Matt Levine had an especially clear exposition recently I thought:
A simple version of the charges against Sam Bankman-Fried would be something like “people deposited money at his crypto exchange, FTX, and he stole it and gave it to his crypto trading firm, Alameda Research, which squandered it on dumb crypto trades and endorsement deals.”
But this story is not exactly right. There was not money sitting in customer accounts that was then transferred to Alameda accounts and squandered. FTX was a futures exchange; it did not keep money in a box for customers. The money in your FTX account was just money that FTX owed you. Nor did Alameda need to steal the money; FTX was a leveraged futures exchange, and traders like Alameda could, in the ordinary course of business, borrow money from FTX based on their crypto positions. The problem, ultimately, at FTX, was that it owed customers a lot of money, but it couldn’t pay them, because Alameda owed FTX a lot of money, but it couldn’t pay it, because it had squandered the money on dumb crypto trades and endorsement deals.
This distinction seems nitpicky, but it is important. The story in the first paragraph is obviously illegal, but the story in the second paragraph might not be. A story like “we owed a lot of customers money, but our biggest customer owed us money, and the market moved against that customer and it defaulted on its obligations to us, so we couldn’t pay our other customers,” can be legitimate, an embarrassing accident but not fraud. (As I keepsaying, it kind of happened in the legitimate regulated market for nickel futures last year.)
Instead, to prove fraud, prosecutors need to prove some lies. The evidence of fraud is not just “people put money at FTX and the money ended up with Alameda, which squandered it”: That could happen legally. The evidence of fraud has to be something more like “people put money at FTX and it ended up with Alameda in ways that FTX said it wouldn’t.” “Alameda owed us money, and defaulted” is not in itself evidence of fraud. But if FTX was going around saying things like “we have made it impossible for Alameda to owe us money and default,” then that turned out to be a lie. And that is fraud.
I have said this before, and I think some people have found it annoying. People want this case to be simple: The money was stolen, all of this stuff about leveraged futures trading is a hand-waving distraction. But I think it is clear, from the trial so far, that the prosecutors know what they have to prove. They are doing what I would: They are trying to prove that Bankman-Fried was going around lying to people about how much customers (including Alameda) could owe to FTX, and how carefully FTX managed the risk of any customer defaulting on its obligations.
This is not at all what happened. Alameda’s “borrows” were not made via the normal margin lending program. You can see Caroline Ellison admitting so in a contemporaneous meeting that was recorded and played in court. Nishad Singh and Gary Wang explicitly wrote code to allow Alameda specifically to take customer funds from FTX via the “allow_negative” flag, according to their own sworn testimonies. It seems like Matt Levine is confusing this collapse with the Mango Markets collapse that happened around the same time, his description fits Mango much better than FTX.
Alameda also lied to investors, as Caroline Ellison testified during the trial and pleaded guilty to doing. According to her sworn testimony, it was SBF who directed her to do so.
“In the ordinary course of business” is doing a lot of work in Levine’s account. The allow_negative flag sure doesn’t sound ordinary to me.
I also think some of the wording focuses more than I would on affirmative lies. I don’t think Levine is wrong in his wording, but I’ve seen a few people get the impression that SBF could do anything with the money as long as the TOS didn’t explicitly forbid it.
That’s kind of like saying a mechanic doesn’t convert his repair clients’ cars when he secretly rents them out to teenagers for joyrides after repairing them. The repair contract didn’t explicitly say he couldn’t...
“[T]he words ‘to defraud’ in the mail fraud statute [which is interpreted analogously] have the ‘common understanding’ of ‘”wrongdoing one in his property rights by dishonest methods or schemes,” and “usually signify the deprivation of something of value by trick, chicane, or overreaching.”‘” “The concept of ‘fraud’ includes the act of embezzlement, which is ‘”the fraudulent appropriation to one’s own use of the money or goods entrusted to one’s own care by another.”’”
The fact that Alameda could and did “borrow” (much) more than any other account on FTX due to the allow_negative flag is consistent with Levine’s description, but I agree a fuller accounting of events would include this piece of information and the accusations you cite.
Could you say a bit more about why the allow_negative flag, which was unique to Alameda accounts, is consistent with Levine’s references to borrowing “in the ordinary course of business . . . based on their crypto positions”? A special exception for a customer owned by FTX’s CEO, which allowed said customer to go over $10B in the red when no other customer was allowed a similar privilege, does not sound “in the ordinary course of business” to me. That doesn’t sound “based on their crypto positions” either.
Source for over $10B: this summary of recent testimony by an accounting professor in the trial. Also from the same source: “The main takeaway: from January 2021 all the way up until FTX’s (and Alameda’s) collapse on Nov. 11, 2022, all of Alameda’s “allow negative”-enabled accounts on the exchange were massively in the red. And despite this woeful state of affairs, it didn’t stop Alameda from paying out billions to meet its obligations.”
Levine claimed that the fraud was not in how the money ended up at Alameda, but in how FTX claimed to be safe. I think that’s wrong since the “allow_negative” flag looks fraudulent in itself. It just looks like something you’d use to implement embezzlement in computer code.
For what it’s worth, Levine’s account of what the prosecution is trying to claim in the trial also seems wrong. He claims that the prosecution agrees with him, but their opening statement in the trial sounds much more like the version of the story he claims is wrong than the version he claims is correct.
Alameda had secret access to FTX assets. Once Alameda had it, the defendant could spend it as he pleased. How did he do it? Two ways. First, customers sometimes deposits dollars on FTX, the company would tell them it was in their accounts.
But it never made it to FTX. He set up a bank account linked to Alameda. He lied to a bank to set up an Alameda bank account. Then he lied to the customers. He took billions of dollars, the customers had no way to know.
Here’s the second way. He took customers’ crypto. Accounts that hold crypto are called digital wallets. He gave Alameda the ability to withdraw—he made sure it was written right into the computer code.
The fact that Levine is wrong is made even clearer in Ellison’s testimony. Again from @innercitypress:
AUSA: What makes you guilty?
Ellison: Alameda took several billions of dollars from FTX customers and used it for investments.
Note that she said “Alameda took several billions of dollars from FTX customers” is what makes her guilty, not “FTX lied to customers about how good their risk engine was.”
As others have commented, this strikes me as a misleading summary.
But this story is not exactly right. There was not money sitting in customer accounts that was then transferred to Alameda accounts and squandered. FTX was a futures exchange; it did not keep money in a box for customers. The money in your FTX account was just money that FTX owed you. Nor did Alameda need to steal the money; FTX was a leveraged futures exchange, and traders like Alameda could, in the ordinary course of business, borrow money from FTX based on their crypto positions. The problem, ultimately, at FTX, was that it owed customers a lot of money, but it couldn’t pay them, because Alameda owed FTX a lot of money, but it couldn’t pay it, because it had squandered the money on dumb crypto trades and endorsement deals.
The passage makes it seem like FTX customers agreed to terms of service (ToS) that their money could be lent out. Most customers, for most of FTX customer money, did not.
So, the only way that Alameda can end up with a massive negative balance that’s larger than FTX’s assets and the pool of money where customers agreed that it could lend out, is through breaking of ToS. [Edit: I agree, after the discussion in the comments below, that this paragraph is false without added context. What I should have added is: “I’m operating on the assumption that FTX is bound to their previous advertizing of their advanced liquidation engine that prevents situations where a liquidation of one big customer can be detrimental to other customers who weren’t engaged in trading.”]
In theory, SBF’s defense could argue that they had poor accounting and the position ended up getting slowly bigger and bigger until at some point they overstepped the threshold where they are now clearly breaking ToS. That would still be poor management, but maybe not intentional fraud? However, the prosecution already brought up a bunch of convincing evidence that SBF authorized/decided to increase Alameda’s lending position even at a point where they were already breaking ToS, so unless all that evidence somehow turns out to be based on misrepresentations, that narrative is no longer plausible.
[...] squandered the money on dumb crypto trades and endorsement deals.
And illiquid venture investments. It’s not even clear to me that the crypto trades were a huge problem by themselves. From following the trial, I’m getting the impression that SBF had fear of missing out about investment opportunities (or endorsement deals/advertizing, which is similarly “investing into growth of his empire”) and seemed okay taking big risks and doing dodgy stuff to grow his portfolio faster.
(There is a similar theme in Michael Lewis’s book: SBF chooses the Hoard Dragon in the game Storybook Brawl, who has poor stats in the early game but gets benefits whenever it collects treasure, so it does well in the endgame from its earlier investments and boosts from treasure chests.)
the only way that Alameda can end up with a massive loan that’s larger than FTX’s assets and the pool of money where customers agreed that it could lend out, is through breaking of ToS.
The nickel options trading story that Matt links in that post is one example of how this could happen without breaking ToS.
Simplified version:
I sell you a naked call option to buy a ton of nickel with a strike of $100
Nickel is currently trading at $100, and I have $10 of assets, so I am fine so long as the price stays < $110
But now the price of nickel rises to $200
You execute the option, and I now owe you $100, which is >> $10, even though I didn’t do anything untowards with my $10 of assets, it was “just” bad risk management
The London Metals Exchange says “sorry Lukas, I know Ben technically owes you $100 but he’s just going to pay you $10, sucks to suck”
(I’m not sure if this is actually what happened with FTX, but it does contradict the claim that breaking ToS is “the only way”.)
This doesn’t explain why customers who weren’t using the margin lending program lost their money. According to Can Sun, the FTX lawyer who testified[1] today, FTX Digital Markets had the responsibility to ensure the segregation of those customers’ digital assets from FTX’s assets. He testified that if FTX went bankrupt, those customers were supposed to still be able to get all of their digital assets back (because it was theirs, not FTX’s). Customer digital assets were not debt; they were the private property of customers. Since those customers don’t have their money, something must have gone wrong.
Moreover, Sun testified that he only learned that something was amiss at the same time that everybody else in the world did, at which point Sam asked him for a “legal justification” for the missing funds. He had to tell SBF that “there are no justifications but there are some theoretical explanations.” According to his testimony, he listed a few theoretical explanations, including the margin lending program, but explained that this excuse didn’t work, and SBF seemed to acknowledge that. Sun quit on the following day.
I see what you (and Matt Levine) mean here, but then that still means that Alameda was putting up FTX customer funds as potential collateral in case their trades go poorly. So, in this scenario, they would have been putting customer funds at risk, which IMO isn’t relevantly different from misappropriating them for investments or directly trading with them.
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.
[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.)
Matt Levine had an especially clear exposition recently I thought:
Edit March 2024: bookmarking a useful Ben West comment on the same question
This is not at all what happened. Alameda’s “borrows” were not made via the normal margin lending program. You can see Caroline Ellison admitting so in a contemporaneous meeting that was recorded and played in court. Nishad Singh and Gary Wang explicitly wrote code to allow Alameda specifically to take customer funds from FTX via the “allow_negative” flag, according to their own sworn testimonies. It seems like Matt Levine is confusing this collapse with the Mango Markets collapse that happened around the same time, his description fits Mango much better than FTX.
Alameda also lied to investors, as Caroline Ellison testified during the trial and pleaded guilty to doing. According to her sworn testimony, it was SBF who directed her to do so.
“In the ordinary course of business” is doing a lot of work in Levine’s account. The allow_negative flag sure doesn’t sound ordinary to me.
I also think some of the wording focuses more than I would on affirmative lies. I don’t think Levine is wrong in his wording, but I’ve seen a few people get the impression that SBF could do anything with the money as long as the TOS didn’t explicitly forbid it.
That’s kind of like saying a mechanic doesn’t convert his repair clients’ cars when he secretly rents them out to teenagers for joyrides after repairing them. The repair contract didn’t explicitly say he couldn’t...
“[T]he words ‘to defraud’ in the mail fraud statute [which is interpreted analogously] have the ‘common understanding’ of ‘”wrongdoing one in his property rights by dishonest methods or schemes,” and “usually signify the deprivation of something of value by trick, chicane, or overreaching.”‘” “The concept of ‘fraud’ includes the act of embezzlement, which is ‘”the fraudulent appropriation to one’s own use of the money or goods entrusted to one’s own care by another.”’”
https://www.justice.gov/archives/jm/criminal-resource-manual-942-scheme-and-artifice-defraud (citations omitted, cleaned up, brackets added) (citing appellate decisions).
The fact that Alameda could and did “borrow” (much) more than any other account on FTX due to the allow_negative flag is consistent with Levine’s description, but I agree a fuller accounting of events would include this piece of information and the accusations you cite.
Could you say a bit more about why the allow_negative flag, which was unique to Alameda accounts, is consistent with Levine’s references to borrowing “in the ordinary course of business . . . based on their crypto positions”? A special exception for a customer owned by FTX’s CEO, which allowed said customer to go over $10B in the red when no other customer was allowed a similar privilege, does not sound “in the ordinary course of business” to me. That doesn’t sound “based on their crypto positions” either.
Source for over $10B: this summary of recent testimony by an accounting professor in the trial. Also from the same source: “The main takeaway: from January 2021 all the way up until FTX’s (and Alameda’s) collapse on Nov. 11, 2022, all of Alameda’s “allow negative”-enabled accounts on the exchange were massively in the red. And despite this woeful state of affairs, it didn’t stop Alameda from paying out billions to meet its obligations.”
Levine claimed that the fraud was not in how the money ended up at Alameda, but in how FTX claimed to be safe. I think that’s wrong since the “allow_negative” flag looks fraudulent in itself. It just looks like something you’d use to implement embezzlement in computer code.
For what it’s worth, Levine’s account of what the prosecution is trying to claim in the trial also seems wrong. He claims that the prosecution agrees with him, but their opening statement in the trial sounds much more like the version of the story he claims is wrong than the version he claims is correct.
See, for example, the prosecution’s opening statements (summarized by @innercitypress):
The fact that Levine is wrong is made even clearer in Ellison’s testimony. Again from @innercitypress:
Note that she said “Alameda took several billions of dollars from FTX customers” is what makes her guilty, not “FTX lied to customers about how good their risk engine was.”
As others have commented, this strikes me as a misleading summary.
The passage makes it seem like FTX customers agreed to terms of service (ToS) that their money could be lent out. Most customers, for most of FTX customer money, did not.
So, the only way that Alameda can end up with a massive negative balance that’s larger than FTX’s assets and the pool of money where customers agreed that it could lend out, is through breaking of ToS. [Edit: I agree, after the discussion in the comments below, that this paragraph is false without added context. What I should have added is: “I’m operating on the assumption that FTX is bound to their previous advertizing of their advanced liquidation engine that prevents situations where a liquidation of one big customer can be detrimental to other customers who weren’t engaged in trading.”]
In theory, SBF’s defense could argue that they had poor accounting and the position ended up getting slowly bigger and bigger until at some point they overstepped the threshold where they are now clearly breaking ToS. That would still be poor management, but maybe not intentional fraud? However, the prosecution already brought up a bunch of convincing evidence that SBF authorized/decided to increase Alameda’s lending position even at a point where they were already breaking ToS, so unless all that evidence somehow turns out to be based on misrepresentations, that narrative is no longer plausible.
And illiquid venture investments. It’s not even clear to me that the crypto trades were a huge problem by themselves. From following the trial, I’m getting the impression that SBF had fear of missing out about investment opportunities (or endorsement deals/advertizing, which is similarly “investing into growth of his empire”) and seemed okay taking big risks and doing dodgy stuff to grow his portfolio faster.
(There is a similar theme in Michael Lewis’s book: SBF chooses the Hoard Dragon in the game Storybook Brawl, who has poor stats in the early game but gets benefits whenever it collects treasure, so it does well in the endgame from its earlier investments and boosts from treasure chests.)
The nickel options trading story that Matt links in that post is one example of how this could happen without breaking ToS.
Simplified version:
I sell you a naked call option to buy a ton of nickel with a strike of $100
Nickel is currently trading at $100, and I have $10 of assets, so I am fine so long as the price stays < $110
But now the price of nickel rises to $200
You execute the option, and I now owe you $100, which is >> $10, even though I didn’t do anything untowards with my $10 of assets, it was “just” bad risk management
The London Metals Exchange says “sorry Lukas, I know Ben technically owes you $100 but he’s just going to pay you $10, sucks to suck”
(I’m not sure if this is actually what happened with FTX, but it does contradict the claim that breaking ToS is “the only way”.)
This doesn’t explain why customers who weren’t using the margin lending program lost their money. According to Can Sun, the FTX lawyer who testified[1] today, FTX Digital Markets had the responsibility to ensure the segregation of those customers’ digital assets from FTX’s assets. He testified that if FTX went bankrupt, those customers were supposed to still be able to get all of their digital assets back (because it was theirs, not FTX’s). Customer digital assets were not debt; they were the private property of customers. Since those customers don’t have their money, something must have gone wrong.
Moreover, Sun testified that he only learned that something was amiss at the same time that everybody else in the world did, at which point Sam asked him for a “legal justification” for the missing funds. He had to tell SBF that “there are no justifications but there are some theoretical explanations.” According to his testimony, he listed a few theoretical explanations, including the margin lending program, but explained that this excuse didn’t work, and SBF seemed to acknowledge that. Sun quit on the following day.
Supporting sources: https://www.axios.com/2023/10/19/ftx-trial-sun-testimony, https://x.com/innercitypress/status/1714999654989860918?s=20,
https://www.axios.com/2022/11/12/ftx-terms-service-trading-customer-funds (contemporaneous), https://newsletter.mollywhite.net/p/the-ftx-trial-day-twelve, this YouTube vlog
I see what you (and Matt Levine) mean here, but then that still means that Alameda was putting up FTX customer funds as potential collateral in case their trades go poorly. So, in this scenario, they would have been putting customer funds at risk, which IMO isn’t relevantly different from misappropriating them for investments or directly trading with them.
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.
[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.)
This is extremely good thank you.