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 âlending customer depositsâ, but itâs 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 havenât been following the trial closely. I would be appreciative if someone has evidence to the contrary.
I feel like that distinction isnât whatâs relevant. I mean, I donât know what the law is here, but it would be a ridiculous law if it allowed for this sort of loophole.
Say Iâm sharing my finances with my wife and Iâm buying naked call options on some exchanges without telling her (and then go massively into minus). In that scenario, Iâm putting her part of our finances at risk. Call it what you want but she wouldnât (and shouldnât!) be happy with the âexcuseâ 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 didnât happen. FermiâDirac 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 doesnât have enough money to cover that liability, then FTX declares bankruptcy. Creditors canât go after FTX customersâ money because itâs the customersâ money, not FTXâs.
(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, youâre 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 âallow negativeâ feature is obviously problematic/âin tension with that assumption, as is the fact that FTX no longer has the assets (they paid back some lenders, as opposed to saying âwe would be short if you treated us as connected to Alameda, but obviously we arenât connected to them and weâre not giving Alameda our customersâ money to pay any of their debtsâ).
You replied to that, âThe point of the example is that there were never any assets, it was a naked option.â
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 âas is the fact that FTX no longer has the assets,â I obviously meant their customerâs assets, not âassets put up for collateral.â) It seems that prosecution has evidence that some of it was used to pay off some of Alamedaâs debtors. So, the two entities arenât properly segregated/âdistinct, and something about Levineâs summary therefore seems misleading. Your account would be accurate if FTX refused to pay any of Alamedaâs loans to third parties and therefore still had enough assets to make customers whole.
Or maybe youâre 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 ânumbers on an exchangeâ 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 peopleâs 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 FTXâs ToS + their talk about their advanced liquidation engine. Itâs as simple as that: you cannot explain that the customer money is no longer there if the liquidation engine is âonâ for every customer (including Alameda as the largest customer) and if they didnât 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.)
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 âlending customer depositsâ, but itâs 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 havenât been following the trial closely. I would be appreciative if someone has evidence to the contrary.
I feel like that distinction isnât whatâs relevant. I mean, I donât know what the law is here, but it would be a ridiculous law if it allowed for this sort of loophole.
Say Iâm sharing my finances with my wife and Iâm buying naked call options on some exchanges without telling her (and then go massively into minus). In that scenario, Iâm putting her part of our finances at risk. Call it what you want but she wouldnât (and shouldnât!) be happy with the âexcuseâ 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 didnât happen. FermiâDirac 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 doesnât have enough money to cover that liability, then FTX declares bankruptcy. Creditors canât go after FTX customersâ money because itâs the customersâ money, not FTXâs.
(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, youâre making the argument I described in my earlier reply:
You replied to that, âThe point of the example is that there were never any assets, it was a naked option.â
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 âas is the fact that FTX no longer has the assets,â I obviously meant their customerâs assets, not âassets put up for collateral.â) It seems that prosecution has evidence that some of it was used to pay off some of Alamedaâs debtors. So, the two entities arenât properly segregated/âdistinct, and something about Levineâs summary therefore seems misleading. Your account would be accurate if FTX refused to pay any of Alamedaâs loans to third parties and therefore still had enough assets to make customers whole.
Or maybe youâre 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 ânumbers on an exchangeâ 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 peopleâs 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 FTXâs ToS + their talk about their advanced liquidation engine. Itâs as simple as that: you cannot explain that the customer money is no longer there if the liquidation engine is âonâ for every customer (including Alameda as the largest customer) and if they didnât 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.)