The Risk of Ruin Newsletter, Along With Podcast Adjacent Stuff - 12/2/22
About the Newsletter
Hey folks, I’m starting a podcast-related newsletter so that there’s one more way to stay in touch with listeners.
I’ll be announcing new episodes when they’re released, letting you know about upcoming episode guests, and also mentioning podcast-adjacent content. Basically, anything interesting that has some overlap with topics covered in the episodes. That could include: casino games, sports, the markets, the economy, and credit cards/travel hacking, etc.
For now I’m going to keep it to about an email per week.
Latest Episode - Rocket Man
The most recent episode details the Twitter arb trade. I talked to two investors who were involved, along with a lawyer that covered the court case. The basic idea was that you could buy TWTR over the summer for between $33 and $40, and on October 31 you got paid $54.20.
One constant challenge in making these episodes is: how much knowledge do you assume the listener has? The topics tend to be pretty esoteric, no matter what we’re talking about. The workings of a slot machine are no more obvious to someone that makes a living in the stock market, than are the workings of the stock market, to a slot hustler.
I never know how to really explain the right amount, so I have taken an approach of: explain very little and ask the listener to catch up. I don’t know if that’s the right approach or not.
Ted Lasso Meets Moneyball
Rufus Peabody was one of the guests for the episodes titled “Greetings from Las Vegas.” He hosts the “Bet the Process” podcast with MIT Blackjack Team alum Jeff Ma, and I liked their episode this week with Preston Johnson. Preston talks about buying an English soccer club with an eye toward employing a high volatility and analytics driven approach. I liked the discussion because pretty much any time you try to have a discussion with someone where the idea is to get some buy-in about analytics (or math, or EV, or correct basic strategy, or variance, or… insert any non-intuitive numbers topic you’d like) you kind of know how badly it will probably go. Preston says that the coaches all say they are on board with analytics, and yet that does not mean they are on board with analytics.
The Sam Bankman-Fried Mystery
The FTX meltdown and accompanying questions about Sam Bankman-Fried’s role in the disaster are very interesting as a puzzle. We have some limited information about what happened, and then we can try to assemble all of the pieces and figure out whether this was a simple blowup, or did something more sinister happen?
Blowups happen in markets from time to time, and sometimes the people involved were well-meaning, and just didn’t understand the risks they were taking. People lose money, but it’s a risk game, and losing is one of the known outcomes.
Then other times there’s wrongdoing - a la Madoff, where there is no real business, it’s a pure ponzi.
The evidence against FTX and Alameda Research is all very murky, but pretty much none of it looks good. SBF is on a media tour to try to convince people that the very murky details add up to incompetence, and not wrongdoing. If he pulls it off it will be one of the great needle-threadings of all time. Because he first convinced the galaxy brain VCs in Silicon Valley that he was smarter than they were. And now he is trying to convince the rest of us that he was too dumb to be trusted with anyone’s money - but that being dumb isn’t a crime. Here is an excerpt from Bloomberg this morning.
“You misplaced $8 billion?” I ask.
“Misaccounted,” Bankman-Fried says, sounding almost proud of his explanation. Sometimes, he says, customers would wire money to Alameda Research instead of sending it directly to FTX. (Some banks were more willing to work with the hedge fund than the exchange, for some reason.) He claims that somehow, FTX’s internal accounting system double-counted this money, essentially crediting it to both the exchange and the fund.
That still doesn’t explain why the money was gone. “Where did the $8 billion go?” I ask.
To answer, Bankman-Fried creates a new tab on the spreadsheet and starts typing. He lists Alameda and FTX’s biggest cash flows. One of the biggest expenses is paying a net $2.5 billion to Binance, a rival, to buy out its investment in FTX. He also lists $250 million for real estate, $1.5 billion for expenses, $4 billion for venture capital investments, $1.5 billion for acquisitions and $1 billion labeled “fuckups.” Even accounting for both firms’ profits, and all the venture capital money raised by FTX, it tallies to negative $6.5 billion.
Advantage Move, or Just Being an Asshole?
Southwest Airlines is reinstating a rule that allows self-reported passengers with nut allergies to board the plane early so that they can wipe down the area around their seat. I’m sure you can imagine how this could be abused. To be fair, there are like 8 seats on a Southwest flight that are even worth fighting over. But anyway…
We fly Southwest often so the first thing I thought of when I read this was: if you make up a peanut allergy to get a better seat, is that an AP move, or are you just an asshole?
-John Reeder, Risk of Ruin Podcast
Thanks for having me on your podcast; that was fun.