Sorry, I think this Manifold market is answering a different question, it’s what percentage of assets will they get back in-expectation.
I do actually disagree with the Manifold market a good amount, so I am updating downwards here. I was assigning like a solid 20% chance that almost all of the funds will be recovered. For example, for Bernie Madoff, of the $18 billion in estimated losses, ~$14.4 billion were recovered, so I was assuming a roughly similar rate here.
I don’t think the outcome in Madoff, the most successful Ponzi-scheme recovery in history, would be a good predictor of the outcome here. Madoff’s scheme was rather simple and inert at heart—he basically put incoming money in the bank and took it out when his customers wanted to make withdrawals. So little money was “lost” to bad investment decisions in Madoff. There was merely a transfer from clients who were net depositors into the scheme to those who had withdrawn more than they had deposited. Although there has been much legal wrangling about the clawbacks, there were obvious targets (people who had flat out received more than they put in, in other words people who got totally fictious profits). And those people did not, as a general rule, have good legal defenses.
Although we don’t know how FTX/Alameda lost billions in customer monies, all signs so far point to speculative trading activities. For example, if FTX/Alameda bought billions in magic beans (i.e., certain forms of crypto) at fair market value and then that crypto later crashed in value—that money is gone. You generally cannot claw back transactions that were fair at the time they were made just because they don’t look so great in retrospect. Because the transferee gave then-equivalent value for the funds received, an avoidance action isn’t going to generate funds for the estate in those sorts of losses.
Although each massive fraud is sui generis, I think the outcome will be closer to Enron (about 7% recovery) than to Madoff due to the lack of good targets. Of course, for anyone who feels that I or the Manifold Markets consensus is wrong—there’s a nice potential profit to be made, as distressed FTX debt is for sale for really cheap last I checked (e.g., 5-8 cents on the dollar).
These are good arguments! I have updated that recovery of most of the money is less likely than I previously thought, having anchored too much on the Madoff case.
I meant the shareholder victims, who had their $100B in stock evaporate and got about $7B from banks. That was intended as an example of a defrauded class who didn’t have good targets.
As for the smaller Enron creditor class—Enron’s fraud was substantially more complex than FTX’s (which, from initial reports, may have only required a few people to execute without any outside help). Outside corporations with hefty balance sheets were caught up in the fraud—not with fraudulent intent per se, but with at least somewhat unclean hands that negligently assisted with fraud. It’s not clear to me that there are equivalent third parties here (or that those third parties are going to be able to pay judgments). Alameda’s counterparties likely didn’t have anything to do with draining customer accounts, for instance.
So I put the expected recovery as closer to Enron-investor than near-full recovery, although I freely admit I could be wrong.
I meant the shareholder victims, who had their $100B in stock evaporate and got about $7B from banks. That was intended as an example of a defrauded class who didn’t have good targets.
Huh, this feels pretty non-analogous to me. Shareholders don’t seem to me like victims that are much at all in the reference class of FTX depositors (like, still victims, but much less obvious ones).
When I buy a stock, I am totally taking into account that the company might go bust for various reasons, this includes a probability that it’s not reporting its books accurately (like, if a company lies about its books and I nevertheless make money, nobody comes to take my money away from me, and I think many investors totally try to buy into frauds, just to get out earlier than the others).
Indeed, shareholders seem partially morally culpable for having helped Enron defraud other people, by providing funds to run their operations. There are still laws about shareholders being able to sue to get their money back, but the situation strikes me as very different from the depositor case (who were just using a product and had a specific contract that specified that FTX was merely entrusted to keep the money safe, not to do things with).
Noth the ethical and legal rights of these shareholders seem much more limited than the rights of the depositors who I expect to be in the FTX case much earlier in line for having their funds returned than the shareholders in the Enron case.
The Enron shareholders were last in line for any distributions and surely got nothing through the bankruptcy process. However, they owned their own claims for violations of the securities laws designed to protect investors. Those claims were not part of the bankruptcy estate because they were not owned by Enron. However, they did not have many strong targets for the vindication of those claims, so they only got 7%. If there had been a clearly liable and super-deep-pocketed target—say, someone central to committing securities fraud was secretly a trillionaire—they would potentially have collected 100%.
My point is that the rate of recovery is often primarily determined by (1) how deep the pockets of potential defendants are and (2) how good those defendants’ defenses are. I am suggesting that the FTX depositors—no matter how clearly their rights were violated—may not have many deep pockets to sue who lack good defenses. I haven’t heard any identification of any deep pockets without good defenses, or information that would lead me to believe they likely exist. Hence my suggestion that the depositors’ fate will be closer to pennies on the dollar than to near-full recovery.
Reporting from Bloomberg suggests that depositor claims are being sold at 5-8 cents on the dollar, which suggests that the market agrees that substantial recovery is unlikely. The market could of course be wrong, but these folks are experts in purchasing debt claims against bankruptcy companies. They have doubtless thought harder about potential avenues for recovery thanme or anyone else posting on an EA forum.
Yeah, sorry, I buy the overall claim that FTX debt is sold cheaply, and this is strong evidence that recovery is unlikely, but I still think reasoning from analogy from the Enron shareholders to the FTX depositors seems wrong to me.
Manifold estimates 19%. I don’t think this is particularly principled or reliable, but seems better than my personal guesses.
Sorry, I think this Manifold market is answering a different question, it’s what percentage of assets will they get back in-expectation.
I do actually disagree with the Manifold market a good amount, so I am updating downwards here. I was assigning like a solid 20% chance that almost all of the funds will be recovered. For example, for Bernie Madoff, of the $18 billion in estimated losses, ~$14.4 billion were recovered, so I was assuming a roughly similar rate here.
I don’t think the outcome in Madoff, the most successful Ponzi-scheme recovery in history, would be a good predictor of the outcome here. Madoff’s scheme was rather simple and inert at heart—he basically put incoming money in the bank and took it out when his customers wanted to make withdrawals. So little money was “lost” to bad investment decisions in Madoff. There was merely a transfer from clients who were net depositors into the scheme to those who had withdrawn more than they had deposited. Although there has been much legal wrangling about the clawbacks, there were obvious targets (people who had flat out received more than they put in, in other words people who got totally fictious profits). And those people did not, as a general rule, have good legal defenses.
Although we don’t know how FTX/Alameda lost billions in customer monies, all signs so far point to speculative trading activities. For example, if FTX/Alameda bought billions in magic beans (i.e., certain forms of crypto) at fair market value and then that crypto later crashed in value—that money is gone. You generally cannot claw back transactions that were fair at the time they were made just because they don’t look so great in retrospect. Because the transferee gave then-equivalent value for the funds received, an avoidance action isn’t going to generate funds for the estate in those sorts of losses.
Although each massive fraud is sui generis, I think the outcome will be closer to Enron (about 7% recovery) than to Madoff due to the lack of good targets. Of course, for anyone who feels that I or the Manifold Markets consensus is wrong—there’s a nice potential profit to be made, as distressed FTX debt is for sale for really cheap last I checked (e.g., 5-8 cents on the dollar).
These are good arguments! I have updated that recovery of most of the money is less likely than I previously thought, having anchored too much on the Madoff case.
However, some random googling caused me to believe that Enron creditors received back 53% of their defrauded assets (a total of $21 billion): https://www.bloomberg.com/news/articles/2012-01-13/enron-creditors-pocket-21-8-billion-in-cash-stock-1-
So I am curious where your 7% is coming from.
I meant the shareholder victims, who had their $100B in stock evaporate and got about $7B from banks. That was intended as an example of a defrauded class who didn’t have good targets.
As for the smaller Enron creditor class—Enron’s fraud was substantially more complex than FTX’s (which, from initial reports, may have only required a few people to execute without any outside help). Outside corporations with hefty balance sheets were caught up in the fraud—not with fraudulent intent per se, but with at least somewhat unclean hands that negligently assisted with fraud. It’s not clear to me that there are equivalent third parties here (or that those third parties are going to be able to pay judgments). Alameda’s counterparties likely didn’t have anything to do with draining customer accounts, for instance.
So I put the expected recovery as closer to Enron-investor than near-full recovery, although I freely admit I could be wrong.
Huh, this feels pretty non-analogous to me. Shareholders don’t seem to me like victims that are much at all in the reference class of FTX depositors (like, still victims, but much less obvious ones).
When I buy a stock, I am totally taking into account that the company might go bust for various reasons, this includes a probability that it’s not reporting its books accurately (like, if a company lies about its books and I nevertheless make money, nobody comes to take my money away from me, and I think many investors totally try to buy into frauds, just to get out earlier than the others).
Indeed, shareholders seem partially morally culpable for having helped Enron defraud other people, by providing funds to run their operations. There are still laws about shareholders being able to sue to get their money back, but the situation strikes me as very different from the depositor case (who were just using a product and had a specific contract that specified that FTX was merely entrusted to keep the money safe, not to do things with).
Noth the ethical and legal rights of these shareholders seem much more limited than the rights of the depositors who I expect to be in the FTX case much earlier in line for having their funds returned than the shareholders in the Enron case.
The Enron shareholders were last in line for any distributions and surely got nothing through the bankruptcy process. However, they owned their own claims for violations of the securities laws designed to protect investors. Those claims were not part of the bankruptcy estate because they were not owned by Enron. However, they did not have many strong targets for the vindication of those claims, so they only got 7%. If there had been a clearly liable and super-deep-pocketed target—say, someone central to committing securities fraud was secretly a trillionaire—they would potentially have collected 100%.
My point is that the rate of recovery is often primarily determined by (1) how deep the pockets of potential defendants are and (2) how good those defendants’ defenses are. I am suggesting that the FTX depositors—no matter how clearly their rights were violated—may not have many deep pockets to sue who lack good defenses. I haven’t heard any identification of any deep pockets without good defenses, or information that would lead me to believe they likely exist. Hence my suggestion that the depositors’ fate will be closer to pennies on the dollar than to near-full recovery.
Reporting from Bloomberg suggests that depositor claims are being sold at 5-8 cents on the dollar, which suggests that the market agrees that substantial recovery is unlikely. The market could of course be wrong, but these folks are experts in purchasing debt claims against bankruptcy companies. They have doubtless thought harder about potential avenues for recovery thanme or anyone else posting on an EA forum.
Yeah, sorry, I buy the overall claim that FTX debt is sold cheaply, and this is strong evidence that recovery is unlikely, but I still think reasoning from analogy from the Enron shareholders to the FTX depositors seems wrong to me.