Why didn't the FTX Foundation secure its bag?

By Greg_Colbourn @ 2022-11-15T19:54 (+57)

“Asked whether he had set up any kind of endowment for his giving, Mr. Bankman-Fried said in the Times interview last month: “It’s more of a pay-as-we-go thing, and the reason for that, frankly, is I’m not liquid enough for it to make sense to do an endowment right now.”” (Source (a))

Quite apart from the fact that in hindsight, the above quote should’ve been ringing alarm bells^[1], I think a big lesson here is that foundations should "secure their bags"^[2] – aka secure assets/their endowment – early. The fact that the FTX Foundation didn't do this is a massive loss - for the world, EA, and FTX creditors^[3]. It's not even just about fraud or bankruptcy risk. Basic risk management would suggest that it should be done to hedge against the possibility of the major donors' wealth diminishing for any reason^[4].

This is a massive risk management failure from the high level EA community point of view of doing good with the money. Equity, or crypto, should've been donated to the foundation, and sold for cash by it. And the foundation should've been controlled by people who weren't FTX/Alameda! As a community, we put way too much faith and trust in those who owned/controlled FTX/Alameda, and insufficient effort into pressing for commitments to be secured. Trust, but verify.

As I understand it, OpenPhil has a few $B that is theirs^[5], under independent legal control (i.e. separate from Moskovitz and Tuna, who, whilst being board members, do not have unilateral control of the funds; they make up 2/5 of the board). [Added 17Nov: actually Good Ventures, which sends out the grants recommended by OpenPhil, is 2/3 controlled by Moskovitz and Tuna^[6]. Perhaps more needs to be done to secure OpenPhil's bag?]

The point I'm making here is bigger than just the loss of current promised grants. It's about making sure that money is secured when pledges are made, to minimise the risks of losing it. Otherwise the pledges don't count for much (as we can see here). If Moskovitz and Tuna went down now, OpenPhil would still have $Bs at its disposal. Sure, funds might be frozen for some amount of time (if the donors went bankrupt), but it is very unlikely that they would be lost^[7].

For a much smaller example, I can attest that with CEEALAR (the org I founded), we set up a charity, for which I only control 1/3 (i.e. the other two Trustees could out vote me), and I have donated the building to the charity. It can go on without me.

Regarding any moral/PR risks of the FTX Foundation spending money now were it to have it; suppose the FTX Foundation was set-up like OpenPhil so it had at least $1B in assets that weren't under the control of SBF and his cronies. And suppose that money was made in a non-fraudulent way (which seems likely if it were to have been given last year^[8], significantly before all the financial trouble started at FTX/Alameda). We would be in a much better position now even from the point of view of wanting (or being compelled) to use the money to pay back FTX creditors (i.e. there would be significantly more money for the creditors).

In practice, maybe securing significant assets wasn’t really possible with the FTX Foundation, given the likely illiquid nature of any sizeable assets that FTX/Alameda could’ve donated (e.g. FTT or FTX stock), which have now collapsed in value. But it still would’ve been a step in the right direction. [Added 17Nov: the selling of private equity, e.g. in FTX, on the secondary market seems like it was quite possible in 2021. It is a tragedy that this wasn't done.]. Did anyone at the FTX Foundation or Future Fund, or others in advisory roles, press for this? A side benefit might’ve also been uncovering the fraud earlier and perhaps mitigating it somewhat.
 

1. ^{^}

   Although note that I can’t seem to find any public reference to the original source of the quote from “last month”.

2. ^{^}

   To use a phrase that is popular in crypto.

3. ^{^}

   See penultimate paragraph.

4. ^{^}

   I can imagine SBF saying something like the max-EV thing to do is keeping all the funds in the for-profit companies to maximise their growth, and the FTX Foundation / Future Fund staff/advisors going along with it because they trusted him (or just independently agreed and didn't put any significant weight on FTX/Alameda collapsing or even just becoming less rich). Obviously an error in hindsight. 

5. ^{^}

   It would be good to see proof of this. Edit: the Good Ventures Foundation (who Open Phil recommends their grants to) had >$3bn in June 2020 [H/T Aleks].

6. ^{^}

   H/T Jeff Kauffman

7. ^{^}

   Especially given the usual back-dating limits for clawbacks.

8. ^{^}

   The foundation was founded in early 2021.