On the Sam Harris podcast MacAskill and Harris seem to think it plausible that most of the 8bn$ of losses came in Summer 2022 - that Alameda was accepting funding on behalf of FTX, was meant to transfer it but didn’t. To me this seems too generous to FTX. Does anyone know?
The framing sounds too generous, since I do not think there was any plan to transfer it at any point. But I can see a grain of truth here. As covered in OP, SBF seemed to think Alameda’s balance sheet by October 2022 was very roughly:
$18bn of illiquid assets
$6bn of liquid assets
-$15bn of customer liabilities
Then the customers started to withdraw, $5bn in liquid assets was returned, then they more or less ran out and declared bankruptcy.
So what might this have looked like before returning money to crypto lenders in June 2022? I did not find any concrete figure for what the size of those transfers was, but I’ve generally assumed around $10bn. If so then the pre-return state was:
$18bn of illiquid assets
$16bn of liquid assets
-$15bn of customer liabilities
-$10bn of crypto lender liabilities
So on this hypothetical, at this point Alameda/FTX have liquid assets exceeding customer liabilities; in a crisis of confidence they can meet a full bank run from customers, though of course at cost of still going bankrupt and blowing up the lenders.
To be clear, this is all very rough and speculative. But I can readily imagine that Alameda had sufficient liquid assets to cover customer liabilities before they repaid their other major funding source. Of course the problems of the commingled assets, investing of customer assets, lying to everyone, and various other crimes would remain.
There are some assumptions that go into what counts as “liquid”, and what valuation your assets have, that may be relevant here. One big thing that I think happened is that FTX / Alameda were holding a lot of FTT (and other similar assets), whose value was sharply correlated with perceived health of FTX, meaning that while assets may have appeared to exceed liabilities, in the event of an actual bank run, some large fraction of the assets just evaporate and you’re very predictably underwater. So just looking at naive dollar valuations isn’t sufficient here.
(Not confident how big of an issue this is or how much your numbers already took it into account)
I could have been clearer about what is being counted as what, but such FTX-related assets are all counted as illiquid in this categorisation / hypothetical. I agree that assets appearing to exceed liabilities in itself doesn’t necessarily mean much, was covered in OP in the first section.
Mostly looking at $200m ‘USD in ledger prime’, $500m ‘locked USDT’, and $500m of HOOD shares.
The $5bn returned to customers during the bank run
Since this was successfully returned, it’s almost liquid-by-definition.
I would assume this was overwhelmingly USD / stablecoins / BTC / ETH, since those collectively made up almost all of the final liabilities (SBF balance sheet over on top left)
The $???bn returned to the lenders in June 2022
I speculated $10bn in prior comment, but again this is very much just a guess.
Anyway, it’s hard to put much weight on any of this because so much is uncertain, including the accuracy of that balance sheet.
Caroline claims she was able to track their finances well enough to (a) establish that they couldn’t afford to buy out Binance and (b) calculate a -$2.7bn NAV-excluding SamCoins for Alameda and recommend against $3bn of venture investments, both in 2021. I gave some links for that in OP. Then they calculated out how to repay lenders in June 2022, creating the spreadsheet that was central to the eventual guilty findings. So I don’t think they were completely clueless when it came to 10 figure numbers or the big picture more generally.
I suppose I consider it almost a given that they did not have good financial controls on ‘mere’ 7-8 figure sums, because at this scale and complexity that would be a full time job for a professional, probably multiple professionals. Per Going Infinite, VCs knew this and tried to push Sam to hire a CFO; he mocked them as quoted in OP and refused. So in the end all four people permitted to know the true state of things had substantial other responsibilities and no accounting background.
What does it mean for “losses” to have “come” (or not) at a specific point in time in this context?
I can accept that depositor losses had not “come” if FTX would have been able to pay depositors the fiat or crypto in their accounts in a matter of a few days. I specify that time period because depositors should have understood that a few days’ delay might be necessary for non-fraud reasons like technical failure.
Beyond that, I’d probably say the loss had come but that there were prospects for mitigation. If a thief takes my car, I’d normally say the loss occurred when I was deprived of my right (here, of possession). That I might get the car back from the person to whom the thief sold, or cash compensation from the thief’s bank account, does not negate the timing of that loss.
I believe the theory is that Alamada had accepted money on behalf of FTX and FTX thought that they’d transferred it but they hadn’t. And in the summer Alameda lost it. Honestly even writing that it looks like fraud, since they should have transferred it immediately.
Even Alameda accepting money for FTX at all was probably bank fraud, even if they had transferred it immediately, because they told the banks that the accounts would not be used for that (there’s a section in the OP about this).
See also this AML / KYC explainer, which I admit I have not read all of but seems pretty good. In particular:
Many, many crimes involve lies, but most lies told are not crimes and most lies told are not recorded for forever. We did, however, make a special rule for lies told to banks: they’re potentially very serious crimes and they will be recorded with exacting precision, for years, by one of the institutions in society most capable of keeping accurate records and most findable by agents of the state.
This means that if your crime touches money, and much crime is financially motivated, and you get beyond the threshold of crime which can be done purely offline and in cash, you will at some point attempt to interface with the banking system. And you will lie to the banks, because you need bank accounts, and you could not get accounts if you told the whole truth.
The government wants you to do this. Their first choice would be you not committing crimes, but contingent on you choosing to break the law, they prefer you also lie to a bank.
(I found out about this explainer because Matt Levine at Bloomberg linked to it; a lot of what I know about financial crime in the US I learned from his Money Stuff column)
On the Sam Harris podcast MacAskill and Harris seem to think it plausible that most of the 8bn$ of losses came in Summer 2022 - that Alameda was accepting funding on behalf of FTX, was meant to transfer it but didn’t. To me this seems too generous to FTX. Does anyone know?
The framing sounds too generous, since I do not think there was any plan to transfer it at any point. But I can see a grain of truth here. As covered in OP, SBF seemed to think Alameda’s balance sheet by October 2022 was very roughly:
$18bn of illiquid assets
$6bn of liquid assets
-$15bn of customer liabilities
Then the customers started to withdraw, $5bn in liquid assets was returned, then they more or less ran out and declared bankruptcy.
So what might this have looked like before returning money to crypto lenders in June 2022? I did not find any concrete figure for what the size of those transfers was, but I’ve generally assumed around $10bn. If so then the pre-return state was:
$18bn of illiquid assets
$16bn of liquid assets
-$15bn of customer liabilities
-$10bn of crypto lender liabilities
So on this hypothetical, at this point Alameda/FTX have liquid assets exceeding customer liabilities; in a crisis of confidence they can meet a full bank run from customers, though of course at cost of still going bankrupt and blowing up the lenders.
To be clear, this is all very rough and speculative. But I can readily imagine that Alameda had sufficient liquid assets to cover customer liabilities before they repaid their other major funding source. Of course the problems of the commingled assets, investing of customer assets, lying to everyone, and various other crimes would remain.
There are some assumptions that go into what counts as “liquid”, and what valuation your assets have, that may be relevant here. One big thing that I think happened is that FTX / Alameda were holding a lot of FTT (and other similar assets), whose value was sharply correlated with perceived health of FTX, meaning that while assets may have appeared to exceed liabilities, in the event of an actual bank run, some large fraction of the assets just evaporate and you’re very predictably underwater. So just looking at naive dollar valuations isn’t sufficient here.
(Not confident how big of an issue this is or how much your numbers already took it into account)
I could have been clearer about what is being counted as what, but such FTX-related assets are all counted as illiquid in this categorisation / hypothetical. I agree that assets appearing to exceed liabilities in itself doesn’t necessarily mean much, was covered in OP in the first section.
All I’m counting as liquid here is:
Roughly $1bn of the final SBF balance sheet
Mostly looking at $200m ‘USD in ledger prime’, $500m ‘locked USDT’, and $500m of HOOD shares.
The $5bn returned to customers during the bank run
Since this was successfully returned, it’s almost liquid-by-definition.
I would assume this was overwhelmingly USD / stablecoins / BTC / ETH, since those collectively made up almost all of the final liabilities (SBF balance sheet over on top left)
The $???bn returned to the lenders in June 2022
I speculated $10bn in prior comment, but again this is very much just a guess.
Anyway, it’s hard to put much weight on any of this because so much is uncertain, including the accuracy of that balance sheet.
My sense is they weren’t able to track their finances. Would you agree with that? Is there evidence I can look at for that?
Caroline claims she was able to track their finances well enough to (a) establish that they couldn’t afford to buy out Binance and (b) calculate a -$2.7bn NAV-excluding SamCoins for Alameda and recommend against $3bn of venture investments, both in 2021. I gave some links for that in OP. Then they calculated out how to repay lenders in June 2022, creating the spreadsheet that was central to the eventual guilty findings. So I don’t think they were completely clueless when it came to 10 figure numbers or the big picture more generally.
I suppose I consider it almost a given that they did not have good financial controls on ‘mere’ 7-8 figure sums, because at this scale and complexity that would be a full time job for a professional, probably multiple professionals. Per Going Infinite, VCs knew this and tried to push Sam to hire a CFO; he mocked them as quoted in OP and refused. So in the end all four people permitted to know the true state of things had substantial other responsibilities and no accounting background.
What does it mean for “losses” to have “come” (or not) at a specific point in time in this context?
I can accept that depositor losses had not “come” if FTX would have been able to pay depositors the fiat or crypto in their accounts in a matter of a few days. I specify that time period because depositors should have understood that a few days’ delay might be necessary for non-fraud reasons like technical failure.
Beyond that, I’d probably say the loss had come but that there were prospects for mitigation. If a thief takes my car, I’d normally say the loss occurred when I was deprived of my right (here, of possession). That I might get the car back from the person to whom the thief sold, or cash compensation from the thief’s bank account, does not negate the timing of that loss.
I believe the theory is that Alamada had accepted money on behalf of FTX and FTX thought that they’d transferred it but they hadn’t. And in the summer Alameda lost it. Honestly even writing that it looks like fraud, since they should have transferred it immediately.
Even Alameda accepting money for FTX at all was probably bank fraud, even if they had transferred it immediately, because they told the banks that the accounts would not be used for that (there’s a section in the OP about this).
See also this AML / KYC explainer, which I admit I have not read all of but seems pretty good. In particular:
(I found out about this explainer because Matt Levine at Bloomberg linked to it; a lot of what I know about financial crime in the US I learned from his Money Stuff column)