[Edit]: This comment was meant as a reply to your:
Do you think that I am “putting up customer funds as potential collateral” in the example? If so, I’m confused how, because there was no customer funds. If not, then it seems like Alameda could do the same.
I accidentally replied to your earlier comment higher up in the thread.
[/edit]
I’m not sure I’m understanding this right, but:
In this story, if FTX/Alameda (assuming for the moment that they’re acting as the same entity, as is alleged by prosecutors) is analogous to Ben, then it seems like Ben did put customer accounts on the hook by agreeing to a trade that could result in outsized debt.
Maybe your point is based on treating FTX and Alameda as two properly segregated entities (even if just for the sake of argument). But then the “allow negative” feature is obviously problematic/in tension with that assumption, as is the fact that FTX no longer has the assets (they paid back some lenders, as opposed to saying “we would be short if you treated us as connected to Alameda, but obviously we aren’t connected to them and we’re not giving Alameda our customers’ money to pay any of their debts”).
(Relatedly, according to some testimonies for the prosecution, there was a point where lenders asked for their money back, and someone from Alameda – don’t remember who it was but probably Caroline Ellison – asked SBF whether to pay back these lenders knowing that Alameda cannot pay back what it owes FTX, and SBF said to go ahead with some of these payments (but wait with others). That couldn’t be allowed to happen if FTX was properly segregated from Alameda and if the debt was already exceeding FTX’s assets by that point.)
The point of the example is that there were never any assets, it was a naked option. No assets were lent, inappropriately or otherwise.
To be clear: failing to disclose that Alameda was exempt from risk limits is bad, and the finance is complicated enough that I understand why journalists simplify the badness to “lending customer deposits”, but it’s not actually lending customer deposits, and I would like to stick up for Matt Levine for not making that simplification.[1]
Or at least I have not heard any evidence that lending customer deposits happened, but I haven’t been following the trial closely. I would be appreciative if someone has evidence to the contrary.
I feel like that distinction isn’t what’s relevant. I mean, I don’t know what the law is here, but it would be a ridiculous law if it allowed for this sort of loophole.
Say I’m sharing my finances with my wife and I’m buying naked call options on some exchanges without telling her (and then go massively into minus). In that scenario, I’m putting her part of our finances at risk. Call it what you want but she wouldn’t (and shouldn’t!) be happy with the “excuse” that I never explicitly posted her share of the money as collateral.
[Edit: Either way, it seems like our discussion might be about a scenario that didn’t happen. Fermi–Dirac Distribution points out in the comments that, according to the Prosecution, there seem to have been borrowed assets: it looks like Alameda withdrew actual assets with the allow negative feature.]
I feel confused about your analogy because I thought the entire point was that customers did not give FTX joint ownership of their assets? So if FTX is liable for something Alameda did, and FTX doesn’t have enough money to cover that liability, then FTX declares bankruptcy. Creditors can’t go after FTX customers’ money because it’s the customers’ money, not FTX’s.
(This is different from the marital example because there your spouse is agreeing to be liable for your debts.)
Anyway, I agree that this is probably not super important to discuss, but appreciate you diving into it with me nonetheless!
I see. So, you’re making the argument I described in my earlier reply:
Maybe your point is based on treating FTX and Alameda as two properly segregated entities (even if just for the sake of argument). But then the “allow negative” feature is obviously problematic/in tension with that assumption, as is the fact that FTX no longer has the assets (they paid back some lenders, as opposed to saying “we would be short if you treated us as connected to Alameda, but obviously we aren’t connected to them and we’re not giving Alameda our customers’ money to pay any of their debts”).
You replied to that, “The point of the example is that there were never any assets, it was a naked option.”
But my point was that, even if it was initially a naked option by Alameda, the FTX customer money ended up (partly) gone. Where did it go? (Edit: When I said “as is the fact that FTX no longer has the assets,” I obviously meant their customer’s assets, not “assets put up for collateral.”) It seems that prosecution has evidence that some of it was used to pay off some of Alameda’s debtors. So, the two entities aren’t properly segregated/distinct, and something about Levine’s summary therefore seems misleading. Your account would be accurate if FTX refused to pay any of Alameda’s loans to third parties and therefore still had enough assets to make customers whole.
Or maybe you’re saying that FTX is a bit like the London Metals Exchange in your initial analogy and the fact that its biggest customer made such a big trading loss also affects other customers, because all the money was “numbers on an exchange” and therefore intertwined. In that case, it seems like FTX must have lied about its liquidation engine! They kept advertizing how they have an advanced liquidation engine that prevents situations where large customers making massive trading losses due to fast market movements (and liquidation not happening fast enough) puts other people’s customer funds at risk.
So, I keep believing that the fact that the money is no longer there in a liquid state cannot be explained without FTX lying about at least some things. We know this from FTX’s ToS + their talk about their advanced liquidation engine. It’s as simple as that: you cannot explain that the customer money is no longer there if the liquidation engine is “on” for every customer (including Alameda as the largest customer) and if they didn’t use customer funds to bail out Alameda when Alameda was in the red.
(And we indeed have evidence now that they lied about the liquidation engine; Alameda was exempt from it, but this was not disclosed.)
[Edit]: This comment was meant as a reply to your:
I accidentally replied to your earlier comment higher up in the thread.
[/edit]
I’m not sure I’m understanding this right, but:
In this story, if FTX/Alameda (assuming for the moment that they’re acting as the same entity, as is alleged by prosecutors) is analogous to Ben, then it seems like Ben did put customer accounts on the hook by agreeing to a trade that could result in outsized debt.
Maybe your point is based on treating FTX and Alameda as two properly segregated entities (even if just for the sake of argument). But then the “allow negative” feature is obviously problematic/in tension with that assumption, as is the fact that FTX no longer has the assets (they paid back some lenders, as opposed to saying “we would be short if you treated us as connected to Alameda, but obviously we aren’t connected to them and we’re not giving Alameda our customers’ money to pay any of their debts”).
(Relatedly, according to some testimonies for the prosecution, there was a point where lenders asked for their money back, and someone from Alameda – don’t remember who it was but probably Caroline Ellison – asked SBF whether to pay back these lenders knowing that Alameda cannot pay back what it owes FTX, and SBF said to go ahead with some of these payments (but wait with others). That couldn’t be allowed to happen if FTX was properly segregated from Alameda and if the debt was already exceeding FTX’s assets by that point.)
The point of the example is that there were never any assets, it was a naked option. No assets were lent, inappropriately or otherwise.
To be clear: failing to disclose that Alameda was exempt from risk limits is bad, and the finance is complicated enough that I understand why journalists simplify the badness to “lending customer deposits”, but it’s not actually lending customer deposits, and I would like to stick up for Matt Levine for not making that simplification.[1]
Or at least I have not heard any evidence that lending customer deposits happened, but I haven’t been following the trial closely. I would be appreciative if someone has evidence to the contrary.
I feel like that distinction isn’t what’s relevant. I mean, I don’t know what the law is here, but it would be a ridiculous law if it allowed for this sort of loophole.
Say I’m sharing my finances with my wife and I’m buying naked call options on some exchanges without telling her (and then go massively into minus). In that scenario, I’m putting her part of our finances at risk. Call it what you want but she wouldn’t (and shouldn’t!) be happy with the “excuse” that I never explicitly posted her share of the money as collateral.
[Edit: Either way, it seems like our discussion might be about a scenario that didn’t happen. Fermi–Dirac Distribution points out in the comments that, according to the Prosecution, there seem to have been borrowed assets: it looks like Alameda withdrew actual assets with the allow negative feature.]
I feel confused about your analogy because I thought the entire point was that customers did not give FTX joint ownership of their assets? So if FTX is liable for something Alameda did, and FTX doesn’t have enough money to cover that liability, then FTX declares bankruptcy. Creditors can’t go after FTX customers’ money because it’s the customers’ money, not FTX’s.
(This is different from the marital example because there your spouse is agreeing to be liable for your debts.)
Anyway, I agree that this is probably not super important to discuss, but appreciate you diving into it with me nonetheless!
I see. So, you’re making the argument I described in my earlier reply:
You replied to that, “The point of the example is that there were never any assets, it was a naked option.”
But my point was that, even if it was initially a naked option by Alameda, the FTX customer money ended up (partly) gone. Where did it go? (Edit: When I said “as is the fact that FTX no longer has the assets,” I obviously meant their customer’s assets, not “assets put up for collateral.”) It seems that prosecution has evidence that some of it was used to pay off some of Alameda’s debtors. So, the two entities aren’t properly segregated/distinct, and something about Levine’s summary therefore seems misleading. Your account would be accurate if FTX refused to pay any of Alameda’s loans to third parties and therefore still had enough assets to make customers whole.
Or maybe you’re saying that FTX is a bit like the London Metals Exchange in your initial analogy and the fact that its biggest customer made such a big trading loss also affects other customers, because all the money was “numbers on an exchange” and therefore intertwined. In that case, it seems like FTX must have lied about its liquidation engine! They kept advertizing how they have an advanced liquidation engine that prevents situations where large customers making massive trading losses due to fast market movements (and liquidation not happening fast enough) puts other people’s customer funds at risk.
So, I keep believing that the fact that the money is no longer there in a liquid state cannot be explained without FTX lying about at least some things. We know this from FTX’s ToS + their talk about their advanced liquidation engine. It’s as simple as that: you cannot explain that the customer money is no longer there if the liquidation engine is “on” for every customer (including Alameda as the largest customer) and if they didn’t use customer funds to bail out Alameda when Alameda was in the red.
(And we indeed have evidence now that they lied about the liquidation engine; Alameda was exempt from it, but this was not disclosed.)