As far as the general narrative, the Matt Levine quote in @basil.halperin’s comment is good. [edit to strikethrough]
As I understand it, FTX told everyone that a customer’s collateral would get liquidated when it wasn’t sufficient to justify the lending—in other words, FTX would lend only on a secured basis, and would take immediate action if the loan became undersecured to protect depositors. But Alameda was secretly exempt from that rule, despite statements that it enjoyed no special privileges.
A few other observations:
Of course, the question of what SBF did ethically wrong and what he did legally wrong are somewhat distinct.
Many of the counts on trial this month involve fraud against lenders or investors (e.g., counts 3-4 & 6 here). So they are part of a parallel, somewhat intersecting narrative than the alleged fraud against depositors (e.g., counts 1-2).
I think the following bolded words in Levine’s explanation are important: “traders like Alameda could, in the ordinary course of business, borrow money from FTX based on their crypto positions.” As far as I know, borrowing was not supposed to happen based on alleged (or even actual) value of private equity investments or the like. This would make it harder for SBF to claim that Alameda had “sufficient collateral . . . to continue borrowing from other FTX customers” (agreed facts, point 5) when its crypto position collapsed.
The accounting was horribly messy . . . and I think it is too messy for “Alameda borrowed the money from FTX” to be a clean description of what happened. Much of the money first came into Alameda bank accounts and then flowed every which way. In my view, the “agreed facts” section in the post doesn’t fully capture the extent to which FTX and Alameda acted like conjoined twins rather than at least nominally arms-length corporations. That, in turn, affects the possible narratives that can be constructed out on those facts. I think understanding them as heavily conjoined rather than quasi-arms-length makes the prosecution narrative relatively more convincing.
“Lending” to Alameda is the leading allegation, but—based on material I’ve seen out of the bankruptcy case—it seems that accounts containing customer deposits were used for other things, including FTX Foundation grants. FTX certainly didn’t have authority to use depositor assets for its own business purposes or for grantmaking.
Likewise, there were very thinly documented, massive “loans” to FTX insiders. I don’t think there was collateral backing those up. And the possibility that much of these monies will eventually be recovered wouldn’t make the “lending” any more legal.
FTX and SBF spending money in YOLO style as described by the two bullet points above significantly undercuts a narrative that FTX was making loans to Alameda using depositor assets that it believed in good faith to be adequately secured.
As far as the general narrative, the Matt Levine quote in@basil.halperin’s comment is good. [edit to strikethrough]As I understand it, FTX told everyone that a customer’s collateral would get liquidated when it wasn’t sufficient to justify the lending—in other words, FTX would lend only on a secured basis, and would take immediate action if the loan became undersecured to protect depositors. But Alameda was secretly exempt from that rule, despite statements that it enjoyed no special privileges.
A few other observations:
Of course, the question of what SBF did ethically wrong and what he did legally wrong are somewhat distinct.
Many of the counts on trial this month involve fraud against lenders or investors (e.g., counts 3-4 & 6 here). So they are part of a parallel, somewhat intersecting narrative than the alleged fraud against depositors (e.g., counts 1-2).
I think the following bolded words in Levine’s explanation are important: “traders like Alameda could, in the ordinary course of business, borrow money from FTX based on their crypto positions.” As far as I know, borrowing was not supposed to happen based on alleged (or even actual) value of private equity investments or the like. This would make it harder for SBF to claim that Alameda had “sufficient collateral . . . to continue borrowing from other FTX customers” (agreed facts, point 5) when its crypto position collapsed.
The accounting was horribly messy . . . and I think it is too messy for “Alameda borrowed the money from FTX” to be a clean description of what happened. Much of the money first came into Alameda bank accounts and then flowed every which way. In my view, the “agreed facts” section in the post doesn’t fully capture the extent to which FTX and Alameda acted like conjoined twins rather than at least nominally arms-length corporations. That, in turn, affects the possible narratives that can be constructed out on those facts. I think understanding them as heavily conjoined rather than quasi-arms-length makes the prosecution narrative relatively more convincing.
“Lending” to Alameda is the leading allegation, but—based on material I’ve seen out of the bankruptcy case—it seems that accounts containing customer deposits were used for other things, including FTX Foundation grants. FTX certainly didn’t have authority to use depositor assets for its own business purposes or for grantmaking.
Likewise, there were very thinly documented, massive “loans” to FTX insiders. I don’t think there was collateral backing those up. And the possibility that much of these monies will eventually be recovered wouldn’t make the “lending” any more legal.
FTX and SBF spending money in YOLO style as described by the two bullet points above significantly undercuts a narrative that FTX was making loans to Alameda using depositor assets that it believed in good faith to be adequately secured.