My opinionated and annotated summary / distillation of the SBF’s account of the FTX crisis based on recent articles and interviews (particularly this Bloomberg article).
Over the past year, the macroeconomy changed and central banks raised their interest rates which led to crypto losing value. Then, after a crypto crash in May, Alameda needed billions, fast, to repay its nervous lenders or would go bust.
According to sources, Alameda’s CEO Ellison said that she, SBF, Gary Wang and Nishad Singh had a meeting re: the shortfall and decided to loan Alameda FTX user funds. If true, they knowingly committed fraud.
SBF’s account is different:
Generally, he didn’t know what was going on at Alameda anymore, despite owing 90% of it. He disengaged because he was busy running FTX and for ‘conflict of interest reasons’.[1]
He didn’t pay much attention during the meeting and it didn’t seem like a crisis, but just a matter of extending a bit more credit to Alameda (from $4B by $6B[2] to ~$10B[3]). Alameda already traded on margin and still had collateral worth way more than enough to cover the loan, and, despite having been the liquidity provider historically, seemed to be less important over time, as they made up an ever smaller fraction of all trades.
Yet they still had larger limits than other users, who’d get auto-liquidated if their positions got too big and risky. He didn’t realize that Alameda’s position on FTX got much more leveraged, and thought the risk was much smaller. Also, a lot of Alameda’s collatoral was FTT, ~FTX stock, which rapidly lost value.
If FTX had liquidated, Alameda and maybe even their lenders, would’ve gone bust. And even if FTX didn’t take direct losses, users would’ve lost confidence, causing a hard-to-predict cascade of events.
If FTX hadn’t margin-called there was ~70% chance everything would be OK, but even if not, downside and risk would have been much smaller, and the hole more manageable.
SBF thought FTX and Alameda’s combined accounts were:
Debt: $8.9B
Assets:
Cash: $9B
‘Less liquid’: $15.4B
‘Illiquid’: $3.2B
Naively, despite some big liabilities, they should be able to cover it.
But crucially, they actually had $8B less cash, since FTX didn’t have a bank account when they first started, users sent >$5B[4] to Alameda, and then their bad accounting double-counted by crediting both. Many users’ funds never moved from Alameda, and FTX users’ accounts were credited with a notional balance that did not represent underlying assets held by FTX—users traded with crypto that did not actually exist.
This is why Alameda invested so much, while FTX didn’t have enough money when users tried to withdraw.[5]
Even after FTX/Alameda profits (at least $10B[8]) and the VC money they raised ($2B[9] - aside: after raising $400M in Jan, they tried to raise money again in July[10] and then again in Sept.[11])—all this adds to minus $6.5B. The FT says FTX is short of $8B[12] of ~1M users’[13] money. In sum, this was because he didn’t realize that they spent way more than they made, paid very little attention to expenses, was really lazy about mental math, and there was a diffusion of responsibility amongst leadership.
While FTX.US was more like a bank and highly regulated and had as much reserves as users put in, FTX int’l was an exchange. Legally, exchanges don’t lend out users’ funds, but users themselves lend out their funds to other users (of which Alameda was just one of). FTX just facilitated this. An analogy: file-sharing platforms like Napster never upload music themselves illegally, but just facilitate peer-to-peer sharing.
Much more than $1B (SBF ‘~$8B-$10B at its peak’[14]) of user funds opted into peer-to-peer lending / order book margin trading (others say that this was less than $4B[15]; all user deposits were $16B[16]). Also, while parts of the terms of service say that FTX never lends out users’ assets, those are overridden by other parts of the terms of service and he isn’t aware that FTX violated the terms of use (see FTX Terms of Service).
—
For me, the key remaining questions are:
Did many users legally agree to their crypto being lent out without meaning to, by accepting the terms of service, even if they didn’t opt into the lending program? If so, it might be hard to hold FTX legally accountable, especially since they’re in the Bahamas.
If they did effectively lend out customer funds, did they do it multiple times (perhaps repeatedly since the start of FTX), or just once?
Did FTX make it look like users’ money were very secure like a highly regulated bank and that their money wasn’t at risk e.g. by partnering with Visa for crypto debit cards[17] or by blurring the line between FTX.us (‘A safe and easy way to get into crypto’) and FTX.com?
Did FTX sweep users to opt into peer-to-peer lending?
ht/ to Ryan Carey: ‘notably some of this could be consistent with macro conditions crushing their financial position, especially the VC investments in crypto.’
My opinionated and annotated summary / distillation of the SBF’s account of the FTX crisis based on recent articles and interviews (particularly this Bloomberg article).
Over the past year, the macroeconomy changed and central banks raised their interest rates which led to crypto losing value. Then, after a crypto crash in May, Alameda needed billions, fast, to repay its nervous lenders or would go bust.
According to sources, Alameda’s CEO Ellison said that she, SBF, Gary Wang and Nishad Singh had a meeting re: the shortfall and decided to loan Alameda FTX user funds. If true, they knowingly committed fraud.
SBF’s account is different:
Generally, he didn’t know what was going on at Alameda anymore, despite owing 90% of it. He disengaged because he was busy running FTX and for ‘conflict of interest reasons’.[1]
He didn’t pay much attention during the meeting and it didn’t seem like a crisis, but just a matter of extending a bit more credit to Alameda (from $4B by $6B[2] to ~$10B[3]). Alameda already traded on margin and still had collateral worth way more than enough to cover the loan, and, despite having been the liquidity provider historically, seemed to be less important over time, as they made up an ever smaller fraction of all trades.
Yet they still had larger limits than other users, who’d get auto-liquidated if their positions got too big and risky. He didn’t realize that Alameda’s position on FTX got much more leveraged, and thought the risk was much smaller. Also, a lot of Alameda’s collatoral was FTT, ~FTX stock, which rapidly lost value.
If FTX had liquidated, Alameda and maybe even their lenders, would’ve gone bust. And even if FTX didn’t take direct losses, users would’ve lost confidence, causing a hard-to-predict cascade of events.
If FTX hadn’t margin-called there was ~70% chance everything would be OK, but even if not, downside and risk would have been much smaller, and the hole more manageable.
SBF thought FTX and Alameda’s combined accounts were:
Debt: $8.9B
Assets:
Cash: $9B
‘Less liquid’: $15.4B
‘Illiquid’: $3.2B
Naively, despite some big liabilities, they should be able to cover it.
But crucially, they actually had $8B less cash, since FTX didn’t have a bank account when they first started, users sent >$5B[4] to Alameda, and then their bad accounting double-counted by crediting both. Many users’ funds never moved from Alameda, and FTX users’ accounts were credited with a notional balance that did not represent underlying assets held by FTX—users traded with crypto that did not actually exist.
This is why Alameda invested so much, while FTX didn’t have enough money when users tried to withdraw.[5]
They spent $10.75B on:[6]
$4B for VC investments
$2.5B to Binance buy out its investment in FTX (another figure is $3B)
$1.5B for expenses
$1.5B for acquisitions
$1B labeled ‘fuckups’[7]
$0.25B for real estate
Even after FTX/Alameda profits (at least $10B[8]) and the VC money they raised ($2B[9] - aside: after raising $400M in Jan, they tried to raise money again in July[10] and then again in Sept.[11])—all this adds to minus $6.5B. The FT says FTX is short of $8B[12] of ~1M users’[13] money. In sum, this was because he didn’t realize that they spent way more than they made, paid very little attention to expenses, was really lazy about mental math, and there was a diffusion of responsibility amongst leadership.
While FTX.US was more like a bank and highly regulated and had as much reserves as users put in, FTX int’l was an exchange. Legally, exchanges don’t lend out users’ funds, but users themselves lend out their funds to other users (of which Alameda was just one of). FTX just facilitated this. An analogy: file-sharing platforms like Napster never upload music themselves illegally, but just facilitate peer-to-peer sharing.
Much more than $1B (SBF ‘~$8B-$10B at its peak’[14]) of user funds opted into peer-to-peer lending / order book margin trading (others say that this was less than $4B[15]; all user deposits were $16B[16]). Also, while parts of the terms of service say that FTX never lends out users’ assets, those are overridden by other parts of the terms of service and he isn’t aware that FTX violated the terms of use (see FTX Terms of Service).
—
For me, the key remaining questions are:
Did many users legally agree to their crypto being lent out without meaning to, by accepting the terms of service, even if they didn’t opt into the lending program? If so, it might be hard to hold FTX legally accountable, especially since they’re in the Bahamas.
If they did effectively lend out customer funds, did they do it multiple times (perhaps repeatedly since the start of FTX), or just once?
Did FTX make it look like users’ money were very secure like a highly regulated bank and that their money wasn’t at risk e.g. by partnering with Visa for crypto debit cards[17] or by blurring the line between FTX.us (‘A safe and easy way to get into crypto’) and FTX.com?
Did FTX sweep users to opt into peer-to-peer lending?
FTX Founder Sam Bankman-Fried Says He Can’t Account for Billions Sent to Alameda
‘We kind of lost track’: how Sam Bankman-Fried blurred lines between FTX and Alameda | Financial Times
Sam Bankman-Fried’s trading shop was given special treatment on FTX for years | Financial Times
FTX Founder Sam Bankman-Fried Says He Can’t Account for Billions Sent to Alameda
SBF Reveals FTX Was Selling Assets That Didn’t Exist—The Defiant
ht/ to Ryan Carey: ‘notably some of this could be consistent with macro conditions crushing their financial position, especially the VC investments in crypto.’
I think he might refer to this: archive.ph/ATPHq#selection-1981.172-1981.301
Milky Eggs » Blog Archive » What happened at Alameda Research.
Investors Who Put $2 Billion Into FTX Face Scrutiny, Too—The New York Times
Crypto Brokerage Genesis Tries to Raise Funds and Eyes Bankruptcy
FTX in talks to raise up to $1 billion at valuation of about $32 billion, in-line with prior round
‘We kind of lost track’: how Sam Bankman-Fried blurred lines between FTX and Alameda | Financial Times
Sam Bankman-Fried’s trading shop was given special treatment on FTX for years | Financial Times
See video interview here: FTX Founder Sam Bankman-Fried Says He Can’t Account for Billions Sent to Alameda
https://twitter.com/adamscochran/status/1593020920695660546
FTX Tapped Into Customer Accounts to Fund Risky Bets, Setting Up Its Downfall—WSJ
Crypto Exchange FTX’s Token Surges 7% After Visa Partnership Report