and even if they were solvent at the time, that does not mean they were not fraudulent.
If I took all my customers money, which I had promised to safekeep, and went to the nearest casino and put it all on red, even if I won it would still be fraud.
My understanding (for whatever it’s worth) is that most of the reason why a full repayment looks feasible now is a combination of:
Creditors are paid back the dollar value of their assets at the time of bankruptcy. Economically it’s a bit like everyone was forced to sell all their crypto to FTX at bankruptcy date, and then the crypto FTX held appreciated a bunch in the meantime.
FTX held a stake in Anthropic, and for general AI hype reasons that’s likely to have appreciated a lot too.
I think it’s reasonable to think of both of these as luck, and certainly a company relying on them to pay their debts is not solvent.
Perhaps. But it sounds like many[1] have been treating the fact that FTX did in fact face a liquidity crisis as strong (conclusive?) evidence of SBF’s excessive risk-taking in a way that’s relevant for intent. And now they claim that the extent to which customers are made whole or FTX was insolvent is not relevant.
It feels like people in general are happy to attribute good luck to his decisions but not bad luck.
Including the prosecution: “its customers were left with billions of dollars in losses”, “the defendant talked with his inner circle about...how customers could never be repaid”, “Billions of dollars from thousands of people gone”, “there is no serious dispute that around $10 billion went missing”...
Well, regarding Anthropic at least, this particular bet may be lucky, but if you make a bunch of high-variance bets and one of them turns out in your favor, is that still just luck?
Crypto prices in general also turned out in their favour, and without having looked into it closely I’d guess both of those bets paying off were necessary for people to get paid back,
If the bankruptcy hadn’t forced dollarization all of FTX’s customer deposits, I’m guessing they still wouldn’t be able to pay everyone back today,
Customer money wasn’t supposed to be going into bets with any variance. Having a diversified portfolio reduces variance but doesn’t eliminate it (and anyway I suspect FTX’s portfolio wasn’t in reality very diversified, given that tech stocks and crypto have historically been pretty correlated)
Do you want to create a market? I’d be happy to bet 1:70.
Not only they’re returning all the customer money, they were also able to pay somewhere between hundreds of millions and 1.5b (couldn’t find an accurate number) to the lawyers. My impression is that they found a lot of unaccounted money lying around. It’s also not obvious what was the value of Anthropic
The main reason they are in a better position to pay is the massive increase in the value of crypto assets after filing vs. the proposal to pay out the value of customer holdings on the day of bankruptcy. That is irrelevant to whether they were solvent in November 2022.
Actually, the bankruptcy lawyers and other professionals get paid by the estate ahead of almost all unsecured claimants. Their claims are generally entitled to administrative expense priority. That priority exists because no sane lawyer or professional would agree to represent the bankrupt while accepting general unsecured creditor status (after all, they already know the debtor is insolvent!). The same is true of many other vendors and service providers who provide services to the estate after the bankruptcy petition is filed.
If everyone else had truly been made whole, equity holders are last in line to get the remainder. But I think the odds of SBF receiving a meaningful distribution here are ~zero; the bankruptcy judge would amend the reorg plan as necessary to prevent him from profiting from his crimes.
No, they already spent at least hundreds of millions (and possibly more than a billion- I saw a $1.5b number somewhere) on the lawyers. The first thing the lawyers did, back in November 2022, was getting paid
Although I think people may be using the term “solvency” in slightly different ways in discussions around FTX. I think that in FTX’s case, illiquidity effectively amounted to insolvency, and that it’s uncertain how much they could have sold their illiquid assets for. If for some reason you were to trust SBF’s own estimate of $8b, their total assets would have (just) covered their total liabilities.
Sullivan & Cromwell’s John Ray said in December 2022 “We’ve lost $8bn of customer money” and I think most people have interpreted this as FTX having a net asset value of minus $8b. Presumably, though, Ray was referring either to the temporary shortfall in liquid funds or to the accounting discrepancy that was uncovered that summer/fall.
SBF also claimed that he could have raised enough liquidity to make customers substantially whole given a few more weeks, but was under extreme pressure to declare bankruptcy. I think there’s a good chance this is accurate, in part because most of the pressure came from Sullivan & Cromwell and a former partner of the firm, who are now facing a class action lawsuit for their alleged role in the fraud.
(If anyone has evidence that FTX’s liabilities did in fact exceed its assets by $8b at the time of the bankruptcy, I would be interested in seeing it.)
SBF also claimed that he could have raised enough liquidity to make customers substantially whole given a few more weeks, but was under extreme pressure to declare bankruptcy. I think there’s a good chance this is accurate [. . . .]
This seems unlikely to me. The books were just in too bad of a shape for anyone conducting even a minimum amount of due diligence to fork over the needed liquid assets. Selling the illiquid assets would have taken time, and in many cases doing so quickly would have depressed the value of those assets. Moreover, suspending withdrawals until liquidity could be obtained would have been the death knell for FTX’s enterprise value. So, contra the earlier situations in which investors poured money into FTX, the potential upside would be fairly limited for accepting the risk of whatever landmines might be buried in FTX’s financials.
The estate hopes everyone can be made whole as far as recovering the value in USD on the date of filing, but that is based in part on appreciation in the value of crypto and to a lesser extent on use of the trustee’s muscular powers in bankruptcy (such as clawing back ~$30M from EVF, getting out of expensive sponsorship deals, etc.).
Finally, even assuming it was possible to get FTX into shape to attract liquidity, that would have involved massive effort. The universe in which SBF hires an army of forensic accountants to untangle FTX’s disastrous accounting very quickly is a universe in which a lot of outsiders now have proof of very serious fraud. Those people are not likely to allow SBF to hide the extent of the fraud from would-be saviors.
Bear in mind that even if FTX can pay everyone back now, that does not mean they were solvent at the point they were put into bankruptcy.
and even if they were solvent at the time, that does not mean they were not fraudulent.
If I took all my customers money, which I had promised to safekeep, and went to the nearest casino and put it all on red, even if I won it would still be fraud.
Strong agree—I enjoyed Brad Delong on this point.
My understanding (for whatever it’s worth) is that most of the reason why a full repayment looks feasible now is a combination of:
Creditors are paid back the dollar value of their assets at the time of bankruptcy. Economically it’s a bit like everyone was forced to sell all their crypto to FTX at bankruptcy date, and then the crypto FTX held appreciated a bunch in the meantime.
FTX held a stake in Anthropic, and for general AI hype reasons that’s likely to have appreciated a lot too.
I think it’s reasonable to think of both of these as luck, and certainly a company relying on them to pay their debts is not solvent.
Perhaps. But it sounds like many[1] have been treating the fact that FTX did in fact face a liquidity crisis as strong (conclusive?) evidence of SBF’s excessive risk-taking in a way that’s relevant for intent. And now they claim that the extent to which customers are made whole or FTX was insolvent is not relevant.
It feels like people in general are happy to attribute good luck to his decisions but not bad luck.
Including the prosecution: “its customers were left with billions of dollars in losses”, “the defendant talked with his inner circle about...how customers could never be repaid”, “Billions of dollars from thousands of people gone”, “there is no serious dispute that around $10 billion went missing”...
Well, regarding Anthropic at least, this particular bet may be lucky, but if you make a bunch of high-variance bets and one of them turns out in your favor, is that still just luck?
Crypto prices in general also turned out in their favour, and without having looked into it closely I’d guess both of those bets paying off were necessary for people to get paid back,
If the bankruptcy hadn’t forced dollarization all of FTX’s customer deposits, I’m guessing they still wouldn’t be able to pay everyone back today,
Customer money wasn’t supposed to be going into bets with any variance. Having a diversified portfolio reduces variance but doesn’t eliminate it (and anyway I suspect FTX’s portfolio wasn’t in reality very diversified, given that tech stocks and crypto have historically been pretty correlated)
They almost certainly were not. (99%)
Do you want to create a market? I’d be happy to bet 1:70.
Not only they’re returning all the customer money, they were also able to pay somewhere between hundreds of millions and 1.5b (couldn’t find an accurate number) to the lawyers. My impression is that they found a lot of unaccounted money lying around. It’s also not obvious what was the value of Anthropic
The main reason they are in a better position to pay is the massive increase in the value of crypto assets after filing vs. the proposal to pay out the value of customer holdings on the day of bankruptcy. That is irrelevant to whether they were solvent in November 2022.
Surely they don’t pay the lawyers. Surely after the debtors are paid they pay the shareholders?
Actually, the bankruptcy lawyers and other professionals get paid by the estate ahead of almost all unsecured claimants. Their claims are generally entitled to administrative expense priority. That priority exists because no sane lawyer or professional would agree to represent the bankrupt while accepting general unsecured creditor status (after all, they already know the debtor is insolvent!). The same is true of many other vendors and service providers who provide services to the estate after the bankruptcy petition is filed.
If everyone else had truly been made whole, equity holders are last in line to get the remainder. But I think the odds of SBF receiving a meaningful distribution here are ~zero; the bankruptcy judge would amend the reorg plan as necessary to prevent him from profiting from his crimes.
No, they already spent at least hundreds of millions (and possibly more than a billion- I saw a $1.5b number somewhere) on the lawyers. The first thing the lawyers did, back in November 2022, was getting paid
Agree. In fact, SBF himself described FTX International as insolvent on his substack.
Although I think people may be using the term “solvency” in slightly different ways in discussions around FTX. I think that in FTX’s case, illiquidity effectively amounted to insolvency, and that it’s uncertain how much they could have sold their illiquid assets for. If for some reason you were to trust SBF’s own estimate of $8b, their total assets would have (just) covered their total liabilities.
Sullivan & Cromwell’s John Ray said in December 2022 “We’ve lost $8bn of customer money” and I think most people have interpreted this as FTX having a net asset value of minus $8b. Presumably, though, Ray was referring either to the temporary shortfall in liquid funds or to the accounting discrepancy that was uncovered that summer/fall.
SBF also claimed that he could have raised enough liquidity to make customers substantially whole given a few more weeks, but was under extreme pressure to declare bankruptcy. I think there’s a good chance this is accurate, in part because most of the pressure came from Sullivan & Cromwell and a former partner of the firm, who are now facing a class action lawsuit for their alleged role in the fraud.
(If anyone has evidence that FTX’s liabilities did in fact exceed its assets by $8b at the time of the bankruptcy, I would be interested in seeing it.)
This seems unlikely to me. The books were just in too bad of a shape for anyone conducting even a minimum amount of due diligence to fork over the needed liquid assets. Selling the illiquid assets would have taken time, and in many cases doing so quickly would have depressed the value of those assets. Moreover, suspending withdrawals until liquidity could be obtained would have been the death knell for FTX’s enterprise value. So, contra the earlier situations in which investors poured money into FTX, the potential upside would be fairly limited for accepting the risk of whatever landmines might be buried in FTX’s financials.
The estate hopes everyone can be made whole as far as recovering the value in USD on the date of filing, but that is based in part on appreciation in the value of crypto and to a lesser extent on use of the trustee’s muscular powers in bankruptcy (such as clawing back ~$30M from EVF, getting out of expensive sponsorship deals, etc.).
Finally, even assuming it was possible to get FTX into shape to attract liquidity, that would have involved massive effort. The universe in which SBF hires an army of forensic accountants to untangle FTX’s disastrous accounting very quickly is a universe in which a lot of outsiders now have proof of very serious fraud. Those people are not likely to allow SBF to hide the extent of the fraud from would-be saviors.
Sorry, I just meant the second part (“was under extreme pressure to declare bankruptcy”)