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naraburns  nihil supernum  1yr ago (text post)   34971 thread views

Culture War Roundup for the week of November 28, 2022

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I have a lot of sympathy (or maybe pity) for SBF. "Stole client funds" appears to have solidified as a meme much the same way "crossed state lines" had in the Rittenhouse case.

I think it's hard for people, including technologists who haven't worked as quants, to appreciate the level of technology risk that's present in quant trading. In most of tech your biggest risk is having all of your data destroyed, and you can address that with well worn improvements in backups. You also risk being hacked but those breaches tend to be embarrassing rather than company ending. Even Sony, which was pwned as hard as you could possibly be pwned, ultimately recovered. But an additional risk in quant trading is accidentally and irrecoverably giving all of your assets away in a few seconds.

Even companies that are following all of the rules and have the right number of members of the professional management class in their ranks can destroy themselves in a matter of minutes. Knight Capital Group destroyed itself in 30 minutes by (with some creative license) failing to follow heroic practices around retiring old flags in protobufs.

Alameda/FTX had a culture that resembled "move fast and break things". They grew extremely quickly. I'm highly skeptical they were able to stand up robust accounting and practices to mitigate technology risks in so short a time.

When SBF says he didn't realize they were leveraged due to accounting error, I believe him. It's not like you can just install the QuickBooks Enterprise Crypto Derivatives Exchange plugin. All of this stuff was bespoke, and in a hurry.

When you thought you had $30b in assets and minimal liabilities, you can spend a billion or two on indulgences, charitable giving and campaign contributions. Your can say confidently you're not investing client funds. If those assets are suddenly marked down 90% you look like a fraud and you're in deep shit.

That's the nature of the business and he knew the risks. But probably in hindsight I'm sure he wishes he had been even more careful.

This isn't to say that I believe he definitely didn't commit fraud. Rather this is me saying that as someone who has pushed code that I thought accidentally gave away $10 million of my employer's money (the gigantic exhale of relief came when we learned I failed to scale by 1000x in the reporting and not the ordering), I am defaulting to blaming it on stupidity before malice.

"Stole client funds" appears to have solidified as a meme much the same way "crossed state lines" had in the Rittenhouse case.

He legit stole client's funds though. They were supposed to be idle just sitting in cold storage. Instead the guy directly routed them to Alameda (For FTX US, the bank account that you would deposit your money to is Alameda's) and gambled with them by placing huge directional bets. And that's ignoring all the real estate and donations that he has done that also came from these funds too.

Yeah. It'd be one thing if Alameda was deep underwater but funds could be recovered from FTX balances, but Alameda tried to double-down on their bets with client funds

Umm... How did he accidentally backdoored the software of the exchange so he could wire without alerts. How did he accidentally exempted Alameda from the auto liquidation algorithms. How did he accidently tapped into customer accounts?

Alameda was always a clear scam. 15% risk free is always a scam proposition.

I have a lot of sympathy (or maybe pity) for SBF. "Stole client funds" appears to have solidified as a meme much the same way "crossed state lines" had in the Rittenhouse case.

The FTX terms of service were very clear in saying that client digital assets belonged to the client, were the property of the client, were under the control of the client and were not to be loaned or traded out. "Title to your Digital Assets shall at all times remain with you and shall not transfer to FTX Trading. None of the Digital Assets in your Account are the property of, or shall or may be loaned to, FTX Trading;"

Caroline admitted that in fact they intentionally transferred/loaned these customer deposits to Alameda. That is straight up embezzlement, go directly to jail, do not pass Go, do not collect $200.

This is like a bank drilling into a customer's safe deposit box to take their gold, lending out the gold and then losing it. It's theft, not merely a trading mistake.

"Title to your Digital Assets shall at all times remain with you and shall not transfer to FTX Trading. None of the Digital Assets in your Account are the property of, or shall or may be loaned to, FTX Trading;"

And that is what he is relying on as a defence, or part of one. "FTX didn't do any of that! It was Alameda, which was totally separate!" Yeah, sure.

This is like a bank drilling into a customer's safe deposit box to take their gold, lending out the gold and then losing it. It's theft, not merely a trading mistake.

You're assuming there was a bank account called CLIENT FUNDS and another account called EXCHANGE FUNDS and they decided to raid the CLIENT FUNDS one to make bets.

What if there was actually just a gigantic intermingled account and the separation between client funds and exchange funds were records in an accounting system that, when they snapped it to reality, they realized the funds they had left were smaller than what they were liable for in client redemptions?

Someone better at financial accounting than me explain this, because it sounds like he was hiding funds:

Customer custodial fund liabilities are comprised of fiat customer deposit balances. Balances of customer crypto assets deposited were not recorded as assets on the balance sheet and are not presented.

This runs all through the bankruptcy filing when parsing the "balance sheets" provided for the various 'silos'. So whatever fund they were keeping as CUSTOMER FUNDS, they sure weren't keeping any separate records of "we took in $50 million of customer money that wanted to buy crypto and bought $X million of crypto with it, and here's a list of the customer accounts with who owns what".

That's going beyond carelessness. But if I'm interpreting it wrongly and there's an honest reason for doing this, go ahead and explain it to me. For instance, this is one of the "balance sheets" where the Customer Custodial Funds are the fiat balances, but whatever crypto assets they might have held aren't anywhere:

WRS Silo

Consolidated Assets as of September 30, 2022

Current Assets

Cash and Cash Equivalents $144,207

Restricted Cash $267,738

U.S. Dollar Denominated Stablecoins $68,035

Customer Custodial Funds $102,225

Accounts Receivable $2,978

Accounts Receivable, Related Party $71,563

Loans Receivable $250,000

Prepaid Expenses and Other Current Assets $21,448

Crypto Assets Held at Fair Value $1,026

Total Current Assets $929,220

Property and Equipment, Net $2,017

Other Non-Current Assets $429,428

Total Assets $1,360,665

(1) Amounts shown in thousands of U.S. Dollars.

(2) In the above table, assets shown reflect the elimination of intercompany entries within and between the WRS Silo and Dotcom Silo.

(3) Restricted cash at the WRS Silo is primarily comprised of approximately $250 million in restricted funds at non-Debtor LedgerX.

(4) Customer custodial fund assets are comprised of fiat customer deposit balances. Balances of customer crypto assets deposited were not >recorded as assets on the balance sheet and are not presented.

(5) Loans receivable of $250 million consists of a loan by Debtor West Realm Shires Inc. to BlockFi Inc. of $250 million in FTT tokens.

(6) Intangible assets (in the amount of $229 million) are not reflected above. These consist of values attributable to customer relationships and trade names.

(7) Goodwill balance (in the amount of $135 million) is not reflected above.

WRS Silo

Consolidated Liabilities as of September 30, 2022

Current Liabilities

Accounts Payable and Accrued Expenses $6,014

Accounts Payable, Related Party $124,221

Custodial Funds Due to Customers $102,225

Purchase Consideration Payable –

Loan Payable –

Lease Liability, Current $1,672

Crypto Asset Borrowings at Fair Value $1,737

Total Current Liabilities $235,869

Lease Liability, Non-Current $9,399

Deferred Taxes $20,185

Contract Liability $887

SAFE Note, Related Party, Non-Current $50,000

Other Non-Current Liabilities –

Total Liabilities $316,014

(1) Amounts shown in thousands of U.S. Dollars.

(2) In the above table, liabilities shown reflect the elimination of intercompany entries within and between the WRS Silo and Dotcom Silo.

(3) Customer custodial fund liabilities are comprised of fiat customer deposit balances. Balances of customer crypto assets deposited are not presented

So this is showing "We have $102,225,000 in customer funds (paper money) and we owe them that amount back" but nothing about "and we bought such-and-such amount of crypto as instructed by them", if I am interpreting this correctly.

It sounds like when you opened an account at FTX, wired them money, and then bought bitcoin with it, no bitcoin was ever necessarily bought. You just got a bitcoin-denominated claim on FTX assets.

That's where the shazam part comes in. It's not at all clear if (1) they took your money and told you it was invested but they spent it on personal loans and Sam's big nap time beanbag (2) they took your money and issued you their own tokens in magic beans (3) they took your money, bought bitcoin, and then wheeee! gambling! oopsies, lost it! never mind, try again with new monies!

Money was certainly coming in, and it was certainly going out, but the in-between part of whose money where when wasn't being tracked. Or at least, only Bankman-Fried knew where it was going. At least, that's how it seems.

The fact that all the dollars were sloshing around in a single big pool doesn't negate the fact that many of them weren't FTX'S dollars, but instead customer dollars. Instead, the act of throwing the money into a single big pool itself is evidence that FTX and SBF were extremely reckless with client funds, and didn't care that the money wasn't theirs in the first instance.

Alameda/FTX had a culture that resembled "move fast and break things". They grew extremely quickly. I'm highly skeptical they were able to stand up robust accounting and practices to mitigate technology risks in so short a time.

When SBF says he didn't realize they were leveraged due to accounting error, I believe him. It's not like you can just install the QuickBooks Enterprise Crypto Derivatives Exchange plugin. All of this stuff was bespoke, and in a hurry.

The problem is that they didn't even try to have anything in place to handle what is basic practices in running any kind of a business. The bankruptcy filing is apoplectic about this, and sure, you can write that off as "old, out-of-touch guy doesn't understand modern new Internet" but even the adulatory pieces (like the Sequoia article which I keep coming back to again and again because you can pull so many plums out of it) describes how it was being run like a college dorm. And, uh, it keeps giving EA a black eye in the process, since it was via EA that Bankman-Fried met the likes of MacAskill and got involved with EA people and used them for labour and sources of funding to start him off. Bankman-Fried was making fast and (relatively) easy money off the "kimchi premium" but like all good things, that came to an end. So what next? Well, spinning up Alameda Research and FTX into a crypto exchange!:

The first 15 people SBF hired, all from the EA pool, were packed together in a shabby, 600-square-foot walk-up, working around the clock. The kitchen was given over to stand-up desks, the closet was reserved for sleeping, and the entire space overrun with half-eaten take-out containers. It was a royal mess. But it was also the good old days, when Alameda was just kids on a high-stakes, big-money, earn-to-give commando operation. Fifty percent of Alameda’s profits were going to EA-approved charities.

“This thing couldn’t have taken off without EA,” reminisces Singh, running his hand through a shock of thick black hair. He removes his glasses to think. They’re broken: A chopstick has been Scotch taped to one of the frame’s sides, serving as a makeshift temple. “All the employees, all the funding—everything was EA to start with.”

The HQ building is distinguished by a reception desk in the microscopic lobby. The door is unlocked. There is no receptionist. I peek around the corner and into the FTX command center—29 desks in a room designed to hold 8, at most. Every desk touches two or three others. There are no aisles. To get across the room, you have to wade through (and, at times, climb over) a sea of office chairs. Walls of wide-screen monitors—two, four, even six per desk—stand in place of cubicle walls. The screens erupt like palm leaves from aluminum uprights and are oriented willy-nilly: up, down, sideways. Some screens are mounted so high they seem to hang down from the ceiling. It’s office environment as jungle, and the oddest thing about it is that no one seems to be home.

At first blush, the scene is classic startup—the kitchen full of snacks and soda; the free catered breakfasts, lunches, and dinners; the company bathroom stocked with everything you’d need to actually live at the office: Q-tips, disposable razors, Kotex. In keeping with the fashion aesthetic of senior management, the dress code is marketing-swag-meets-utilitarian-merch: gift-bag T-shirts featuring the FTX logo, nylon athletic shorts, white-cotton gym socks.

So it was chaotic and disorganised, but that doesn't mean anything more sinister than incompetence and biting off more than they could chew, right? Except again, and this is going off bits and pieces I've read online but don't have bookmarked to quote as sources, there was something going on below the surface. One of the 'co-founders' quit in 2018 because of unspecified concerns about how it was being run, as in 'not 100% honest'. Another claim is that early on, when a bunch of people who thought they were co-founders or equal partners or however they had taken it on trust that FTX 'belonged' to them all, wanted to leave and cash out what they thought they were due, turns out that Bankman-Fried had registered everything in his name and was the sole legal owner of the entire kit and kaboodle. So there are indications that he wasn't simply over-eager and not able to handle this, but had basically good intentions.

There's an entire web of entities associated with the entire FTX/Alameda operation, and Bankman-Fried holds majority ownership of most of them (again, God bless the bankruptcy filing, Mr. John J. Ray III may be old-school but he knows how to track down what he needs to know):

For purposes of managing the Debtors’ affairs, I have identified four groups of businesses, which I refer to as “Silos.” These Silos include: (a) a group composed of Debtor West Realm Shires Inc. and its Debtor and non-Debtor subsidiaries (the “WRS Silo”), which includes the businesses known as “FTX US,” “LedgerX,” “FTX US Derivatives,” “FTX US Capital Markets,” and “Embed Clearing,” among other businesses; (b) a group composed of Debtor Alameda Research LLC and its Debtor subsidiaries (the “Alameda Silo”); (c) a group composed of Debtor Clifton Bay Investments LLC, Debtor Clifton Bay Investments Ltd., Debtor Island Bay Ventures Inc. and Debtor FTX Ventures Ltd. (the “Ventures Silo”); and (d) a group composed of Debtor FTX Trading Ltd. and its Debtor and non-Debtor subsidiaries (the “Dotcom Silo”), including the exchanges doing business as “FTX.com” and similar exchanges in non-U.S. jurisdictions. These Silos together are referred to by me as the “FTX Group.”

Each of the Silos was controlled by Mr. Bankman-Fried. Minority equity interests in the Silos were held by Zixiao “Gary” Wang and Nishad Singh, the co-founders of the business along with Mr. Bankman-Fried. The WRS Silo and Dotcom Silo also have third party equity investors, including investment funds, endowments, sovereign wealth funds and families. To my knowledge, no single investor other than the co-founders owns more than 2% of the equity of any Silo.

To my knowledge, Mr. Bankman-Fried owns (a) directly, approximately 53% of the equity in Debtor West Realm Shires Inc.; (b) indirectly, approximately 75% of the equity in Debtor FTX Trading Ltd.; (c) directly, approximately 90% of the equity in Debtor Alameda Research LLC; and (d) directly, approximately 67% of the equity in Clifton Bay Investments LLC.

Also, Alameda was making loans to several of the founders/executives of FTX, and whatever about Bankman-Fried's alleged austere lifestyle, what did he do with a personal loan of $1 billion?

Related Party Loans Receivable of $4.1 billion at Alameda Research (consolidated) consisted primarily of a loan by Euclid Way Ltd. to Paper Bird Inc. (a Debtor) of $2.3 billion and three loans by Alameda Research Ltd.: one to Mr. Bankman-Fried, of $1 billion; one to Mr. Singh, of $543 million; and one to Ryan Salame, of $55 million.

He definitely got in over his head, but it's looking like he was spoofing all along and was aware that he couldn't keep the promises he was making. He figured out a way to make a quick buck (the kimchi premium) but that was never going to last, and once it ran dry, it seems like he couldn't go back to being just another quant trader looking for his old job at Jane Street back, he liked the fame and praise, as well as the money, from being the bitcoin arbitrage genius and so he looked for more ways to make fast, big bucks off crypto.

EDIT: Whoops, how could I forget the "software backdoor"? That moves things from the "well-meaning but dumb" column to the "oh yeah shady as frick" column:

There was no daily reconciliation of crypto positions. A software backdoor “conceal[ed] the misuse of customer funds”. User keys and critically sensitive data were sent around the group by an “unsecured group email account”. Group payment requests went “through an online chat platform where a disparate group of supervisors approved disbursements by responding with personalised emojis.” A paper trail is largely non-existent.

So, I also have worked in HFT Finance and am currently director of Operations for a (fully CFTC regulated) BTC futures/options exchange. I completely sympathize with losing scads of money in seconds ( my biggest hit was $70k because I misread a settlement value) and I was working the day Knight Capital imploded (I had met the VP a week earlier at a CME training session!).

Anyway, I guess my point is that there's some serious differences between running a trading firm and running an exchange and as stated below, the security of your customers' accounts is paramount, possibly more important that the actual functioning of the exchange. This is why US exchanges are required to use 3rd party clearing houses and a variety of other services to ensure the proper handling of margin, reserves, fees, open interest and settlements. We have industry wide annual disaster recovery tests, risk control evaluations and hundreds of other hoops to jump through.

I think this was a huge hit to the credibility of all things Crypto but if there's a silver lining, it's that companies like mine, who take the extra few years to not only align with CFTC regulations, but help to inform how they can be improved, will ultimately be preferred over foreign companies that lack these controls--if BTC can maintain it's value. I don't want to seem like a CFTC fanboy, but regardless of the extent to which you think they make good decisions ,their mere existence creates some sense of normalcy and safety and provides a history of precedent that is mostly transparent. (I'm not sure I'd say the same about the SEC, fwiw).

Of course the big question is what is all this stuff and what's it worth and is the value of Bitcoin actually reduced because of US government controls. I'm not sure and always wonder about what the future of this stuff will be but I feel confident in saying some sort of digital blockchain currency will perpetuate into the future.

As for SBF, it seems like there's a lot reasons to be upset with the dude and his team. They really screwed up (or maybe they pulled a fast one, I dunno). To me, this whole episode seems to be more reflective of the un-serious direction our civilization has taken where we consistently fall for the hype and never seem to do the boring research. We hand billions of dollars to kids because we feel they've been vetted by some university or other pedigree. I've spent a life surrounded by grad students and high IQ scientists, doctors and lawyers and can say emphatically: smart people are some of the dumbest people I know.

They really screwed up (or maybe they pulled a fast one, I dunno).

I think, with regard to what you say about regulation, that this was the space they were trying to exploit. Looking for unregulated markets to get that edge, with of course the attendant risk, and they couldn't keep up the promise of "we will make gazillions" because the exploit holes were getting plugged one after another, so Bankman-Fried had to take bigger and bigger risks to keep the appearance going of "this guy is a whiz who knows how to make a fortune overnight". His One Weird Trick with Alameda, exploiting the difference in the price of bitcoin between Asia and the rest of the world, only worked - and could only work - once. After that, to make the same kind of returns as fast, he tried setting up FTX

In 2017, when he was merely 25, SBF collapsed the so-called kimchi premium, an anomalous delta between the price of Bitcoin in much of Asia and its price in the rest of the world. It was a daring feat of arbitrage—SBF is the only trader known to have pulled this off in any meaningful way—one which quickly made him a billionaire and achieved the status of legend.

Because of the existence of regulations, he could only pull it off once:

SBF decided to create some accounts on different exchanges and see if he could execute the trade. He couldn’t. But, interestingly, it wasn’t because the arbitrage opportunity wasn’t there—it was. But there was so much red tape with the banking system and currency controls that it was a difficult trade to execute.

Another day of work dealing with the red-tape problem netted SBF a single round-trip trade—to Asia and back—for a $20 profit. That was it: the proof of concept. There was an opportunity to be had. SBF immediately put $50,000 of his own money to work. The first job was just getting the money into the system. The operational challenges were huge. Not just anyone can walk into a foreign bank and start wiring money out of the country every day. There are know-your-customer rules, caps on withdrawals, citizenship requirements. Even worse, to any normal bank, the constant zeroing out, then maxing out, of a cash account—with the money coming and going overseas, to and from fly-by-night Bitcoin exchanges—raised every red flag in the book. It looked like laundering. It looked like drug money. There were even monetary policy concerns: The liquidity of the South Korean won is sharply limited by the country’s central bank.

So in hindsight, the system was working as it should work, except that there was a loophole. He found the loophole, but eventually it was filled in.

With a goosed-up capital account, the money started piling up so fast that SBF placed what he refers to as “a market order for employees” to tend to the Rube Goldberg operation that kept the capital spinning. There were constant blowups with banks, which are wary of anything crypto. Crypto was so new that regulators in South Korea and elsewhere were constantly changing their mind about regulations—then making those changes retroactive. It was a swirling mess.

And that's when he seems to have decided to go for the dodgy (sorry, "risk-neutral") side:

The Bitcoin arbitrage didn’t—and couldn’t—last forever. The Japanese appetite for overpriced Bitcoin withered (or, more likely, another shadowy arbitrage outfit also found its way to the trade and collapsed it). Either way, the spread narrowed to almost nothing. But there were other trades to be had. The simple fact that crypto was new, and that the tools traders needed to handle it were still under construction, meant that there were market inefficiencies all over the place. And behind every market inefficiency is an arbitrage opportunity.

The biggest headache for Alameda wasn’t finding the opportunities, but executing the trades. At that time, when it came to crypto exchanges, the choice basically boiled down to Coinbase or Binance. Coinbase makes a point of being regulated by authorities in the U.S., but as a consequence, didn’t offer the kinds of options contracts and derivatives professional traders need to hedge their bets. Binance, on the other hand, offered the kinds of derivatives SBF was familiar with when he traded for Jane Street—but as a company, it was continually moving from country to country in an attempt to evade all jurisdictional authority. Neither exchange was particularly good to trade on.

“Everything was rickety—there was no avoiding the ricketiness. Obviously, the line between rickety and shady is a little unclear at times, but the places that seemed like they were going to steal customer funds outright, we didn’t touch,” Singh says. “Even the best players in the space were having big problems.”

At this point, mid-2019, SBF decided to double down again—and scratch his own itch. He would bet Alameda’s multimillion-dollar trading profits on a new venture: a trading exchange called FTX. It would combine Coinbase’s stolid, regulation-loving approach with the kinds of derivatives being offered by Binance and others.

Looking back with hindsight, the warning signs were already showing up, but everyone was so ready to believe in golden geese and magic beans when it came to producing huge fortunes out of thin air that they ignored them:

The problem, as Bailhe saw it, was that FTX didn’t appear to need any money. She was correct, but what she didn’t know was that SBF was starting to think about raising money anyway. Alameda had some unexpected losses due to so-called counterparty risk. Arbitrage is, in theory, riskless. But not when the rickety exchange you’re using to place your trades suddenly locks up and refuses to disburse your money. Or, worse yet, when two crypto exchanges can’t even agree on what a crypto transfer looks like, and so the act of sending crypto from one exchange to another results in tokens just disappearing into the ether. And don’t even ask about futures contracts that see their terms unilaterally changed mid-agreement: the dreaded “clawbacks.” Alameda was not immune to the exchange-level shenanigans that gave crypto as a whole its sleazy reputation. But FTX had an ambition to change that. It was built to be the exchange traders could count on. SBF needed to get the word out. He wanted FTX to be known as the respectable face of crypto. This required ad campaigns, sponsorship deals, a charitable wing—and a war chest to pay for it all.

...FTX did need money, after all. And it needed that money from credible sources so it could continue to distinguish itself from the bottom-feeders who came to crypto to fleece the suckers. So, in the summer of 2021, when FTX started to raise its Series B from a who’s who of Silicon Valley VCs, Bailhe and Lin hit the “Don’t Panic” button. “Embarrassingly, we had never tried to reach out to Sam, because we figured he didn’t need us,” Bailhe admits. “I thought they were just minting money and had absolutely no need for investors.”

Uh, yeah, about those charities...

Alameda Research, the company that generated the FTX grubstake, still exists, and its purpose seems to be to generate profits—on the order of $100 million a year today, but potentially up to a billion—that can be stuffed into the brand-new FTX Foundation. Similarly, even now, 1 percent of net FTX fees are donated to that same foundation, and FTX handles nearly $5 billion dollars’ worth of trades per day. The foundation, in turn, gives to a diversified group of EA-approved charities.

So was it all really a sham? They plugged EA as their reason for existing, but nobody from FTX ever actually showed up to meet EA people?

A cocktail party is in full swing, with about a dozen people I don’t recognize standing around. It turns out to be a mixer for the local EA community that’s been drawn to Nassau in the hopes that the FTX Foundation will fund its various altruistic ideas. The point of the party is to provide a friendly forum for the EAs who actually run EA-aligned nonprofits to meet the earn-to-give EAs at FTX who will fund them, and vice versa. The irony is that, while FTX hosts the weekly mixer—providing the venue and the beverages—it’s rare for an actual FTX employee to ever show up and mix. Presumably, they’re working too hard.

Bankman-Fried kept shifting FTX headquarters to countries deemed crypto-friendly and lax on regulations, precisely because although he needed the appearance of being solid and reliable, the real money-making was done through being 'shady' and 'rickety'. And of course, the entire house of cards eventually came tumbling down.

I think the part that makes people read this more as "stole client funds" is the extravagant spending SBF was doing even while his firm was on the brink of collapse.

The ways to read this do not preclude that he was simply mistaken, but given that a lot of that spending seemed geared towards creating a friendly political and public relations environment to operate in, it sure looks premeditated on some level.

Oh right, there's the part where he presented himself as the "regulator-friendly" face of crypto exchanges vs. the much more libertarianish and Gov-skeptical Coinbase and Kraken.

And finally the reports coming out from the New CEO are giving me the picture that things were so horribly bad over there that it was either EXTREME amounts of negligence, or perhaps an intentional effort to keep the situation so obfuscated and insecure that malsfeasance

A) Would be harder to detect, and

B) Would surely look like negligence.

https://apnews.com/article/ftx-trading-former-ceo-d2c2b881dc0eb0ec37b454674f446b52

Which is ironic if he was supposed to be the one welcoming tighter regulation.

To me, there's a plausible hypothesis that sometime this year SBF became aware of how screwed they actually were, and whilst attempting to keep the house of cards from collapsing and attract new money he was also laying the groundwork to personally escape the worst consequences by acquiring political allies, getting PR puff pieces published, and getting deeply engrained in charitable giving via the EA community, so that he wouldn't look like your stereotypical corrupt exec.

Alas the full crypto-winter made things collapse faster than expected.

Why is this plausible? Because he admits to being openly misleading on at least some levels:

In an interview with the online news outlet Vox, Bankman-Fried admitted that his previous calls for regulation of cryptocurrencies were mostly for public relations.

“Regulators, they make everything worse,” Bankman-Fried said, using an expletive for emphasis.

Here's an interview where he's called out his previous claims about being excellent at managing risk:

https://twitter.com/Ringalls86/status/1598327159055159301

Well, what happened?

As the CEO, the buck should stop with him, regardless. I don't care much whether it was ignorance, inexperience, or greedy overindulgence that led to the outcome. Either we establish actual skin in the game for people entrusted with others' money, or we have yet another institution failing to protect the average person from the misbehavior of 'elites' and 'experts.'

Why is this plausible? Because he admits to being openly misleading on at least some levels:

Well, suppose we were talking about Pfizer instead of FTX.

“Regulators, they make everything worse,” Bankman-Fried said, using an expletive for emphasis.

Do you doubt that the CEO of Pfizer has said this aloud (and worse) about the FDA in closed door meetings with a handful of trusted people and definitely not in writing? Pfizer absolutely depends on being in the FDA's good graces to survive and they almost assuredly suck them off all day long and will never say a bad word about them in public.

Is this evidence of malfeasance from Pfizer? Or are they just playing this game and they and everyone know it's bullshit?

Or do you mean that as an EA courting nerd savant he's supposed to be above all of that and the fact that he sank to at least the level of normal CEO (in this limited regard) shatters the image and makes him somehow worse?

As the CEO, the buck should stop with him, regardless. I don't care much whether it was ignorance, inexperience, or greedy overindulgence that led to the outcome. Either we establish actual skin in the game for people entrusted with others' money, or we have yet another institution failing to protect the average person from the misbehavior of 'elites' and 'experts.'

At least according to his public statements he does not deny that he's not completely responsible for it. The question, IMO, is whether or not failing spectacularly at business is a crime you go to jail for.

Which is ironic if he was supposed to be the one welcoming tighter regulation.

From what I'm piecing together from online articles he was cosying up to regulators for (1) moving to a softer regulatory body (the CFTC not the SEC) and (2) as moves in his fight with Binance, which wasn't regulated. If that worked, then Binance either had to get regulated (so losing an advantage) or stay out (and get a reputation as untrustworthy and unsafe).

Binance really pulled a reverse uno trap card move on him if that was the case.

I don't know if Binance is on the level (it seems to be a bit sketchy itself and to have avoided a similar crash by the skin of its teeth) but you have to admit, Changpeng Zhao played a blinder in his on-off fight with Bankman-Fried. First he extended the olive branch and then pulled the rug out from under Bankman-Fried just as hope of a rescue seemed within grasp, including turning off any other potential rescuers with "Sorry Sam, after taking a look at it the entire mess is too terrible for us to take on, see ya!" Truly, revenge is a dish best served cold!

I don't know. The FTT collapse seemed preordained once the Coindesk article was published, even if CZ was the catalyst that toppled the house of cards. And I think pulling out of an acquisition was inevitable for the same reason that SBF's attempts to "fundraise" after the FTT crash were doomed: their balance sheet is a black hole, and no acquirer on earth with the resources to bail out their customers would come to any other conclusion after even a cursory look. SBF's whole "well played, CZ, you won" shtick looks delusional in hindsight.

If anything, CZ probably wishes that he had just quietly sold as much of the Binance FTT holdings as he could after the Coindesk article landed. The outcome would be the same, but he wouldn't feature in the headlines, and they'd have probably recovered at least $100M or so in the sale.

Damning with faint praise. They failed to do the basic tasks of their entire purpose. They won a stupid prize from a stupid game.

This is the part that's sympathetic pitiful to me. Starting a business and failing at it badly enough that you lose customer money is just sad.

It's stupid, but not criminal. Unless you think criminally stupid is a thing.

He didn't simply "lose" customer money, as though he were a factory owner all whose warehouses burned down taking his entire stock with them, leaving nothing to sell for the lucrative Christmas quarter and the enterprise up to its ears in debt and bankrupt.

He embezzled customer funds and funnelled them into Alameda in order to shore up his failing enterprise, just like any other common swindler who loses a packet on bad stocks or slow horses, and thinks that if he just 'borrows' that cash in the customer accounts and buys/bets on the sure thing he will make it all back and can repay and nobody need ever know.

That's stupid and where it crosses over into "criminal" is "taking money that is not yours to take and you know you shouldn't do this, or at least you ought to know".

He didn't simply "lose" customer money, as though he were a factory owner all whose warehouses burned down taking his entire stock with them, leaving nothing to sell for the lucrative Christmas quarter and the enterprise up to its ears in debt and bankrupt.

Permit me a moment to torture the analogy. Suppose you have warehouse full of valuable stuff that's been freshly manufactured ready to ship to buyers that have already paid for it. You spent all of the money the customers paid you (including profit) to build even more units than your customers ordered in anticipation of future demand. Right around this time your brother calls you up and asks you hey bro can you send me like a fuckton of units I've got a whale. You say sure. You look at your inventory list and ship only the extra units to your brother.

The units for your brother burn down in transit because of an accident. Nobody had insurance, because he was your brother and you both though you could manage the risk of casualty. Fuck. Well, I guess there's no profit but at least you can ship to your customers.

Then, while processing customer fulfillment someone looks at the accounting closer and realizes there was an error in inventory, you actually accidentally also gave away a huge portion of your customer's units to your brother too, which burned down in transit. Your warehouse is almost empty but still something like half of your customers got nothing. And you have no money to pay them back with.

Did you commit a crime? Or did you just flagrantly fuck up?

Did you commit a crime? Or did you just flagrantly fuck up?

At this point, I'm betting your brother was going to burn down the warehouses for the insurance and you thought you could improve on the scam by burning the units in transit.

"I thought you had insurance on them!" "No, I thought you had the insurance, it was your dumb plan in the first place!"

If you can't refund the customers the money you have 100% commit a crime in every legal system that has ever existed. That is textbook fraud. Incompetence is no defense against defrauding people of their money.

I'm willing to bet that prosecutors will find a Rubicon moment somewhere in the chronology where SBF and whats-her-name decided to bail out Alameda with a quantity of FTX funds that would have been impossible to mistake for not-customer-money.

They failed to do the basic tasks of their entire purpose.

I hate to be dumping on EA like this and I've always thought the quokka meme was unkind and annoying, but it really does come down to 'everyone trusted Sam' and they did that because they were all EA and so of course they were all pure, high-minded individuals in this to do good for the world, right? Sam is one of us so we don't need red tape and regulations, his word is good enough, and he knows about iterated prisoner's dilemma, so he's gonna do right by us all:

Can Sun, FTX’s in-house legal counsel, tells me that his main job is to cement the many deals SBF makes on a handshake. Ninety-nine times out of a hundred, Sun says, the terms favor the other side. It’s another corporate policy derived from a rigorous logical argument: In an iterated prisoner’s dilemma, the best first move is always to cooperate. And, if the counterparty defects, “it’s better that I know this guy will screw me over now,” Sun says, “rather than later.”

Also the entire mindset around non-conventional morality/standards of behaviour. Whereas a dinosaur like me would be grimly insisting "yeah well these are the rules, so I am going to need more than a 'personalised emoji' to keep track of who's asking for money and for what, and who is granting it, so fill out these expenses claims forms IN TRIPLICATE" (I've worked/work in civil and public service, so the reason for all the red tape is to prevent shenanigans like this, and they do happen: boss guy waves through big lump of funding for personal friend/business crony and over-rides rules around it. Not when you have to fill out the forms IN TRIPLICATE, sir, I'm very sorry but them's the regulations).

I hate to be dumping on EA like this and I've always thought the quokka meme was unkind and annoying, but it really does come down to 'everyone trusted Sam' and they did that because they were all EA and so of course they were all pure, high-minded individuals in this to do good for the world, right? Sam is one of us so we don't need red tape and regulations, his word is good enough, and he knows about iterated prisoner's dilemma, so he's gonna do right by us all:

This but I'll raise you. Even if the reputation was well deserved and SBF didn't have a malicious bone in his body, it's still a bad idea to trust any one person so much. It wasn't just the EA community. VCs and other investors trusted him too. Nobody demanded a board seat? Nobody wanted independently audited financial statements? Everyone was smitten.

This is bad. Even if you're a genius and even if you're a saint, you cannot be perfect all of the time. You can still make catastrophic mistakes. Being challenged, having a process where you need to justify your request, out loud, to another human, is healthy. At the very least it's a sanity check.

Any company that scales past a certain size quickly learns that one person shouldn't have the admin password for every single system in the company -- even if they're qualified to do all of the things. Part of the reason is security, but it's also because by being the admin it's possible there's nothing in place to ever force them to go through the gatekeepers that the company has stood up for good reasons. They might not even know there are gatekeepers now!

Absolute trust is bad. I expect if Elon ever flames out spectacularly for technological reasons it'll be over something similar.

VCs and other investors trusted him too. Nobody demanded a board seat? Nobody wanted independently audited financial statements? Everyone was smitten.

That is the part I don't understand. Whatever about the EA community, where it seems his brother was part of it and brought him in that way (and hence people did trust him as "he's Gabe's brother"), these were allegedly hard-headed business people and he bowled them over with charm, though what charm he has I have no idea. He must be one hell of a persuader. Again, I have to quote the Sequoia article, because these were the people who after one flippin' Zoom call just threw money at him, and the writer of this article seemed to have contracted a massive man-crush as well:

As Covid-19 descended, Michelle Bailhe, a young gun at Sequoia Capital, and veteran partner Alfred Lin were starting to closely examine the crypto space. Lin, a no-nonsense workaholic if there ever was one, had little patience for the kind of utopianism that motivated the first wave of cryptopians. Lin’s intellect was tempered in graduate school at Stanford, where he studied statistics and price options, swaps, and derivatives. And when he thought about crypto, the question he asked himself was: What is it good for?

…Bailhe spent months researching the space full time, focusing her energies on the exchanges. She met with every founder and every company that would have her. And she built a map—a landscape, as such a document is called at Sequoia—of the entire market.

…FTX did need money, after all. And it needed that money from credible sources so it could continue to distinguish itself from the bottom-feeders who came to crypto to fleece the suckers. So, in the summer of 2021, when FTX started to raise its Series B from a who’s who of Silicon Valley VCs, Bailhe and Lin hit the “Don’t Panic” button. “Embarrassingly, we had never tried to reach out to Sam, because we figured he didn’t need us,” Bailhe admits. “I thought they were just minting money and had absolutely no need for investors.” Learning otherwise, they quickly contacted SBF and organized a last-minute Zoom call between him and the partners at Sequoia—at four California time on a hot July Friday afternoon. Bailhe was adamant, putting her reputation with the other partners on the line: “I’m like, ‘No, it’s worth it. Cancel your afternoon.’”

The Zoom went well for all concerned. SBF looked relaxed as he answered questions, talking, as he usually does, in complete paragraphs about topics of extreme complexity. Ramnik Arora, FTX’s head of product and another ex-Facebook engineer, remembers the meeting clearly: “We’re getting all these questions from Sequoia toward the end. He’s absolutely fantastic.” Arora locks eyes with me, and I am mesmerized. Arora is intense—calling to mind a Bollywood version of Adrian Brody. “Unbelievably fantastic,” he says, shaking his head.

Bailhe remembers it the same way: “We had a great meeting with Sam, but the last question, which I remember Alfred asking, was, ‘So, everything you’re building is great, but what is your long-term vision for FTX?’”

That’s when SBF told Sequoia about the so-called super-app: “I want FTX to be a place where you can do anything you want with your next dollar. You can buy bitcoin. You can send money in whatever currency to any friend anywhere in the world. You can buy a banana. You can do anything you want with your money from inside FTX.”

Suddenly, the chat window on Sequoia’s side of the Zoom lights up with partners freaking out.

“I LOVE THIS FOUNDER,” typed one partner.

“I am a 10 out of 10,” pinged another.

“YES!!!” exclaimed a third.

…“We were incredibly impressed,” Bailhe says. “It was one of those your-hair-is-blown-back type of meetings.”

…The B round raised a billion dollars. Soon afterward came the “meme round”: $420.69 million from 69 investors.

After my interview with SBF, I was convinced: I was talking to a future trillionaire. Whatever mojo he worked on the partners at Sequoia—who fell for him after one Zoom—had worked on me, too. For me, it was simply a gut feeling. I’ve been talking to founders and doing deep dives into technology companies for decades. It’s been my entire professional life as a writer. And because of that experience, there must be a pattern-matching algorithm churning away somewhere in my subconscious. I don’t know how I know, I just do. SBF is a winner.

But that wasn’t even the main thing. There was something else I felt: something in my heart, not just my gut. After sitting ten feet from him for most of the week, studying him in the human musk of the startup grind and chatting in between beanbag naps, I couldn’t shake the feeling that this guy is actually as selfless as he claims to be.

So I find myself convinced that, if SBF can keep his wits about him in the years ahead, he’s going to slay—that, just as Alameda was a stepping stone to FTX, FTX will be to the super-app. Banking will be disrupted and transformed by crypto, just as media was transformed and disrupted by the web. Something of the sort must happen eventually, as the current system, with its layers upon layers of intermediaries, is antiquated and prone to crashing—the global financial crisis of 2008 was just the latest in a long line of failures that occurred because banks didn’t actually know what was on their balance sheets. Crypto is money that can audit itself, no accountant or bookkeeper needed, and thus a financial system with the blockchain built in can, in theory, cut out most of the financial middlemen, to the advantage of all. Of course, that’s the pitch of every crypto company out there. The FTX competitive advantage? Ethical behavior. SBF is a Peter Singer–inspired utilitarian in a sea of Robert Nozick–inspired libertarians. He’s an ethical maximalist in an industry that’s overwhelmingly populated with ethical minimalists. I’m a Nozick man myself, but I know who I’d rather trust my money with: SBF, hands-down. And if he does end up saving the world as a side effect of being my banker, all the better.

Forget crypto, if someone can just figure out what Bankman-Fried has to reduce people like this to squeeing fanboys and then bottle it, that's a sure-fire fortune!

Also, I have to wonder what Michelle Bailhe is doing now; she's the one 'staked her reputation' and persuaded them to give Bankman-Fried a hearing, ouch!

Forget crypto, if someone can just figure out what Bankman-Fried has to reduce people like this to squeeing fanboys and then bottle it, that's a sure-fire fortune!

These insane asset bubbles are torture for professional asset managers obligated to deploy capital in related spaces. Sure, they can try to sit it out, but the crypto clown-car has been rolling for years now, with idiot 23-year-olds popping out as billionaires left and right. Andreessen launched a crypto fund and returned something like 5x in just a couple of years. Where's your return, investors and colleagues ask? What's your crypto strategy? How many years can you spend shifting uncomfortably in your seat and muttering "well, but, in the fullness of time..." before you make a move?

Yeah, but if your 20-something whiz kid replies, in answer to "so what can your shiny new bauble do?" that "you can buy bananas with it", then you should be smiling and closing down the Zoom window and muttering under your breath "waste of a frickin' afternoon", not going ALL CAPS I LOVE THIS GUY.

I suppose this is why I'll never be a millionaire!

Jane Street, the esteemed quant trading firm SBF and Ellison came from, have had their reputation tarnished a bit as a result. But on the other hand...

Forget crypto, if someone can just figure out what Bankman-Fried has to reduce people like this to squeeing fanboys and then bottle it, that's a sure-fire fortune!

SBF and Ellison apparently were not successful in convincing them to help build their rocket ship to the moon, so maybe they're much smarter than we thought.

Also, I have to wonder what Michelle Bailhe is doing now;

Still at Sequoia as a Partner in their Growth section. Privated Twitter around when things started falling apart. @Sequoia has been rather quiet for the last couple of weeks. They did post an update regarding their exposure to the whole mess.

He transferred huge sums to Alameda, who then lost it gambling. Where would he have thought that money was coming from, if not customer deposits?

Alameda/FTX had a culture that resembled "move fast and break things". They grew extremely quickly. I'm highly skeptical they were able to stand up robust accounting and practices to mitigate technology risks in so short a time.

When SBF says he didn't realize they were leveraged due to accounting error, I believe him. It's not like you can just install the QuickBooks Enterprise Crypto Derivatives Exchange plugin. All of this stuff was bespoke, and in a hurry.

Which is why one should not engage in seat-of-the-pants accounting when billions of investor dollars are on the line.

https://news.ycombinator.com/item?id=31239033

Some notes on the Knight Capital anecdote.

Look, I’ve been on the “FTX collapse is overblown” train since the news broke. But that’s because I start by assuming crypto is staffed by rug-pullers or outright scammers. It doesn’t really detract from the amount of damage done. The fact that he had plausible deniability means that people can feel a little less bad that they bought his magic future money, not that they can write it off.

Do you think this should make me despise SBF less? If your summary is entirely accurate, it only serves as further confirmatory evidence that all of these enterprises are bogus, extractive scams.

The more I learn, and the more Bankman-Fried shoots his mouth off in interviews (I can't access that livestream from the NYT DealBook conference because frick me if I pay them a subscription just to watch that), the worse it all looks.

I started out thinking "well, magic beans, can't depend on them, he was foolish but could have happened to anyone". Now it's "yeah the guy was scamming from the very beginning, MacAskill et al. were just huge patsies that made his eyes light up at a way of getting rich quick by mouthing platitudes about charity. Sprinkle enough rationalist jargon into his pitch and they ate it all up".

No - when running an exchange custody of your client funds is your most important responsibility. If you “misplace” them or misappropriate them that’s either intentional fraud or criminal negligence of the highest degree.

Yeah Corzine still pisses me off, he should have gotten a much much stiffer penalty imho.

When SBF says he didn't realize they were leveraged due to accounting error, I believe him. It's not like you can just install the QuickBooks Enterprise Crypto Derivatives Exchange plugin. All of this stuff was bespoke, and in a hurry.

I'm not buying your explanation here, like at all. Yeah there's not really any crypto-specific accounting software out there, but several of the issues FTX had would have been found in under an hour by any random schlub who completed a double-entry accounting course on youtube or skillshare. Having $3 billion in customer funds go into the bank account of an entirely different company (that is also owned by SBF) and never actually get transferred to FTX's accounts is beyond amateur hour. The worst accountants in the world could notice an issue that big. It was almost certainly fraud, and if it wasn't it was reckless and criminal levels of negligence.

The "accounting error" looks like "had no accounts or accounting at all". That is certainly a big error. (And what is this QuickBooks love, we use Sage at work 😁)

As for auditors, I can't do better than this gem from Mr. Ray And The Filing (at this stage, it's practically bedtime reading for me). Yeah, they had auditors, two sets of 'em even! Mr. Ray knows of one firm, but the other...

One of the firm’s auditors is “Prager Metis, a firm with which I am not familiar and whose website indicates they are the first-ever CPA firm to officially open its Metaverse headquarters in the metaverse platform Decentraland,”

When you thought you had $30b in assets and minimal liabilities, you can spend a billion or two on indulgences, charitable giving and campaign contributions. Your can say confidently you're not investing client funds.

I don't think he could, even wrongly, make that claim with any level of honesty. He didn't have 30b in assets; his clients did. FTX's revenue was high but nowhere near high enough to justify his expenditures. And most of the paper value reflected paper that couldn't be plausibly considered anywhere near its claimed worth, either nonconvertible coins or other things that could not be converted to cash.

Does that number include unrealized gains? Crypto exchanges also provide broker-style services, unlike traditional exchanges. Bitcoin grew from $4,800 in 2020 to $69,000 each by 2021. Lots of cryptocurrencies grew on that scale. The brokerage parts of FTX were almost certainly exposed to this upside.

"Stole client funds" appears to have solidified as a meme much the same way "crossed state lines" had in the Rittenhouse case.

Is it? IIRC FTX was calling for funds to be wired to Alameda all along (I'm kind of baffled that this didn't raise flags in cryptoland. But, then again, Tether is somehow still a thing.)

That right there is all we need: that is bad practice to the point of being immoral and a lie given that FTX told customers their funds were separate from Alameda. That's damning enough.

But it gets worse.

When you thought you had $30b in assets and minimal liabilities, you can spend a billion or two on indulgences, charitable giving and campaign contributions.

Except a significant portion of that value was simply coins that FTX had minted or some other shady crypto company had done the same thing. It was funny money, pumping up the valuation. And SBF himself knew this, given the statements he's made about exchanges being insolvent (so their coins are worthless) and the infamous Ponzi scheme discussion with Matt Levine where he basically admitted a lot of this shit is worthless.

The rest was customer funds that he should never have been gambling with in the first place.

SBF did not believe he had $30b in assets the way a bank that held stock, bonds and real estate did. If he claims so I'm inclined to believe he's lying, or so stupid as to not be trusted tying his laces.

So, ultimately, it doesn't matter if they actually were hacked after shit hit the fan.

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