Another Billion-Dollar Bedtime Story
Silicon Valley bet big on yet another young prodigy. Now they're waking up to reality ... again.
This Week In Blunders – July 26 - Aug. 1
“Being too far ahead of your time is indistinguishable from being wrong.” – Howard Marks
More than once upon a time, Silicon Valley handed billions of dollars to children who convinced adults that they were geniuses.
This week it’s Leopold Aschenbrenner, a 24-year-old former OpenAI researcher whose AI hedge fund just booked tens of billions in losses.
In 2024, Aschenbrenner wrote a 165-page essay titled “Situational Awareness: The Decade Ahead,” predicting the rapid arrival of super intelligence. It was so influential, it enabled him to launch an AI-focused hedge fund by the same name.
Never mind the early red flag: OpenAI fired him for what it considered leaking sensitive information, according to published reports.
He attracted about $20 billion from Silicon Valley heavyweights, including Stripe co-founders Patrick and John Collison, former GitHub CEO Nat Friedman, AI investor Daniel Gross and Jane Street, a quantitative trading firm.
He lined up Goldman Sachs, JPMorgan, Citigroup and Bank of America to finance and execute his trades.
He also hired seasoned executives from Goldman Sachs, Sequoia Capital’s hedge-fund affiliate and Ken Griffin’s Citadel, moves that may have calmed critics who pointed out that he had zero investment experience.
The fund reportedly soared 1,000% and ballooned to $45 billion in assets.
Prominent podcaster Dwarkesh Patel called him the “Nostradamus of AI.” In a 2024 episode, he asked Aschenbrenner if he thought about potential downsides.
“There’s a lot of interesting business history books about people who got the thesis right but timed it wrong,” Patel said.
“Obviously,” Aschenbrenner responded, “not blowing up is task No. 1 and 2.”
But it turns out that Nostradamus Jr. here did not foresee the billions his fund borrowed to place its bets would have to be repaid in a pinch.
As Situational Awareness’s leveraged investments on risky AI stocks and chipmakers plummeted, the fund has had to meet margin calls.
To do so, it’s having to sell off the winners in its portfolio to folks like Griffin at Citadel, according to The Wall Street Journal.
“These dynamics are essentially similar to a bank run: vulnerability begetting more vulnerability,” he explained in a note to investors, according to the Journal’s reporting.
It’s yet another Silicon Valley disaster, which famously fell for Elizabeth Holme’s fake blood testing technology at Theranos, and Sam Bankman-Fried’s crypto kleptocracy at FTX.
Unlike those fakers, Aschenbrenner hasn’t been accused of fraud. Just the oldest mistake in finance: Borrowing enormous sums of money to speculate on volatile assets.
“Situational Awareness” should mean you don’t hand tens of billions of dollars to a punk-ass kid.
Not in Silicon Valley.
This is where they all live happily ever after … until the margin calls.
The predictable George Santos
On the same day that New York sued prediction-market giant Kalshi, federal regulators fined George Santos for placing what they say was a rigged bet.
You remember Santos, right? The former Republican congressman, serial fabulist and convicted felon whose seven-year prison sentence was cut short by President Trump through clemency.
According to the Commodity Futures Trading Commission, Santos bet on whether he would attend President Trump’s State of the Union address. Then he publicly suggested he was going while privately wagering that he wouldn’t. He pocketed nearly $18,000 before the CFTC called foul.Nothing like insider trading on yourself.
Kalshi deserves some credit. The company flagged the suspicious trading and referred it to regulators.
But the CFTC news broke as New York Attorney General Letitia James announced a lawsuit claiming that Kalshi runs an illegal gambling operation.
“New York’s gambling laws protect children from underage betting and help combat gambling addiction,” James said.
Indeed, we’ve got to protect children. Especially those elected to Congress.
Yet another Ponzi sequel
I swear there’s a new Ponzi scheme making headlines every week. Some guy allegedly collecting millions or even billions of dollars from unwary investors and doing whatever the hell he likes with it.
This week it’s Jason Cloth, 60, the producer behind movies including “Joker,” “Babylon,” “Ghostbusters: Afterlife,” “House of Gucci” and Longlegs.
Federal prosecutors in Chicago on Wednesday announced a grand jury indictment against Cloth for allegedly running a $100 million Ponzi scheme.
The indictment alleges that Cloth persuaded a Chicago investment adviser, the adviser’s clients, and other investors to put money into purported film and entertainment investments.
Instead, he spent much of the money on unrelated ventures, including a Canadian real estate project, while newer investors’ money was used to repay earlier ones, the classic hallmark of a Ponzi scheme.
Cloth hasn’t commented on the indictment.
But this is not the first time investors have accused Cloth of playing fast and loose with their money.
He has been battling civil lawsuits for years, and Canadian securities regulators separately allege that his company raised roughly $500 million for film and television projects before diverting tens of millions of dollars elsewhere. Those proceedings are still pending.
Hollywood has always been built on fantasies and the suspension of disbelief. It works, even in the sequels.
The Ponzi before Ponzi
Charles Ponzi gets all the credit but his simple scheme of promising big returns and paying older investors with new investor funds goes back long before his time.
In the 1800s, a man who called himself the “Young Napoleon of Finance” conned America’s elite with this trick, including former president and Civil War hero Ulysses S. Grant.
Please welcome Ferdinand Ward to The Business Blunders Hall Of Shame.
Read More: Ferdinand Ward – Grant & Ward
Collusion doesn’t always fly
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"I will gladly pay you Tuesday for a hamburger today!" a quote with which I'm sure the Silicon Valley investors are unfamiliar. But look, at least the one investor got his hands on more Silicon Valley ventures...by the way, since you mentioned FTX, Aschenbrenner worked there in its 'philanthropic arm' a couple years before his 'Situational Awareness' hit the shelves. Maybe not a pure Ponzi scheme, but a scam nonetheless.