👁️ Sam Bankman-Fried's Day of Reckoning is Nigh
Also: Stability AI in crisis; The fragile Yuan; and The Truth Social Truffle Shuffle
Hello, and welcome to your weekly roundup of goons and losers in finance and technology. You might have noticed there was no Sunday installment this week, as I was visiting family. You’ll have an extra bonus piece on Thursday to make up for it!
Notes today on:
Donald Trump’s Truth Social SPAC is Pig Butchering At a Massive Scale
Whispers of Yuan Devaluation and Capital Flight Could be a Crypto Moment
StabilityAI’s Problems Reflect LLMs’ Inevitable Implosion
Sam Bankman-Fried’s prison sentence on seven fraud-related counts will be handed down on Thursday. In their magnum opus charging recommendation, the prosecution requested a 40-50 year sentence, and I think they’re likely to get it. The new Mukasey-Young defense team has made the shopworn arguments that depositors will be “repaid in full” and that SBF made a lot of charitable donations (using stolen money) - arguments that reflect the delusional self-regard of their client and his allies.
As FTX bankruptcy CEO John Ray III made clear in a rebuttal letter, victims of Bankman-Fried’s $8 billion heist will “never be made whole.” In part that’s because the “repayment in full” for depositors touted by the defense team is based on dramatically reduced asset valuations. Much of the money that has been recovered only came back under intense legal pressure, meaning the money most certainly was not, as Michael Lewis has argued, “always there.” And of course, equity investors have lost everything. As I’ve noted before, Judge Kaplan is acutely aware of all of this and likely regards the defense’s sham arguments with unrestrained contempt, or even righteous anger.
With likely good behavior etc., this means Sam will likely be in prison well into his sixties - again, not at all the “death in prison” sentence that the wheedling Mukasey team has alleged. And not even remotely on the scale, in Sam’s precious aggregate abstract, of the years he has stolen from the lives of his innumerable victims.
I’ll be at the Southern District of New York courthouse to see the proceedings. The main thing I’ll be watching out for, as always: whether or not Sam’s parents show up. Joe and Barbara missed his curcio hearing in February, which is not too surprising for a relatively minor procedural matter. But it’s not impossible that they’ve finally internalized that they’re villians in this, too, and will be hesitant to show their faces again.
Donald Trump’s Truth Social SPAC is Pig Butchering At a Massive Scale
Donald Trump’s MAGA-focused social network, Truth Social, has gone public via SPAC at a valuation that has now shot up to $14 billion, with the incredible ticker $DJT. In a move all too familiar to afficianados of crypto con games, this amounts to using his followers as exit liquidity. The valuation is utterly disconnected from reality, despite ruminations about how it reflects his election prospects. As CNN points out, Reddit is currently valued at $6.4 billion, while having 160 times more revenue than Truth Social, which lost money last year and has zero chance of becoming a widely-used platform.
A large number of MAGA-ites are going to buy into the top of this offering and lose their shirts, and while Trump can’t directly dump on him in the way he could a crypto token, the value of his shares is undoubtedly going to play some role in getting him out of his current intractable financial pickle. Trump has to come up with a $454 million bond or the New York Attorney General will begin seizing his assets in a matter of days.
I would bet Trump’s $DJT shares will become collateral for a large private loan, which will then be delayed or written off when the shares inevitably collapse. Rosemary Vrablic may be out at Deutsche Bank, but it shouldn’t be hard to find another banker willing to fuck over their shareholders in exchange for a bit of influence over the highly influenceable once and possibly future President of the United States.
The big question here is the role played by larger institutional investors in the $DJT launch. Virginia Canter of Citizens for Responsibility and Ethics argues that major investors seem to be seeking to influence Trump. Most notable on that front is Jeffrey Yass, who has extensive investing operations in China, and whose help pumping the value of $DJT may have nudged Trump to reconsider his position on a TikTok ban.
I warned during the first SPAC boom back in 2020 that they were ripe vehicles for fraud and grifting, and pioneer Chamath Palihapitiya certainly played out that thesis with alacrity. But using a SPAC as a vehicle to surreptitiously funnel cash into the hands of a corrupt politician is truly visionary.
Whispers of Yuan Devaluation and Capital Flight Could be a Crypto Moment
China has had a terrible few years economically. To pick just one blind item, I recently heard from an architect who visited an architecture school in China, and found that one of the student projects was a design for erecting livable homes inside the countless unfinished buildings that have become an albatross around the neck of the wildly inflated Chinese real estate sector.
A national currency is ultimately an index of the strength of the underlying nation, so naturally the yuan has also been having a terrible time. Last year it hit its lowest valuation against the dollar since the global financial crisis. But China also manages the yuan - it’s not freely traded on the open market, one of the reasons the yuan was never going to supplant the global role of the dollar.
This means that the yuan doesn’t self-correct to account for slowing demand for Chinese goods and services. The logical next step is that Chinese authorities engineer a devaluation of the yuan to increase export demand and buttress their domestic economy, as they did in 2015.
China has of course rebuffed this idea, and not just for optics - the situation is different now than it was in 2015, and a devaluation could be extremely damaging thanks to new entanglements and circumstances. For one thing, there is a much higher risk of capital flight - partly thanks to the rise of crypto.
That’s not a moral endorsement, it’s just a blunt fact: in the event of a yuan devaluation, or even as the odds of one increase, China’s wealthy will shift to cryptoassets and move money, effectively, offshore. Yes, the CCP will be monitoring this and punishing anyone who gets caught, but many will have connections to evade punishment, while for others it will simply be worth the risk.
In purely economic terms, this would play out the “global disciplining force” thesis of Bitcoin. If countries play stupid games with their currencies, as China has with its engineered real estate bubble, there is now an alternative.
I’ll be going into much more depth on this topic. Stay tuned.
StabilityAI’s CEO Steps Down Amid Cash Crunch
Emad Mostaque, CEO of StabilityAI, has resigned suddenly as the former unicorn startup flails less than two years after capturing the public’s imagination. It’s a preview of what’s to come for other LLM-based dog-and-pony shows.
Mostaque’s resignation follows the departure of several of the key researchers who developed the pathbreaking Stable Diffusion image generator (though not originally for StabilityAI), and as the company hits major financial trouble.
The nature of that trouble is both simple and complex. StabilityAI has reportedly been spending $8 million per month on expenses including compute, while bringing in vanishingly tiny revenues. With only $100 million in the bank as of 2022, that’s not much runway, and now it seems it’s running out - Stability has failed to secure more funding.
That failure to get a Series B going is partly for reasons unique to Stability: There has also been controversy about whether StabilityAI actually did much “AI” development. A leaked pitch deck seems to affirm that, at least as of 2022, Stability merely put front-ends on an open-source image generator model.
Mostaque was noted at the time for being a money guy rather than a seasoned AI developer, and it turns out there might not have been as much “there” there as he pitched. If this was presented deceptively to investors, Mostaque’s departure may be ahead of something much worse coming his way. His claims to be resigning because “something something decentralization” are obvious and frankly lazy smoke and mirrors.
At the same time, there are parts of the story that apply to the entire AI industry, and speak to a much larger bubble on the cusp of popping. There simply aren’t many viable commercial applications for image generators that randomly create three-headed monkeys and other freakish weirdness, or for chatbots that make up facts for reasons nobody can understand.
“Artificial Intelligence” in the form of rigorous, purpose-built data processing tools still have seemingly huge potential. But probabilistic, transformer-based LLMs are not that technology, and it seems increasingly clear they never will be - even leaving aside the massive problem of IP risk. They’re fun tools for artists looking to make next-level surrealism, but they’re not going to change the world.
Sam Altman is a Pied Piper who has led the entire tech industry wildly astray with brain-dead hype and false promises. He will, one way or another, be held to account.