele Bundchen. The most storied venture capital firm in history, Sequoia Capital, had invested in FTX. Also, while most crypto firms run like hell when they hear the word “regulation,” SBF actually seemed interested in making crypto legit. He courted regulators.

The reason the story is remarkable is not because it was easy to figure out.

It’s remarkable because almost no one could see it.

But Marc Cohodes saw something that wasn’t quite right.

Marc Cohodes - I Just Can’t Shut it Off

In case you might be thinking that of course it’s easy to say that the SBF story didn’t add up - in hindsight - Marc had been sounding the alarm for months.

Here is a tweet from June 29 where Marc implied that SBF would have a Titanic ending.

Marc sent lots of tweets aimed at SBF. Here’s another one from October, a full month before FTX collapsed.

Then, just before the SBF/FTX story completely unraveled, Marc appeared on Hedgeye and told the world what no one would believe for several weeks.

It’s true that the media was overly credulous, and as we get further into this series we’re going to hear about legitimate failures of some outlets.

But these kinds of operations are engineered to be hidden.

Actually, SBF was in some ways especially skilled in the way that he created his own myth. Almost everything about him seemed like it was meant to disarm. He wasn’t a super slick salesman who made people want to safeguard their wallets.

He wore New Balance.

Here he is sitting next to Gisele Bunchen, and when I look at this picture I think: “there’s only one way the guy in shorts makes it to that stage, and that’s if he’s a some kind of trading savant.”

SBF leaned into Rainman as a marketing strategy.

Also, he didn’t promise any kind of crypto utopia. Actually, the way he discussed crypto yield farming seemed almost too honest. Here is the now somewhat famous clip from SBF on the Odd Lots podcast, where he describes crypto yield farming in terms usually reserved for ponzi schemes.

Sam Bankman-Fried - Crypto Yield Farming as a Ponzi Box

SBF’s nerd act was sort of like the Unfrozen Caveman Lawyer sketch from SNL. The brilliant thing about the Caveman sketch is that it correctly identifies that our brains are wired to be convinced by things which don’t actually make any sense.

To reiterate the point here, I don’t think the media buying into SBF is that remarkable. I think the fact that Marc saw through it is the remarkable thing.

But why was Marc looking at SBF or FTX at all? There was no public company stock to short. So why did he care?

Short sellers are accustomed to the accusation that all of their claims are profit driven - they’re accused of spreading lies and innuendo to dent the stock price. Marc says one of the things he liked about the SBF puzzle was that if he was right, no one could accuse him of a profit motive.

Marc Cohodes - Then What Would People Say

After FTX collapsed you could find explainers on Twitter that broke down various parts of the scheme. But those explainers all had the benefit of having all of the puzzle pieces turned up. Marc put the puzzle together with the pieces turned upside down.

Again, the whole operation ran out of the Bahamas.

In crypto.

With multiple layers of seeming seriousness built up around it.

Even on the day that the house of cards fell there were sophisticated crypto people saying that they didn’t think that FTX was in trouble. Actually, after the exchange fell I heard a podcast where FTX depositors said they expected to be mostly fine.

I want to make a point which is going to be core to this series. As I’ve tried to illustrate above, everything seems easy in hindsight. But these risk endeavors are never easy, and shorting stocks is even harder than the other stuff we cover. So I think that discussing an active short, and watching it play out in real time could be extremely valuable.

If you don’t know anything about Silvergate, here is a graph of the stock price over six months.

The price action over that time is bad. But in the last month it’s bounced between the low teens and 22. That’s not fun if you have a short position.

To give you a sense as to why Silvergate matters, I’ll offer some background. Silvergate is one of the dollar onramps that exists for the crypto universe. They had banking relationships with many of the top crypto firms, including some that have failed. Also, when FTX failed, Sam Bankman-Fried made some very interesting comments about the role that bank accounts played in the mess. Here he is on a Twitter Spaces from December 1, where he says that some of the accounting problems could be related to the way FTX used bank accounts which didn’t belong to the exchange.

SBF - Wires to Alameda

Imagine you’re the bank in question and one of the largest financial debacles in history has just been laid at your doorstep.

Well, Silvergate probably knew there could be a problem because a few days later, on December 5, they issued an 8-K to try to explain away their role in the mess. I am quoting from the release:

We conducted extensive due diligence on FTX and Alameda Research.

Silvergate conducted significant due diligence on FTX and its related entities including Alameda Research, both during the onboarding process and through ongoing monitoring, in accordance with our risk management policies and procedures and the requirements outlined above.

Alameda Research operated an over-the-counter (OTC) trading firm and individuals or entities engaging in OTC trades with Alameda would have been instructed by Alameda to send funds to Alameda’s account whether at Silvergate or any of their other banking partners.

I added emphasis to the words in the 8K that seemed geared toward offering some kind of plausible deniability. In case you’re curious, banks don’t get to just throw up their hands and say that customers are allowed to do whatever they want to with their accounts. Banks are charged with some level of oversight for the ways that customers use accounts. And Silvergate’s release looked like an attempt to carve out a way that they might not have been negligent in overseeing the Alameda accounts.

So FTX went down, and on the way down SBF left a huge flaming bag of shit on Silvergate’s doorstep. Here’s Marc talking about finding Silvergate through FTX.

Marc Cohodes - Found Silvergate After FTX

Even today Marc and the other investors on the Silvergate trail are doing daily research, and every day they’re accused of spreading FUD by the stock’s longs. Also the media has mostly delivered a collective yawn.

So we are at the part of the short where things could be very interesting. The price action on any day might average $15 a share, and yet $30 and $0 are both possible.

This has just been an introductory post. In Volume 2 and beyond you’ll hear more of Marc, the things he saw that didn’t add up at FTX, and the specific problems he sees for Silvergate Bank.

-John Reeder

Risk of Ruin Podcast