I think this post is making some important points, though I think it’s overstating the need for urgency. I agree it’s very likely a good idea to try to avoid spending the FTX money that you’ve received, though if you have no choice (since e.g. you have unavoidable ongoing financial expenses and need time to arrange other sources of funding or pivot your organization), I think people should probably spend the money instead of fully shutting down their organization or defaulting on ongoing liabilities they have, which seems overall likely to cause greater harm than to keep operating for a few months until the situation clears up more (though I also think it’s a good time to cut spending if you can, and therefore avoid spending the unspent FTX money).
I think it’s a good idea to try to make sure that depositors get their money back, though I am not as confident as you seem to be that the clawback procedures are the best way to achieve that. I am currently holding out to see whether I expect the clawback procedures to actually result in an equitable outcome here, or whether we should expect some enormous fraction of the clawback amount to be spent on legal fees, or be siphoned off to e.g. the Bahamas government, or institutional investors beyond their initial investments, which seems pretty plausible to me, and which would make supporting the clawbacks itself a somewhat morally dubious act.
If the clawbacks turn out to be a pretty bad way to actually get money back into the hands of the depositors, then I would like us to spend a decent amount of time trying to figure out some better way to actually achieve that, so I am on board with the overall call for “actively supporting giving stolen money back to FTX depositors”.
Separately, I think it’s also pretty unclear what fraction of the money that was given out by the Future Fund was actually stolen. It’s plausible to me that via various clawback mechanisms (independently of the Future Fund) the vast majority of the funds that were lost to depositors will be recovered, and that only a fraction of the money given out by Future Fund should be modeled as stolen, and where e.g. the fair thing to do is for people to return 20% of the funds given to them by the Future Fund (like, as far as I can tell FTX and Alameda also made a bunch of money and produced a bunch of legitimate value, and in as much as everyone can end up even with only a fraction of the money returned, I think that’s a fairer outcome). I have a ton of uncertainty on this, and expect we won’t know for quite a while, though I think we should continue to actively try to reduce uncertainty on this as the bankruptcy proceedings go on.
I sincerely care about doing right here, and I want us to seriously try to put depositors and debtors to FTX and Alameda back in the green, but I also think the facts of the situation are genuinely uncertain.
Some other questions I have uncertainty about are:
From an accounting perspective, what fraction of FTX money has an organization actually spent if they e.g. received $1MM from FTX a year ago, had $3MM in the bank at the time, and now have $2MM left? (i.e. spent $2MM in the last year). Should they model none of the FTX money as spent? Should they model all of it as spent? Should they model 50% of it as spent? (my guess here is that they should model 50% of it as spent, though I think this approach has some inconsistencies that are a bit ugly, where e.g. if you break things down by month you might get a different answer)
Should people try to invest the FTX money so that depositors can get more of their money back? Should they keep the interest on their money, or should they try to give it back to depositors? What if the clawbacks don’t want the interest, should we somehow try to give it back anyway?
What if the clawbacks happen, but they take money from other people, some of which seem like they had somewhat more right to the money than we think we do, but in a way that’s pretty messy (e.g. they claw the funds back from other trading firms). Should we aim to somehow give money back to the trading firms?
Who should bear a lot of the financial burden of this situation? Should organizations that happened to be funded by FTX, but could have also been funded by other orgs, bear more of the burden than the ones that happened to be funded by other funders? What fraction of the burden should be covered by e.g. Open Phil who I don’t think are much to blame for this situation, but sure are the obvious place that organizations will ask for money from in order to cover money they might want to return?
I think settling this issue will take many years, and I think I want us to put more emphasis on strapping in for the long haul and righting the wrongs that we might have been involved in, than immediate calls to action for people to do things right now.
I also think it’s a time a lot of people are paying attention to us, so I don’t think it’s a terrible time to make commitments to somehow do things right here, but I do have enough uncertainty about how to actually do that that I don’t currently feel comfortable making any super precise and strong commitments besides a general “I will really try pretty hard to make things right somehow, even though I don’t know how yet”.
I think the right thing to do is to follow the official, legally authorized bankruptcy procedure (whichever that is—I do hope it’s the Delaware proceeding, but I guess we’ll see).
I don’t think it would be right for people who happen to be in possession of the funds to be making decisions that second guess things like the amount of legal fees. That’s a pretty involved judgment call, and trying to set up some sort of alternative, direct solution will be difficult to implement and execute. You haven’t been entrusted with any of that responsibility by the people who actually own the money, so I don’t think it would be right for you to intervene in that way, even trying to do the right thing.
I can also say for sure that I don’t think it would be right to invest the money in any way. It should just be kept in a deposit account. Investments come with risk of losing some of the principal, and nobody entrusted you with the authority to make that risk calculation.
I also think it’s a time a lot of people are paying attention to us, so I don’t think it’s a terrible time to make commitments to somehow do things right here, but I do have enough uncertainty about how to actually do that that I don’t currently feel comfortable making any super precise and strong commitments besides a general “I will really try pretty hard to make things right somehow, even though I don’t know how yet”.
This is just my outsiders guess, and in the end who knows, but...I predict that if the EA community did try to be sort of heroic, and tried to do some direct-for-depositors complicated thing that worked around the bankruptcy procedure, that would end up with a lot of people mad at EA, and some takes along the lines that this all confirms some of the initial criticisms.
Instead, I think the approach that’s actually better, and I think also has much better optics, is to just work with the official process. There’s a legal process for returning money to creditors and you’re expected to just go along with it, rather than trying to invent your own alternative to try to get what in your view would be a better outcome.
And while I’m not a lawyer, I think you might be pleasantly surprised about how bankruptcy works. (This is all assuming it goes through the Delaware process—maybe the Bahamas is odd or shady or outright corrupt.)
The basic idea is that the administrator lists out all the people who lent money to the company, which includes the depositors, but can also be other companies. Then they pool up the assets of the company, selling whatever they can for the best price they can manage, and try to pay it out to the creditors. If all the creditors can be paid back, congrats, the company is solvent! Now it can be returned to the shareholders, who might have something left that’s worth more than $0. If creditors can’t be made whole, they receive some fraction of what they’re owed, and the company is wound down.
In practice there’s almost always a seniority ordering of creditors, where you have some loan that was secured against some asset. So it’s not necessarily the case that all the creditors will get the same fraction back out. Like, in the basic case, maybe a “creditor” is a bank who gave a mortgage for some property. They get to liquidate that property, so maybe that creditor gets all its money back out, while the others don’t.
It’s definitely weird and unideal that the depositors are just unsecured creditors. If it were a bank or a brokerage or something, it would be handled differently. Nobody knows what sort of deals FTX might have had, with what sort of creditors, secured against what.
On the other hand, definitely no loans would have been secured against user deposits! An no loans would be secured against like, money to grants. So it’s not like you’re returning assets that some institutional loan will be secured against. I think this does just mean whatever funds are returned will go into the pool for unsecured creditors. I’d definitely be happy to be corrected on this though.
The other thing to note is, a lot of the other unsecured creditors can be other crypto firms or other sorts of counter-parties. And maybe their holdings with FTX mean that they went broke and their own depositors are out of money. Who knows.
I don’t think it’s right or good to second guess any of this. There’s a law and process for how assets are parcelled out to creditors in bankruptcy. You can trust that if more money is kicked back into that pot, creditors will get a slightly higher amount back.
I’ll put it this way. Let’s say there was some money that FTX didn’t pay out in a grant, and it instead sat in its bank account like it was supposed to. That money will be swept up into the bankruptcy proceeding to be allocated to creditors. Now, consider your situation: instead of sitting in FTX’s bank account, that money finds itself in your account. It shouldn’t have been transferred to you; FTX wasn’t solvent when it made that transaction, it needed to keep all of its money to try to pay back its creditors. So the right place for the money to go to is into the bankruptcy proceeding. That’s where it would have be if FTX had never transferred it to you.
As for legal fees, yes they’ll definitely make the pie smaller. On the other hand they don’t scale linearly with the amount of money, and this is a lot of money—so hopefully they don’t take up that big a percent.
Assisting the process where possible will hopefully help reduce the fees too.
Now, consider your situation: instead of sitting in FTX’s bank account, that money finds itself in your account. It shouldn’t have been transferred to you; FTX wasn’t solvent when it made that transaction, it needed to keep all of its money to try to pay back its creditors.
Is that true of grants made back in Jan—Feb? I read somewhere (Forbes, I think) that this was when the big grants to EA orgs were made, whereas it seems maybe the solvency issues didn’t arise until after the Luna crash in May?
For a neater, hypothetical version of the question: consider some honest profits FTX made several years ago. If still in their accounts now, it would need to be used to pay back the creditors. But suppose instead that they immediately granted out those profits (several years ago), which seemed an intrinsically legit transaction given the circumstances at a time, and the recipient org for some reason hasn’t gotten around to spending those funds (not sure exactly what that means, in accounting terms, since money is fungible and the org would surely have had some expenses during this time; but maybe it was earmarked for a specific purpose that hasn’t yet eventuated). Do you think the org is obligated to return the funds in this case?
While none of know exactly what went on or what the state was at any time, my mental model is basically that there was never a time where FTX genuinely had “honest profits” it was free to disperse as it wanted.
It sounds like they intermixed user deposits with operating capital from day 1, and never accounted for anything well enough to have a responsible estimate of whether they had money to donate.
It could be that if you went back to some particular snapshot in time, you could find various points where yes their actual assets exceeded their liabilities (which doesn’t count having as “assets” a bunch of shitcoins marked to market). But even at that point, I think if you go back a further they’ll have passed through points where they weren’t solvent—where they traded on user funds. This is basically what Shkreli went to jail for: he dipped into one fund to rescue another. The trades happened to work so everyone was in the black, but this still isn’t legit.
However, let’s grant the premise of your hypothetical, and imagine a world where FTX circa 2020 had always been in the black, and it granted out some of its rightly gained profits. The recipient of that grant shouldn’t need to give anything back. In that transaction FTX did have the right to give the grant, so there’s no issue.
But I really don’t think this hypothetical has much relation to the actual situation. I think it’s better for recipients of money from FTX to assume it wasn’t legit, and set anything aside that hasn’t been spent.
It sounds like they intermixed user deposits with operating capital from day 1, and never accounted for anything well enough to have a responsible estimate of whether they had money to donate.
I think this is plausible, but I would currently take a bet against this. My best guess is that customer deposits were safe until earlier this year.
It’s plausible to me that via various clawback mechanisms (independently of the Future Fund) the vast majority of the funds that were lost to depositors will be recovered
What’s your thought process on this? It’s a tough question, but any sense of the rough likelihoods?
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.
I think this post is making some important points, though I think it’s overstating the need for urgency. I agree it’s very likely a good idea to try to avoid spending the FTX money that you’ve received, though if you have no choice (since e.g. you have unavoidable ongoing financial expenses and need time to arrange other sources of funding or pivot your organization), I think people should probably spend the money instead of fully shutting down their organization or defaulting on ongoing liabilities they have, which seems overall likely to cause greater harm than to keep operating for a few months until the situation clears up more (though I also think it’s a good time to cut spending if you can, and therefore avoid spending the unspent FTX money).
I think it’s a good idea to try to make sure that depositors get their money back, though I am not as confident as you seem to be that the clawback procedures are the best way to achieve that. I am currently holding out to see whether I expect the clawback procedures to actually result in an equitable outcome here, or whether we should expect some enormous fraction of the clawback amount to be spent on legal fees, or be siphoned off to e.g. the Bahamas government, or institutional investors beyond their initial investments, which seems pretty plausible to me, and which would make supporting the clawbacks itself a somewhat morally dubious act.
If the clawbacks turn out to be a pretty bad way to actually get money back into the hands of the depositors, then I would like us to spend a decent amount of time trying to figure out some better way to actually achieve that, so I am on board with the overall call for “actively supporting giving stolen money back to FTX depositors”.
Separately, I think it’s also pretty unclear what fraction of the money that was given out by the Future Fund was actually stolen. It’s plausible to me that via various clawback mechanisms (independently of the Future Fund) the vast majority of the funds that were lost to depositors will be recovered, and that only a fraction of the money given out by Future Fund should be modeled as stolen, and where e.g. the fair thing to do is for people to return 20% of the funds given to them by the Future Fund (like, as far as I can tell FTX and Alameda also made a bunch of money and produced a bunch of legitimate value, and in as much as everyone can end up even with only a fraction of the money returned, I think that’s a fairer outcome). I have a ton of uncertainty on this, and expect we won’t know for quite a while, though I think we should continue to actively try to reduce uncertainty on this as the bankruptcy proceedings go on.
I sincerely care about doing right here, and I want us to seriously try to put depositors and debtors to FTX and Alameda back in the green, but I also think the facts of the situation are genuinely uncertain.
Some other questions I have uncertainty about are:
From an accounting perspective, what fraction of FTX money has an organization actually spent if they e.g. received $1MM from FTX a year ago, had $3MM in the bank at the time, and now have $2MM left? (i.e. spent $2MM in the last year). Should they model none of the FTX money as spent? Should they model all of it as spent? Should they model 50% of it as spent? (my guess here is that they should model 50% of it as spent, though I think this approach has some inconsistencies that are a bit ugly, where e.g. if you break things down by month you might get a different answer)
Should people try to invest the FTX money so that depositors can get more of their money back? Should they keep the interest on their money, or should they try to give it back to depositors? What if the clawbacks don’t want the interest, should we somehow try to give it back anyway?
What if the clawbacks happen, but they take money from other people, some of which seem like they had somewhat more right to the money than we think we do, but in a way that’s pretty messy (e.g. they claw the funds back from other trading firms). Should we aim to somehow give money back to the trading firms?
Who should bear a lot of the financial burden of this situation? Should organizations that happened to be funded by FTX, but could have also been funded by other orgs, bear more of the burden than the ones that happened to be funded by other funders? What fraction of the burden should be covered by e.g. Open Phil who I don’t think are much to blame for this situation, but sure are the obvious place that organizations will ask for money from in order to cover money they might want to return?
I think settling this issue will take many years, and I think I want us to put more emphasis on strapping in for the long haul and righting the wrongs that we might have been involved in, than immediate calls to action for people to do things right now.
I also think it’s a time a lot of people are paying attention to us, so I don’t think it’s a terrible time to make commitments to somehow do things right here, but I do have enough uncertainty about how to actually do that that I don’t currently feel comfortable making any super precise and strong commitments besides a general “I will really try pretty hard to make things right somehow, even though I don’t know how yet”.
Thanks for such a thoughtful reply.
I think the right thing to do is to follow the official, legally authorized bankruptcy procedure (whichever that is—I do hope it’s the Delaware proceeding, but I guess we’ll see).
I don’t think it would be right for people who happen to be in possession of the funds to be making decisions that second guess things like the amount of legal fees. That’s a pretty involved judgment call, and trying to set up some sort of alternative, direct solution will be difficult to implement and execute. You haven’t been entrusted with any of that responsibility by the people who actually own the money, so I don’t think it would be right for you to intervene in that way, even trying to do the right thing.
I can also say for sure that I don’t think it would be right to invest the money in any way. It should just be kept in a deposit account. Investments come with risk of losing some of the principal, and nobody entrusted you with the authority to make that risk calculation.
This is just my outsiders guess, and in the end who knows, but...I predict that if the EA community did try to be sort of heroic, and tried to do some direct-for-depositors complicated thing that worked around the bankruptcy procedure, that would end up with a lot of people mad at EA, and some takes along the lines that this all confirms some of the initial criticisms.
Instead, I think the approach that’s actually better, and I think also has much better optics, is to just work with the official process. There’s a legal process for returning money to creditors and you’re expected to just go along with it, rather than trying to invent your own alternative to try to get what in your view would be a better outcome.
And while I’m not a lawyer, I think you might be pleasantly surprised about how bankruptcy works. (This is all assuming it goes through the Delaware process—maybe the Bahamas is odd or shady or outright corrupt.)
The basic idea is that the administrator lists out all the people who lent money to the company, which includes the depositors, but can also be other companies. Then they pool up the assets of the company, selling whatever they can for the best price they can manage, and try to pay it out to the creditors. If all the creditors can be paid back, congrats, the company is solvent! Now it can be returned to the shareholders, who might have something left that’s worth more than $0. If creditors can’t be made whole, they receive some fraction of what they’re owed, and the company is wound down.
In practice there’s almost always a seniority ordering of creditors, where you have some loan that was secured against some asset. So it’s not necessarily the case that all the creditors will get the same fraction back out. Like, in the basic case, maybe a “creditor” is a bank who gave a mortgage for some property. They get to liquidate that property, so maybe that creditor gets all its money back out, while the others don’t.
It’s definitely weird and unideal that the depositors are just unsecured creditors. If it were a bank or a brokerage or something, it would be handled differently. Nobody knows what sort of deals FTX might have had, with what sort of creditors, secured against what.
On the other hand, definitely no loans would have been secured against user deposits! An no loans would be secured against like, money to grants. So it’s not like you’re returning assets that some institutional loan will be secured against. I think this does just mean whatever funds are returned will go into the pool for unsecured creditors. I’d definitely be happy to be corrected on this though.
The other thing to note is, a lot of the other unsecured creditors can be other crypto firms or other sorts of counter-parties. And maybe their holdings with FTX mean that they went broke and their own depositors are out of money. Who knows.
I don’t think it’s right or good to second guess any of this. There’s a law and process for how assets are parcelled out to creditors in bankruptcy. You can trust that if more money is kicked back into that pot, creditors will get a slightly higher amount back.
I’ll put it this way. Let’s say there was some money that FTX didn’t pay out in a grant, and it instead sat in its bank account like it was supposed to. That money will be swept up into the bankruptcy proceeding to be allocated to creditors. Now, consider your situation: instead of sitting in FTX’s bank account, that money finds itself in your account. It shouldn’t have been transferred to you; FTX wasn’t solvent when it made that transaction, it needed to keep all of its money to try to pay back its creditors. So the right place for the money to go to is into the bankruptcy proceeding. That’s where it would have be if FTX had never transferred it to you.
As for legal fees, yes they’ll definitely make the pie smaller. On the other hand they don’t scale linearly with the amount of money, and this is a lot of money—so hopefully they don’t take up that big a percent.
Assisting the process where possible will hopefully help reduce the fees too.
Is that true of grants made back in Jan—Feb? I read somewhere (Forbes, I think) that this was when the big grants to EA orgs were made, whereas it seems maybe the solvency issues didn’t arise until after the Luna crash in May?
For a neater, hypothetical version of the question: consider some honest profits FTX made several years ago. If still in their accounts now, it would need to be used to pay back the creditors. But suppose instead that they immediately granted out those profits (several years ago), which seemed an intrinsically legit transaction given the circumstances at a time, and the recipient org for some reason hasn’t gotten around to spending those funds (not sure exactly what that means, in accounting terms, since money is fungible and the org would surely have had some expenses during this time; but maybe it was earmarked for a specific purpose that hasn’t yet eventuated). Do you think the org is obligated to return the funds in this case?
While none of know exactly what went on or what the state was at any time, my mental model is basically that there was never a time where FTX genuinely had “honest profits” it was free to disperse as it wanted.
It sounds like they intermixed user deposits with operating capital from day 1, and never accounted for anything well enough to have a responsible estimate of whether they had money to donate.
It could be that if you went back to some particular snapshot in time, you could find various points where yes their actual assets exceeded their liabilities (which doesn’t count having as “assets” a bunch of shitcoins marked to market). But even at that point, I think if you go back a further they’ll have passed through points where they weren’t solvent—where they traded on user funds. This is basically what Shkreli went to jail for: he dipped into one fund to rescue another. The trades happened to work so everyone was in the black, but this still isn’t legit.
However, let’s grant the premise of your hypothetical, and imagine a world where FTX circa 2020 had always been in the black, and it granted out some of its rightly gained profits. The recipient of that grant shouldn’t need to give anything back. In that transaction FTX did have the right to give the grant, so there’s no issue.
But I really don’t think this hypothetical has much relation to the actual situation. I think it’s better for recipients of money from FTX to assume it wasn’t legit, and set anything aside that hasn’t been spent.
I think this is plausible, but I would currently take a bet against this. My best guess is that customer deposits were safe until earlier this year.
Fair enough, thanks for the explanation!
What’s your thought process on this? It’s a tough question, but any sense of the rough likelihoods?
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.