Alameda research (AR) did a bunch of bad trades, and ended up owing FTX a lot of money....AR’s net position was positive, it’s just that many of the assets weren’t kept on FTX itself and were illiquid
As far as the backdoor is concerned, it looks like the defense challenges this: “SBF had not been under the impression that Alameda did not need to secure its borrowing with on-exchange collateral: “‘You permitted Alameda to borrow without requiring that it post collateral to the exchange?’ . . . SBF: ‘That was not my understanding’” (Bloomberg). However, he did know of another customer who was not required to: “Can you name any customers that were allowed to pledge outside investments as collateral for withdrawing money on FTX apart from Alameda? . . . [SBF:] I believe that we did that with a firm called Crypto Lotus, and I believe that we considered that with Three Arrows” (BitMEX)....SBF testified that he had always been “aware of roughly the amount . . . that it was borrowing” via its FTX credit line, which was “millions in 2019 . . . and then by 2022, my understanding was that it was around $2 billion on average of borrowing through the info@ account”, clarifying that Alameda’s balance on FTX was still “Overall positive, but negative in some assets.” Singh similarly testified that, prior to June 2022, he “thought Alameda had positive balances on FTX, that it was borrowing lots in some places but that overall they had more money than they didn’t.” He emphasized the internal transparency of Alameda’s borrowing via the margin lending program — in contrast to the popular narrative of a secret “backdoor” known only to an “inner circle”, Singh reported that “Alameda’s main accounts balance, is a front-and-center number in all of Alameda’s trading systems. It’s the sort of thing from my time at Alameda I couldn’t imagine being missed or ignored by anyone there”.” (from here)
In June 2022, this bug was discovered, and FTX execs realized AR had been investing fiat which wasn’t theirs
This realization seems to have been spread over several months. In June 2022, they realized AR owed FTX $8B more than they thought it had, but they didn’t yet understand why. The FT reported, “However, not all elements of the prosecution narrative line up neatly. Singh said he left the crucial June meeting still thinking things were OK and did not realise customer funds were being raided until September”. SBF claims that he didn’t piece everything together until September/October. It’s not clear even at that point if they thought of what they had done as illegal, or if they thought that continuing to work on raising liquidity for AR to rectify the mistake rather than announcing to the world that AR had accidentally invested $8B that they hadn’t intended to, was illegal, or if they’d even decided how to proceed before the run on FTX in early November.
My impression is that these valuations were wrong
I don’t think either the CFTC or the team handling the bankruptcy have offered any evidence that this was the case and SBF continues to maintain that AR had sufficient assets to meet its liability. The fact that customers are probably going to be made whole with much (I think billions?) to spare, is always attributed to SBF having made some “lucky” investments that are now doing very well, but to my knowledge, no one has presented any evidence to support this as the sole explanation.
Again, my understanding is that FTX’s actions here per se were not criminal, the crime came because they lied about what they were doing. If SBF had just not made public statements beyond “read the terms of service”, there would be no fraud.
Is it a lie if you yourself believe it? Regardless, I personally haven’t yet come across any statements that seem to be claiming anything other than “FTX itself doesn’t invest customer deposits” or “AR is not front running other customers on FTX.”
Expanding on some of your points
SBF thought AR was following the risk management policy as published
Yes, as far as I’m aware, no one testified that SBF told his team to create a “backdoor” or to “stop Alameda getting liquidated.” SBF and the people who created the “backdoor” only testified that SBF asked them to make sure Alameda wasn’t erroneously liquidated (as it almost was once, which would have been disastrous not only for Alameda, but for FTX and FTX customers in general, because before FTX was successful enough to attract other backstop liquidity providers, it was very reliant on Alameda as a backstop liquidity provider.) SBF wasn’t a coder himself, but he suggested something like “an alert or a delay,” so that engineers could check if the triggered liquidation was erroneous i.e. triggered as a result of Alameda’s role as a backstop liquidity provider, or valid i.e. triggered as a result of Alameda’s role as a customer. Gary and Nishad chose to implement SBF’s instruction by turning off auto-liquidation for Alameda’s account.
consider that FTX’s poor risk management should reflect negatively on them, even if it doesn’t qualify as criminal behavior on behalf of any individual
For what it’s worth, SBF appears to have always taken responsibility and expressed great remorse for the mistakes he made regarding poor risk management, even if he does continue to deny criminal activity.
It’s the sort of thing from my time at Alameda I couldn’t imagine being missed or ignored by anyone there
I don’t understand how it can simultaneously be true that 1) AR’s balance was easily visible, 2) AR’s balance was very negative, and 3) people believed AR’s balance to be positive. Do you understand this?
This realization seems to have been spread over several months
Thanks, I have updated my comment to say “Sometime in 2022”.
I don’t think either the CFTC or the team handling the bankruptcy have offered any evidence that this was the case
Thanks, I have updated my comment to say “my impression is that these valuations were not done rigorously” – let me know if you think that’s still incorrect.
I personally haven’t yet come across any statements that seem to be claiming anything other than “FTX itself doesn’t invest customer deposits”
This is what happened though, isn’t it? Customers deposited fiat into North Dimension, and through the fiat@ glitch, that fiat currency was invested in various things.
I don’t understand how it can simultaneously be true that 1) AR’s balance was easily visible, 2) AR’s balance was very negative, and 3) people believed AR’s balance to be positive. Do you understand this?
I mean...I just think 2) is probably false. Nishad messed up in his testimony and some information that undermined the prosecutors’ story slipped through. He also refers to FTX credit lines as nonwithdrawable, “Q. I’m going to ask you some more questions about line of credit in a bit, but just at a high level, what is a line of credit? A. It’s a nonwithdrawable dollar amount that’s granted to allow for easier trading without actually having to deposit as much money.” How is a credit line supposed to help them steal funds if the funds can’t be withdrawn from the exchange?
Now if we assume Gary wasn’t lying when he read out that AR’s main account on FTX was negative $2.7B in June 2022, I guess it’s still possible that when the prosecutor asked the question, they were pointing at the sub-account that was also helpfully named “info@alamedaresearch”, or at the main account’s balance in a particular coin. (It may not have even been deliberate on the government’s part—there’s a point when one of the prosectors seems to not understand that there’s a difference between AR’s net position on FTX and AR’s balances in different coins.)
“my impression is that these valuations were not done rigorously” – let me know if you think that’s still incorrect
That seems fine to say. I think we just don’t know either way, as the team handling the bankruptcy doesn’t appear to have given anyone access to the original versions, so we just have SBF’s (and Gary’s?) memory of the rough figures and John Ray’s protestations that SBF is deluded.
Customers deposited fiat into North Dimension, and through the fiat@ glitch, that fiat currency was invested in various things.
Was invested by Alameda, not FTX. FTX customers invested each other’s deposits all the time. And, if you believe the defense, FTX didn’t know what this customer was doing until it had already happened. I think FTX and Alameda are treated as effectively the same company or completely separate entities depending on the context and who’s speaking (I think both “sides” are guilty of this), when the reality is somewhere in between.
I broadly agree with all of this.
A few points of (minor) potential disagreement
As far as the backdoor is concerned, it looks like the defense challenges this: “SBF had not been under the impression that Alameda did not need to secure its borrowing with on-exchange collateral: “‘You permitted Alameda to borrow without requiring that it post collateral to the exchange?’ . . . SBF: ‘That was not my understanding’” (Bloomberg). However, he did know of another customer who was not required to: “Can you name any customers that were allowed to pledge outside investments as collateral for withdrawing money on FTX apart from Alameda? . . . [SBF:] I believe that we did that with a firm called Crypto Lotus, and I believe that we considered that with Three Arrows” (BitMEX)....SBF testified that he had always been “aware of roughly the amount . . . that it was borrowing” via its FTX credit line, which was “millions in 2019 . . . and then by 2022, my understanding was that it was around $2 billion on average of borrowing through the info@ account”, clarifying that Alameda’s balance on FTX was still “Overall positive, but negative in some assets.” Singh similarly testified that, prior to June 2022, he “thought Alameda had positive balances on FTX, that it was borrowing lots in some places but that overall they had more money than they didn’t.” He emphasized the internal transparency of Alameda’s borrowing via the margin lending program — in contrast to the popular narrative of a secret “backdoor” known only to an “inner circle”, Singh reported that “Alameda’s main accounts balance, is a front-and-center number in all of Alameda’s trading systems. It’s the sort of thing from my time at Alameda I couldn’t imagine being missed or ignored by anyone there”.” (from here)
This realization seems to have been spread over several months. In June 2022, they realized AR owed FTX $8B more than they thought it had, but they didn’t yet understand why. The FT reported, “However, not all elements of the prosecution narrative line up neatly. Singh said he left the crucial June meeting still thinking things were OK and did not realise customer funds were being raided until September”. SBF claims that he didn’t piece everything together until September/October. It’s not clear even at that point if they thought of what they had done as illegal, or if they thought that continuing to work on raising liquidity for AR to rectify the mistake rather than announcing to the world that AR had accidentally invested $8B that they hadn’t intended to, was illegal, or if they’d even decided how to proceed before the run on FTX in early November.
I don’t think either the CFTC or the team handling the bankruptcy have offered any evidence that this was the case and SBF continues to maintain that AR had sufficient assets to meet its liability. The fact that customers are probably going to be made whole with much (I think billions?) to spare, is always attributed to SBF having made some “lucky” investments that are now doing very well, but to my knowledge, no one has presented any evidence to support this as the sole explanation.
Is it a lie if you yourself believe it? Regardless, I personally haven’t yet come across any statements that seem to be claiming anything other than “FTX itself doesn’t invest customer deposits” or “AR is not front running other customers on FTX.”
Expanding on some of your points
Yes, as far as I’m aware, no one testified that SBF told his team to create a “backdoor” or to “stop Alameda getting liquidated.” SBF and the people who created the “backdoor” only testified that SBF asked them to make sure Alameda wasn’t erroneously liquidated (as it almost was once, which would have been disastrous not only for Alameda, but for FTX and FTX customers in general, because before FTX was successful enough to attract other backstop liquidity providers, it was very reliant on Alameda as a backstop liquidity provider.) SBF wasn’t a coder himself, but he suggested something like “an alert or a delay,” so that engineers could check if the triggered liquidation was erroneous i.e. triggered as a result of Alameda’s role as a backstop liquidity provider, or valid i.e. triggered as a result of Alameda’s role as a customer. Gary and Nishad chose to implement SBF’s instruction by turning off auto-liquidation for Alameda’s account.
For what it’s worth, SBF appears to have always taken responsibility and expressed great remorse for the mistakes he made regarding poor risk management, even if he does continue to deny criminal activity.
Thanks!
I don’t understand how it can simultaneously be true that 1) AR’s balance was easily visible, 2) AR’s balance was very negative, and 3) people believed AR’s balance to be positive. Do you understand this?
Thanks, I have updated my comment to say “Sometime in 2022”.
Thanks, I have updated my comment to say “my impression is that these valuations were not done rigorously” – let me know if you think that’s still incorrect.
This is what happened though, isn’t it? Customers deposited fiat into North Dimension, and through the fiat@ glitch, that fiat currency was invested in various things.
I mean...I just think 2) is probably false. Nishad messed up in his testimony and some information that undermined the prosecutors’ story slipped through. He also refers to FTX credit lines as nonwithdrawable, “Q. I’m going to ask you some more questions about line of credit in a bit, but just at a high level, what is a line of credit? A. It’s a nonwithdrawable dollar amount that’s granted to allow for easier trading without actually having to deposit as much money.” How is a credit line supposed to help them steal funds if the funds can’t be withdrawn from the exchange?
Now if we assume Gary wasn’t lying when he read out that AR’s main account on FTX was negative $2.7B in June 2022, I guess it’s still possible that when the prosecutor asked the question, they were pointing at the sub-account that was also helpfully named “info@alamedaresearch”, or at the main account’s balance in a particular coin. (It may not have even been deliberate on the government’s part—there’s a point when one of the prosectors seems to not understand that there’s a difference between AR’s net position on FTX and AR’s balances in different coins.)
That seems fine to say. I think we just don’t know either way, as the team handling the bankruptcy doesn’t appear to have given anyone access to the original versions, so we just have SBF’s (and Gary’s?) memory of the rough figures and John Ray’s protestations that SBF is deluded.
Was invested by Alameda, not FTX. FTX customers invested each other’s deposits all the time. And, if you believe the defense, FTX didn’t know what this customer was doing until it had already happened. I think FTX and Alameda are treated as effectively the same company or completely separate entities depending on the context and who’s speaking (I think both “sides” are guilty of this), when the reality is somewhere in between.