FTX tapped into customer accounts to fund risky bets, setting up its downfall | Hacker News Reader

FTX tapped into customer accounts to fund risky bets, setting up its downfall

wsj.com

521 pointsmfiguiere709 comments

From the article: "FTX Chief Executive Sam Bankman-Fried said in investor meetings this week that Alameda owes FTX about $10 billion, people familiar with the matter said. FTX extended loans to Alameda using money that customers had deposited on the exchange for trading purposes, a decision that Mr. Bankman-Fried described as a poor judgment call, one of the people said."

In the FTX International terms of service ( https://help.ftx.com/hc/article_attachments/9719619779348/FT... ) they say that users have full title, ownership and control of digital assets. They say that the assets are the property of the user, and shall not be loaned to FTX trading, shall not be treated as they belong to FTX trading, and that users control the assets in the account.

So if they did indeed loan out customer deposits, that is just straight up criminal fraud, open and shut. This isn't like some DeFi scheme where they are working around some legal loophole or in the fine print tell you that they will probably lose your money. This is just straight up illegal under the plain vanilla theft and fraud laws of any country. This isn't even a bank run (banks at least tell you they are loaning your deposits out) -- it's a run on a U-Haul self-storage where you find out that they actually sold all the furniture in your storage unit to a pawn shop.

Banks don't actually even 'lend out' customer deposits. That's a very common misconception.

In modern bank operations, incoming fund transfers (which involve deposits) do provide liquidity that help allow the bank to be able to lend, but banks are actually levering up capital (paid-up share capital, retained earnings, etc.) to lend. The primary limit on how much they are able to lend (by Basel III regulations) is a multiple of this capital, nothing to do with the amount of deposits. Delinquent loans are therefore a loss recorded against this capital, which is shareholder equity - not customer deposits. The real problem for the bank is if more loans become delinquent than the capital they have, and they can't sell collateral for enough to cover it. Then they become insolvent. The Basel III rules increased the capital adequacy limits to try and lower the chances of banks failing after what happened in the GFC.

Bank runs are a liquidity problem because the bank's assets aren't all liquid enough to transfer out all the deposits the bank holds, but they can borrow bank reserves from other banks or the central bank in an emergency.

You’re creating a lot of confusion by ignoring cash accounting (the physical dollar I give a bank is then given to a homeowner as a mortgage) and talking about GAAP accounting, without making it clear that is what you are doing (the jargon only makes things worse).

Like sure, it’s loan to capital ratio that matters but as you point out:

> Bank runs are a liquidity problem because the bank's assets aren't all liquid enough to transfer out all the deposits the bank holds,

This is because in practice the money you give to a bank is lent out, even if it’s technically leverage against capital.

Banks cannot and do not lend out deposits. Bank deposits are a liability of the bank, they do not have it in the first place to lend out. When the bank gives someone else a $500,000 mortgage, they just create the money out of nothing and increase the customer’s bank balance. This new $500,000 liability is balanced by the new loan asset. Almost all money is of this type rather than physical currency.

But there aren't dollars given to banks mostly. Cash is a tiny fraction of the money banks handle. Most of the payment volume is millions of electronics messages between banks to debit and credit numbers in people's accounts, and only at certain times of the day the net of that (a far, far smaller amount of reserves) are actually moved.

It's actually the other way around - trying to follow a physical dollar just makes you confused, because all the actual business of the bank is happening in accounting-land (the bank's balance sheets and electronic records of customer accounts).

I didn't understand much of the jargon, but if banks don't lend out customer deposits, why are they gone when banks go bankrupt?

If they were not lent out, where did they go?

The issue is that it's very abstract, and all the mechanics of banking are accounting operations, whereas people don't tend to think that way. The deposits themselves are entries on the liability side of the bank's balance sheet. The bank doesn't store money for customers, they take whatever asset you give them and give you basically an IOU in return. So the "customer deposit" is not what you gave the bank (say if you deposited cash), it's a number in a database. Just like what is 'in' the bank's exchange settlement accounts at the central bank (e.g. Federal Reserve), and just like what is moved around in international finance. Electronic messages representing IOUs.

This is balanced by a mix of assets, which are a whole number of things. A tiny amount of cash, a small amount of central bank reserves, some in treasuries and bonds, and the assets created by the bank loans, etc.. (When the bank creates those loans, they create new deposits and a new asset in the loan, in equal amounts. So the assets and liabilities of the bank increase but the balance is zero).

So if the bank gets in trouble, it's because some of the asset mix has declined in value (like too many people have defaulted on their loans) to the point that the assets no longer cover those liabilities.

The bank has a balance sheet of assets and liabilities. When you deposit money, that’s a bank liability. When you take a loan, that’s a bank asset.

If some people don’t pay back their loans, then that loan gets written down, so the bank has fewer assets than before. A certain level of default is expected and baked into their operations.

If many people don’t pay back their loans, the bank no longer as as many assets as it expected. But it still has as many liabilities. The value of the bank will decrease, potentially to nothing.

As the grandparent notes, banks are subject to special requirements in law that define how much capital the bank needs to have to remain solvent. If the bank is no longer solvent then it can’t cover the liabilities (deposits).

In that case either the government will step in to bail the bank out, or the bank will collapse and the depositors will have to be paid from a deposit insurance scheme.

US banks have access to the Federal Reserve Bank and get funds from them at the fed funds rate. Then they add some margin and loan it out to you and me. They’re required to keep collateral and can only lend some smaller percentage of their capital. Etc etc.

Such is what I have pieced together.

Bank runs are a problem in the sense that the bank has a short term liability but they have long term assets. This is called a maturity transformation.

If a bank does a transfer to another bank it will have to send its reserves which means it might have to borrow reserves from another bank or sell its long term assets to get enough reserves and that long term asset might worth a lot or worth very little depending on the difference between it's locked in interest rate and the current interest rate.

This is why banks sell their treasuries to the Fed, they have a long duration asset and a short term liability, so they give it to the Fed to get a short term asset.

I don't know what SBF is doing but maturity transformation is probably the riskiest thing you can do as a bank and it is very likely to break down eventually unless you have a central bank that spreads around the risk. From a purists perspective banks should only use certificates of deposits to ensure that their liability duration is longer than their asset duration. Of course that is difficult in practice because nobody is buying CDs nowadays.

The difference between a bank run on the licensed banking system and a crypto exchange is that the licensed banking system has a lot of experience with these types of problems meanwhile in the cryptospace you ask your neighbor and hope he doesn't shrug.

>nothing to do with the amount of deposits

  "Assets = Liabilities + Equity" <-- should "L" be in here or not?

The ratio of assets to capital is limited to prevent levering up to infinity, ok.

But if the liabilities are mostly deposits, then it's the deposits that allow it to be a levered business at all.

Yes an no. When there was no electronic means of transactions, what banks lent out was indeed mostly customers' deposit plus their own assets.

Things became interesting when electronic transactions came into play. Banks virtually no longer have to payout any cash when they issue a loan to a client as they now only need to change two numbers: credit their asset account, and debit loan customer's cash account. So unless there were transactions paying out to another bank, there were no cash movements. So the minimum cash the bank should keep in their operation accounts is just the difference of the transactions paying out and those receiving in.

But does that mean customers' deposits are not significant to the banks? Nope. Banks actually lend out much more than their customers' deposits. How much can they lend out is basicly the deposit amount divided by the reserve rate, e.g. 20%.

This is all a roundabout way of saying that, yes, they do lend out the deposits.

Let's imagine a simple bank where my company is the sole depositor - it deposits 100k dollars. Let's assume the bank has no other assets or liabilities - its only asset is the 100k dollars I deposited, and its only liability is the 100,000 dollars it has to pay back to me.

Alice comes in and asks for a 50k dollar loan. The bank accepts the loan, and now has another asset - the 50k dollars that Alice owes them, and a new 50k dollars liability - the deposit with Alice's money. Alice than buys an antique one of a kind Russian doll with her 50k dollars from Bob, and the bank transfers this liability to Bob's bank. Alice fails to pay back her loan, and the bank becomes the owner of the antique one of a kind Russian doll worth 50k dollars.

However, someone finds a new trove of similar dolls, and this ones becomes essentially worthless. So, now the bank's assets are in total only 50k dollars, but its liabilities are still the 100k it owes me. If I try to buy another of Bob's dolls for 80k dollars, the bank must find someone willing to lend it 30k dollars, or it can't honor the transaction, even though I had deposited 100k dollars with them: they lent out my deposit.

Of course, in practice, when Alice asked to transfer her funds to Bob's bank, the bank would have not immediately used my deposit, it would have sought to obtain credit from someone else, using some of the 150k dollars in assets it had at the time as collateral. But, if it couldn't obtain such a loan fast enough, it would have indeed used money from the deposit it had.

Why do banks bother with customer deposits at all, instead of spinning out to separate companies?

Well, bank lending creates deposits, so they need to deal with deposits to actually be a bank.

There are non-bank lenders (and non-bank payment services companies that offer prepaid visa/mastercard products), but they ultimately are then customers of the bank and they are much more limited in what they can do that banks are. That's why it's crazy difficult to get a banking license.

I have seen a type of banking proposal where the bank always borrows from the central bank at x% and issues loans that way and just passes the x% cost to anyone holding the money. That means no deposits were required to begin with. If anything, cash means that the person who withdrew money would be stuck with the borrowing fee until they deposit their cash back in.

So yeah although this is still theoretical, it is indeed possible to do banking without having a single customer cash deposit.

How many years could Sam Bankman-Fried get in jail?

It is also interesting to read on his Wikipedia profile [1] about "Bankman-Fried is a supporter of effective altruism and claims to pursue earning to give as an altruistic career. He is a member of Giving What We Can and has claimed that he plans to donate the great majority of his wealth to effective charities over the course of his life.". Having direct access to a lot of money changes a some people ethics.

[1] https://en.wikipedia.org/wiki/Sam_Bankman-Fried

It's easy to be altruistic when it's not your money!

Yes. As a judge once said in a sentencing decision involving a crook with a history of philanthropy.

Like any politician railing about higher taxes and "eating the rich" - it's always never about their own money!

Almost always, the louder people are about the good they do, the worse they really are.

Giving away other people’s money is both effective and altruistic, it seems to me.

I suppose it's easier to justify this to yourself when you know most of the people whose money you're gambling with are also driven by the same greed.

The cryptocurrency bubble was very transparently built on delusion and avarice, and everyone involved knew it. There are very few truly innocent victims here.

Eventually, you run out of other people's money.

This is crazy. He was funneling customer funds to politicians too? $40m worth and was planning up to $1b.

"SBF was planning to spend up to one billion dollars to help influence 2024 presidential election campaigns. His real plan is to bankroll the candidate running against former president Donald Trump. In 2020, SBF donated $5.2 million to the Joe Biden presidential campaign.

According to Open Secrets, a platform following the money in politics, SBF is the sixth largest political contributor. The platform reports that he has made a total contribution of $39.8 million for the 2021-2022 cycle."

this doesn't get talked about much.

There should be a tracker for companies that come out of nowhere and buy themselves into the top 10 of any major politician contributors list. So much money, so fast, should be a red flag for astute investors.

Whenever a person in their mental framework have a very high moral goal, it is easy for them to justify to themselves, less-moral actions. Almost impossible for it to not happen.

Or people that are unethical use charities as a front to do illegal things without remorse

Anyone talking about how ethical they are and will be with their money is immediately moved to the top of the “sus” list.

They may do unethical or immoral things but generally they don’t do illegal things. If they do, they’re targets for prosecution.

We’ve got this imperfect system of laws which we use to govern the way we live. Its flawed but it isn’t a free for all either.

He "plans to".

Using client funds to go double or nothing is ethical in utilianism.

When the ends justify the means, anything goes.

Although this is a common criticism of utilitarianism in the Bentham traditition, it is not in fact how utilitarian ethics work as a whole. For example John Stuart Mill would say that whether or not an act in a specific case is ethical can be decided by whether or not it is in violation of a general rule, and whether or not the consequences of the general rule are positive or not. Taking clients funds and using them to go double or nothing would clearly lead to lack of trustworthiness and the consequences of this would be clearly negative in general so this is very clearly unethical according to Mill.[1]

[1] https://www.britannica.com/topic/utilitarianism-philosophy

Very few utilitarians or affective altruists (including me) consider that ethical.

So if the chain is supposed to enable "trustless" finance, what enabled Alameda to take anything? Seems Alameda and its clients should be screwed, but FTX's holders should be relatively easy to identify and restore.

But everyone seems to say that's not the case. So what broke down here? Why isn't the ledger ledgering?

FTX is a centralised exchange, it is not routing all customer trades on chain. It’s not a blockchain failure, it’s just a lack of client asset segregation by a traditional centralised trading house.

This is the correct answer. When you move your tokens into a centralised exchange like FTX, your funds are pooled with everyones deposit.

There are always deposits and wihdrawals, and of course maybe you traded your tokens for another before withdrawing. So its hard to parse how much customers deposited vs genuinely withdrew, and so you cant really tell if the exchange is short unless they declare their actual assets and liabilities.

It is a blockchain failure in that blockchains in general cannot actually support transactions like this. There's too much volume and there are fees.

It is also a regulatory failure, there are reasons this kind of dipping into customer funds is quite illegal in the US. FTX should not have been reachable by US citizens (funding should have been impossible) _or_ FTX should have been sanctioned _by_ the US. There is no reason at all that rogue financial institutions should be allowed to transact with American-regulated banks. If you want to do business in the finance sector with Americans you need to be regulated. Any argument to the contrary is very clearly contradicted by the series of crypto, defi, etc. failures in which gullible Americans lost tons of money while institutions they trusted violated common sense rules that every traditional financial institution in the US must abide by.

If you want to have freedom from this kind of regulation, you have to live in a world where these kinds of failures and frauds don't happen. Clearly they happen over and over without competent government watching them.

It is absolutely a blockchain failure. Blockchains are intentionally designed to facilitate this. They have no possible way to stop this kind of fraud. Even if you built an elaborate set of smart contracts that could audit participants, they would still not stop anything. That activity can just be moved to another chain and avoid the audits. This kind of thing can just keep happening over and over again, as it already has for the last 12 years. Remember Mt Gox? Nothing fundamental has changed about blockchains that could ever prevent this from happening. It's viewed as a feature that everyone just loses their money sometimes. The designers of blockchains want this to happen. From speaking to them, they view any kind of fraud prevention as an affront to their definition of "economic freedom" and what it entails.

The ledger ensures that the handing over of the "thing" can happen without trust in any intermediary. You still ultimately have to trust the counterparty to deliver what they promise.

Think of it like HTTPS. Nobody can sneak anything into the request, but the counterparty you're contacting could still be a fraud.

That's because it is all built on greed and a lot of lies.

The only time you actually are part of the trustless system is when you are sole custodian of any private keys necessary to access the coins.

The issue with this is that a whole lot of people have no idea what it is, how it works, how to be part of the system and how to keep keys secure and safe at the same time.

And it is fine. People can't know everything.

But one thing I know, if you buy stuff you do not understand and then you loose money, it is on you.

Maybe you're thinking of Etherium or other smart-contract systems, Etherium is a system where things like that happen automatically. With Bitcoin, the only thing you have is a secure (but static) ledger of who (which wallet/id) has what bitcoins. Any transfers have to be "manually" and just recorded by the blockchain.

Of course, the automatic processes in Etherium produce a bunch of other weird effects.

Agreed. I haven't dug into the FTX terms of service, but as you put it, the lack of regulations around crypto should be irrelevant - this is outright fraud/theft. Assuming depositors don't all get their money back (which seems like the obvious outcome), seems like some long jail terms are in order.

I mean, Madoff got 150 years and died in prison after about 10 years. While I don't see the FTX fraud in the same league (Madoff went to great lengths, for example, to generate phony statements over many years) it still sounds like fraud to the tune of billions.

> banks at least tell you they are loaning your deposits out

Side not but that’s not really how banking works. Banks create deposits when they originate loans and separately look for the assets they need in order to satisfy any regulatory requirements and net flows of funds for inter bank settlements.

https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...

No, when you take a loan out of a bank, the bank doesn't "create deposits" that it loans to you. The bank loans you existing deposits. The method by which banks end up creating money is less dramatic than you think. I wrote a long-form explainer here: https://www.attejuvonen.fi/money-out-of-thin-air/

The details of how the actual transactions occur might be different, but the general concept of fractional reserve banking is still “loaning out a portion of deposits”

https://en.wikipedia.org/wiki/Fractional-reserve_banking

But that’s the principle of how banking works.

Nobody expects that their money deposited into a savings account is going to sit in a bank vault until it’s time to go pick it up — they know the bank is going to loan it out and pocket the difference between what they charge the borrower and what they pay in interest.

Checking accounts are different in that they should have the money on hand to settle whatever spending the customers get up to but instead they practice fractional reserve deposits with a central bank to bail them out if needed.

The difference here is the crypto bros are practicing fractional reserve without someone to bail them out so depositors just get screwed.

I’m pretty ignorant when it comes to this space. Do they not have any kind of compliance structure? In hindsight it seems pretty obvious that this sort of thing would happen without it.

One thing to note is that FTX.us is an affiliated company that is onshore in the US, that does have compliance requirements, and FTX.us is currently not believed to be insolvent/bankrupt. *This may not be true, there are rumors that I haven't looked into that FTX.us is halting withdrawals, which does not bode well.*

FTX.com is some conglomeration of entities incorporated in Antigua, Bermuda, and the Bahamas[1]. FTX.com is the one that has blown up, and I won't pretend to know about the reporting requirements of such a complicated structure in multiple jurisdictions.

Also, Sam Bankman-Fried owned 90% of Alameda Research as of last year. So unless that changed(I can't find evidence it has), it looks to me like he tried to bail himself out with customers' money. Presumably he thought he could return the money eventually and no one would be the wiser. So much for that.

This is just my understanding and I am not an expert in these things.

[1] https://help.ftx.com/hc/en-us/articles/360056976411

[2] https://finance.yahoo.com/news/ftx-ceo-sam-bankman-fried-pro...

Well, they at least had compliance staff. "Most of FTX's legal and compliance staff quit Tuesday evening, people familiar with the matter told Semafor, leaving few executives who could answer questions that now loom large over the firm." https://www.semafor.com/article/11/09/2022/ftx-legal-and-com...

Pretty much every large exchange has a compliance team, btw, at least the ones with US operations.

compliance to what? all those regulations are just hindering the operation of the free market, and we started this whole crypto thing to avoid them on purpose?

That's the whole promise of the thing.

Think how much cheaper and faster cars could be, if we didn't have to spend resources on seatbelts and catalytic converters. The entrenched car hegemony are in bed with the government to keep the little guy down by requiring these things.

>Do they not have any kind of compliance structure?

Not really, but again banks don't have compliance against this either, it's just that people are less likely to withdraw their money from the bank at the same time, and when they do the gov will tell the fed to print more, and with crypto you can't print more, so a bankrun has immediate effects.

They’re not securities and they’re regulated. Theres nothing to comply to. Perhaps crypto exchanges should be regulated?

I put $100 in my Chase account. Chase goes horse betting with my money and loses it all. My account shows $0.

That's basically what happened here.

Not exactly, because banks tell you that they will loan out your money and you might not get it back, that's why you get interest on the account. They can't go horse betting, but they can loan it out. You don't have "title" over the USD in the bank reserves.

This is like if you put $100 in Chase's security deposit box, and they opened it up, took the cash, and lent it out, and then when you come to get it, they say, woops, we lost it all. That would be just straight up theft or fraud.

Well, your account still shows $100, but Chase has paused withdrawals while they "sort out liquidity issues" so it's effectively $0

If the 50-1 shot horse won the race, they would have put your $100 back in your account and put $4900 in their account

Except

1) Chase doesn't have to show you $0, you'll still see $100.

2) When you decide to spend the money, chances are the seller is also with Chase, then all Chase has to do is show you $0 and the seller +$100

3) If the seller happens to be with another bank, Chase will just go in credit with that other bank for $100. The total of such interbank accounts is around 0 as money flows both ways, and, with a decent margin, within the bank reserve amount.

Fractional-reserve banking works so well with so little "actual" reserve money that some consider it counterfeiting.

Why is this getting downvoted? its a plain speech description of what they did

I know pop culture and humor is frowned upon on HN, but https://m.youtube.com/watch?v=XhFTG7fFwc4 is just too relevant to not share for this whole situation.

This is why in regulated securities markets customer assets must be held in segregated accounts. Corzine, who knew better, ended up with an orange suit for not doing this.

Did Corzine actually go to jail? This didn't sound right to me and a quick search suggests no.

>poor judgment call

>tell people their money is safe then basically steal it by giving it to your friend

SBF needs to be thrown in jail, he won't though, for obvious reasons.

Why won't he be thrown in jail? This looks pretty open and shut. The courts will confiscate his assets and jail him. This is quite similar to what happened to Bernie Madoff.

All: please don't fulminate*. Perhaps you don't owe embattled billionaires better, but you owe this community better if you're participating in it.

HN is a site for curious conversation, so please wait to feel some curiosity before you comment.

* https://news.ycombinator.com/newsguidelines.html

> fulminate

Hearby nominated as word of the day. Excellent.

Diablo 2 taught me this. Along with my other favourite word: Gargantuan.

From Gulliver's Travels by Jonathan Swift, the lands of Lilliput and Gargantua. In one, every resident is tiny, Lilliputian, and in the other: huge, ...Gargantuan

Notably, the book reads in a very modern way, it's a bit shocking to know it was written in the 1700s when stylistically, and according to its vocabulary, it feels so very modern.

Since we're talking language, I hope you won't mind my mentioning it's 'hereby'—etymologically literally 'here'+'by'; nothing to do with hearing.

You are absolutely correct. I missed that on my proofread. Kind of lame since it is such a short post.

The older I get, the more I find myself making spelling mistakes based on word pronunciation. Sometimes I use a totally different word than what I was thinking, which makes absolutely no sense unless you read it aloud. Then you realize what happened. Hopefully it is not early onset dementia. Though it would not be -that- early.

And here I was thinking that it was just chemistry jargon, i.e. mercury fulminate.

thanks dang! Love this

I think this merits your tradition of moderating less if YC's interests are implicated.

Do you mean because there's some connection between FTX and YC? I certainly don't know of any.

Moreover, even if there were, (a) the OP has been on HN's front page for hours and is currently at #4, (b) this story has been heavily discussed on HN, with several major threads in the last few days alone, and (c) asking people not to fulminate doesn't mean they can't make substantive critical points—if anything it helps them do so.

The connection would be that popular posts in the discussion are criticizing Silicon Valley investor culture.

> Moreover, even if there were ...

Makes sense. You have a much better view of that than me.

> I think this merits your tradition of moderating less if YC's interests are implicated.

That tradition has gone out the window: https://twitter.com/breckyunits/status/1590858862504316928

As far as I'm concerned, that tradition is exactly as it has always been.

If you're going to make a claim like that you should say why, and post links, so readers can make up their own minds.

Sorry, no. If I can’t protest here, where can I protest? Is this supposed to be a safe space for billionaires? It’s my community, too. Don’t censor me in the name of curiosities. This isn’t Iran.

This is one of those times when it's helpful to know what you're optimizing for. On HN we have the luxury of a single principle that we're optimizing for: intellectual curiosity. (See https://news.ycombinator.com/newsguidelines.html plus lots of past explanations: https://hn.algolia.com/?dateRange=all&page=0&prefix=true&sor...)

This makes it easier to answer questions that would otherwise feel like hard tradeoffs. In this case: should people be shouting angrily in a protesty way in HN threads? No—but not because protest is bad or unimportant. It's just incompatible with intellectual curiosity, and since we're optimizing for the latter, it takes precedence.

When people are protesting or doing battle, they tend to either repeat their most effective phrases (slogans, etc.) or to spontaneously vent their strong emotions (name-calling, etc.). But repetition and name-calling are clearly bad for curiosity. I believe these are even different neurological states: high indignation comes with a level of arousal that rules out the relaxed playfulness that curious conversation depends on.

I hope it's clear that this isn't a judgment about protest or indignation in general—those are as human as anything else and when they're called for they're called for. It's just relative to the particular mandate of this particular site. We're trying to play one game rather than the other.

Is that censorship? Well, that word has become so stretchy that you can apply it however you feel. But I'd say no, for the same reason that chess isn't crokinole. It isn't censorship to say you don't get to whack your opponent's bishop.

You've clearly and concisely stated what I've been struggling to verbalize for several years now: that heated emotional flamewars aren't discouraged/forbidden on HN because emotion is bad (which is a strawman often brought up), but because HN is not the place for that, because we optimize for intellectual curiosity.

Just like programming languages - HN is neither the only forum in existence, nor does it need to serve the needs of every human in existence.

this is one of those times, dang, where you're fanning the flames for your own entertainment.

Please see the HN Guidelines: https://news.ycombinator.com/newsguidelines.html

"Please don't use Hacker News for political or ideological battle. It tramples curiosity."

I checked my FTX account, only had play money in there. But, despite all the people saying "FTX is fine, withdrawls still work, it's all fine" - nope, everything is disabled, withdrawls show $0.10 avaialble to withdrawl (out of a few hundred I had in actual US cash, plus the BTC and doge transactions are all disabled. This is very serious for many people - there are some who had substantial amounts of money, including my friend who is at the moment suicidal, a lot of his identity and worth was tied up in crypto. Please offer support to those you know who are affected by this scam, and do not encourage or enable anyone else to dablle more than throwaway money into anything crypto

This has nothing to do with crypto, it has to do with people sending their money to a con man. If your friend had "his identity tied up in crypto", then why wasn't he holding it himself?

> nothing to do with crypto, it has to do with people sending their money to a con man

You've just described 99% of crypto though.

> If your friend had "his identity tied up in crypto", then why wasn't he holding it himself?

Some people love day trading crypto. They keep funds on exchanges so they can trade immediately and not deal with constant back and forth transactions with their own wallet.

> why wasn't he holding it himself?

Here's how my story played out -- maybe there are a million stories like me I'm not sure.

Bought Monero on Voyager (because my electricity costs are high where I live and I didn't want to mine it). Planned to immediately transfer it out from Voyager to my offline wallet. Saw that Voyager "didn't yet support transferring out" for that cryptocurrency but would soon. Cool, I'll just wait.

A month or so later, Voyager goes under and I'll probably get nothing or pennies on the dollar.

Genuinely curious, what was the right course of action to buy Monero in a low-overhead, safe way?

Crypto is like the wild west by design. Chaos enables con men. They aren't unrelated

Yup. Not your wallet, not your money.

FTX.us or intl?

ftx.us - checked again, at least my account is still unable to withdraw.

Trading halt announcement at FTX.US.[1] Announcement says withdrawals still up. But Twitter messages indicate withdrawals are not working.

FTX Japan shut down by order of Japan Financial Services Agency.[2]

FTX.intl processing some withdrawals, according to blockchain.[3] A few lucky people got to exit.

Way too much happening to mention here. Just use Google to search "FTX" and limit search to 1 day. Margin calls all over crypto land. JP Morgan says expect 50% drop across the board in crypto. Around 10 AM PST, somebody just pulled a billion dollars out of Tether. Word of the day: "deleveraging".

[1] https://ftx.us/home

[2] https://www.msn.com/en-us/money/companies/japan-cracks-down-...

[3] https://www.msn.com/en-us/money/companies/crypto-exchange-ft...

SBF tweeted[1] not too long ago that FTX.us was safe and was 100% liquid. I suppose that wasn't the case?

[1] https://twitter.com/SBF_FTX/status/1590709195892195329?t=tQR...

Submit a withdrawal order and find out.

He doesn’t get it. The entire brand is tarnished. Nothing to salvage.

Wasn't he tweeting the same thing about FTX proper a couple of days before that? Why would you think this time is any more trustworthy?

If FTX were a real company that Tweet would be enough to be put in handcuffs by the SEC.

Ftx.us is apperantly a totally separate exchange

> JP Morgan says expect 50% drop across the board in crypto. Around 10 AM PST, somebody just pulled a billion dollars out of Tether.

Meanwhile, aggregate of the cryptocurrency market is up 5.38% over the last day, Tether recovered landing on 0.9999 USD after 4-5 hours of the drop hitting bottom at 0.9818 USD, which was nowhere near previous all-time low Tether has hit previously.

In other words, everyone screams "panic!" while the world quietly moves on.

Tether will stay very close to 1.0 until, some day, they can't make a redemption. The number to watch is their "market cap". Note that Tether can make that go up by minting more Tether, but when you see it go down, that usually means someone cashed out.

Stablecoins have only two stable points: 1 and 0.

FTX let people withdraw 100% of the time until they didn’t.

Tether will unravel, it's only a) a matter of time, and b) whether it happens in public, or behind closed doors in smoky rooms.

Because CPI looks better than expected. The entire market goes up.

[2] https://archive.ph/d6uzR

This is one of the reasons downturns in markets are good. If the market would've just kept growing then SBF likely could've kept his ponzi scheme afloat without anyone noticing.

The 2008 recession is what really stopped Bernie Madoff.

>ponzi scheme

This is not a ponzi scheme. This is a good old "not firewalling your customer's money and your investment money" that everyone suffered from in 2008. The situation is cataphoric enough without people mis-using terms.

>The first $10,000 USD value in your deposit wallets will earn 8% APY

(This is what FTX was offering customers)

And now we know the accounts weren't actually covered by real money (or "value" as they called it). So when person X was asking FTX for their money back, FTX would send person X+1's money to cover

Sounds like a Ponzi to me

Even in 2008 that is not what happened.

Tell me which retail brokerages lost their customers assets because they gambled them away?

There is no glossing over the fact that all these crypto explosions are a result of largely re-implementing a pre-Fed, pre-FDIC, pre Great Depression style banking system with all its long-patched defects.

They used FTT as collateral for loans used on trading activities that boosted FTT value

It's not literally a Ponzi, but it's Ponzi adjacent behavior, like what Bill Hwang did.

>"not firewalling your customer's money and your investment money" that everyone suffered from in 2008

... cite for this, please. I don't recall there being any significant client money problems in that period.

What makes it not a ponzi? Is the idea that "the possibility that number may go up" the only thing to distinguish it?

Yes, downturns help expose "the bezzle": the gap between perceived value and long-term economic value.

I first learned the term "bezzle" here on Hacker News and read more about it in the article "Why the Bezzle Matters to the Economy": https://carnegieendowment.org/chinafinancialmarkets/85179

It's an interesting read to those who enjoy economics.

Sure, yet, these people will mostly manage to escape. Have no doubt they all have few mils on side and they are ready to lie to themselves all sort of excuses to make them feel better spending them. Sam apparently "miss-labeled" some accounts all in pursuit to give more to charity i am pretty sure.

It’s only when the tide goes out that you learn who has been swimming naked.

Warren Buffett

"Only when the tide goes out do you discover who's been swimming naked"

Remarkable that a venture-backed company can loan $10B to the founder's hedge fund without running into some sort of board/corporate sign-off that's required to literally execute the agreement/fund transfer.

They had no real board. They had no real governance. What's amazing is that large venture funds would put this much money into this kind of company without any board seats.

He simultaneously played League of Legends when pitching to VC on Zoom call. That indicated to VC how serious and responsible he was. They unanimously and immediately signed off funding merely out of awe.

Really shows how little oversight any of these venture funds have.

They come across more like frat bros with huge pockets casually giving away billions under a pinky promise of eventual returns.

At this point, they are doing the same level of DD as those degens in WSB.

But I guess you don't have much leverage when the fed is printing trillions for years and we end up with dozens of Zuckerberg types, too much power and no oversight to hold them accountable.

WSJ has another article with more information on that:

https://www.wsj.com/articles/silicon-valley-poured-money-int...

"Silicon Valley Poured Money Into FTX, With Few Strings Attached"

"A marquee roster of investors from Silicon Valley and Wall Street swarmed FTX. They invested nearly $2 billion with few strings attached and no oversight on the cryptocurrency exchange’s board, promoting it as a safe bet."

Anyhow, The board of directors consisted of SBF until the summer of 2021. Then 2 "independent" directors were added, 1 was an FTX executive, the other was a lawyer in Antigua

The recent Sebastian Mallaby book about VC charts the growth of this "founder rules" approach.

In the age of ESG, it turns out that the "G" part is being ignored totally (because it counter to the interests of insiders) but the "E" and "S" is ever more important (because it is in the interests of insiders) despite it doing little to help improve returns (SBF was the king of "S"...might there be a correlation between saying you are more ethical than anyone and permitting yourself to steal from customers?).

It feels like a very Adam Neumann move.

Sequoia did a nauseating, hilarious puff piece on him a couple months ago and this guy sounds like Adam Neumann’s second coming.

https://www.sequoiacap.com/article/sam-bankman-fried-spotlig...

Self dealing

The people who invest in venture funds need to demand better governance for portfolio companies, otherwise this will continue to happen.

Sequioa, who invested in FTX quite loudly, reported to their LPs that they only lost 150MM in their fund that had 7.5B in realized gains. Going off their letter they took 5B and turned it into 12.5B for a return of 150%[0].

After this spectacular blowup barely put a dent in their returns, why would LPs demand anything? Sequioa will just tell them "hey it's the name of the game, there are some losers who go bankrupt and winners who return the entire fund several times over".

If Sequioa took a massive markdown on FTX that would be a different story. However they came out unscathed and looks like they are managed well despite fellating SBF quite openly. What would you even demand of them given that they didn't lose much money? They probably lose even more money on companies that end up just not being successful in the first place. You can't ask them to not invest in risky business, thats the whole point of VC.

[0] Could be misinterpreting the letter, they said FTX was 3% of commited capital, 150M / 3% = 5B, and they had 7.5B of realized and unrealized gains.

I generally agree, but it's not "people," it's institutional funds (endowments, pension funds, etc). The way venture returns are distributed is that a small number of funds (of which Sequioia has historically been one) stand out from the rest in terms of returns. With the lengthy bull market that we have had until this year, VC was a high-performing asset class. Pension fund and endowment managers felt they needed to be in the asset class, which really meant being in those top 10 or so funds that were generating outsized returns. When LPs are competing to get into a few top funds, the funds have all the leverage. My sense is that LPs don't feel like they can make any kind of demands on the VC funds, for fear of being blocked out of investing.

Now we have a market turn and VC is unlikely to sustain the returns of the past decade. That may shift the leverage, but history suggests that LPs will still not put any kind of meaningful pressure on the top funds to do anything different.

I mentioned this is another reply, so sorry for anyone who reads both.

I would read Mallaby's history of the VC industry to see why this isn't possible. Around 1997 the balance of power shifted heavily in favour of founders (this is when dual-share class) started, and they stopped demanding seats on the board.

Iirc, Sequoia was a firm that held out (along with other old-style funds), they missed out on a lot of companies over the next ten years so ended up racing to the bottom...this is how we got here.

Btw, just on corporate governance...it is the most important factor for a company. A lot of the issues with corporates we have today are due to poor oversight from shareholders (not helped by passive). If corporate governance isn't working, capitalism won't work either.

The number of 'major red flags' here is shocking, and frankly, you'd think after 2008 that firms would have to hire, you know, an 'accountant'.

My god, there are so many things that were there to have been a modicum of parental oversight, the situation would not have festered.

This one is going to stain Web3, Defi, and notably VC.

Hey - VC are the partners of innovators so it's not good to see them in these situations.

Partly they are victims, but partly, they are responsible obviously.

We should note, this has a lot to do with the magical 'made up' nature of tokens. The entire Ponzi was based on tokens worth nothing, with massive leverage. It's a lot of money that VC cab hardly take their eyes off of. Why invest in 'doing stuff' when you can just 'make something up' and say it's worth billions? Given the way VC portfolios work they are going to run at that stampede because of the money flowing into it.

It's a systemic problem.

It would help if there were more regulations around this - at least to dampen he leverage. More transparency, higher interest rates will help as well.

Would this even be possible at any hedge fund?

I was partner at a couple of hedge funds. Every fund has its own docs, but normally it is going to restrict you to sending money to specific things, you can't just do anything you want. Certainly you cannot just lend it to yourself if you want serious investors, they do a whole due diligence questionnaire about what sign-off is needed, who can sign, audits, and so on.

I remember a friend with a fund, he was in a short-term pickle waiting for some money to bridge a house purchase. Didn't even cross his mind to lend it to himself and pay it back two weeks later, even though that would have been nearly risk free and a minuscule proportion of the fund.

Not a hedge fund but MF Global/Jon Corzine was an interesting similar incident that was not crypto-related.

https://en.wikipedia.org/wiki/Jon_Corzine

> Corzine was subpoenaed to appear before a House committee on December 8, 2011, to answer questions regarding 1.2 billion dollars of missing money from MF Global client accounts. He testified before the committee, "I simply do not know where the money is, or why the accounts have not been reconciled to date," and that given the number of money transfers in the final days of trading at MF Global, he didn't know specifics of the movement of the funds. He also denied authorizing any misuse of customer funds.

> On the day of MF Global's bankruptcy, a Bloomberg reporter wrote "Jon Corzine's risk appetite helped destroy his firm. It also provided an object lesson for Paul Volcker's campaign against proprietary trading on Wall Street."

Of course not. Crypto is a vehicle for tech founders to do all the unethical things that are banned in traditional finance without technically breaking the law.

can do only in crypto

For those wondering why people would store coins on centralised exchanges, the answer is simply because you are heavily incentivised to do so. When Ethereum was congested and simple transfers were costing upwards of $200 - FTX offered a number of free ERC20 withdrawals if you staked a certain amount of FTT.

in addition to that - the more FTT you staked the more preferential treatment you got in access to IDO's and referral fees, when you couple this with a platform that felt "safe" and "trustworthy" - this was a recipe for disaster.

I've been in Crypto a long time and previous rugs always felt a bit sketchy, like it was an unfinished product, you put up with it but your risk tolerance was lower as those platforms felt like they might disappear at any one point.

FTX felt different - and this is why there are people with 8 figures+ stuck on there right now.

It feels like every time there's a crypto exchange exit-scam/fail/crash/run/fraud, someone says "but this one felt safe/different/better than the others".

I (genuinely) wonder how many more times that will happen?

Name one other one? There hasnt been one, there have been custodial lending platforms that have had all the credentials - this isn't the same.

Imagine the second largest bank in your country just up and dissolving with everyones money - that is exactly how this feels to those of us who have been in this space a while.

Well people only know what they know. Nothing is completely safe.

You will likely continue to find people who say that until the day you die.

Another reason is that many people in crypto trade often. They don’t intend to hold any coins for long. Withdrawing and depositing frequently will cost a ton in that case.

To summarize, the WSJ article says he took $10B of $16B in customer deposits to FTX and used that to finance his hedge fund.

...and then the hedge fund lost the whole $10B. Corruption AND incompetence.

Looks like much of it was spent filling in the bezzle left from the early blow-ups in terra, etc. He was trying to prop up the whole ecosystem.

should definitely serve some jail time

or just spent it?

Damn, that's nearly 2/3. Insane.

You know those corner stores that act as Western Union/Moneygram agents? They have to follow stronger regulations (KYC/AML/BSA) and are audited on a quarterly basis by WU/MG to ensure there is no co-mingling of funds.

A bodega conducts better financial oversight than these masters of the cryptoverse.

Did SBF have any cats in the office? That should have been a warning sign.

Are you referencing Tibanne?!

Probably a good time to mention the original mission statement of Bitcoin was to custody your own money without counterparty risk. Time and time again we have seen altcoin ponzis and exchanges collapse under the weight of their fractional reserve. What is still working? Bitcoin.

Greed in this space causes people to act with a more short term view for quick profits while ignoring fundamentals. Over and over again.

This has nothing to do with Bitcoin or not. Bitcoin was probably one of FTXs largest assets. Every cryptocurrency allows self custody, as this is core to the concept.

Well, their largest asset was probably their own token. Once that went to zero, maybe it was Bitcoin, but I doubt it. Tether more likely.

Remember, this was a casino, not really an exchange.

It has everything to do with Bitcoin.

If this was all done on-chain, users would have sole custody over their funds and no one else in the entire world, including SBF, would be able to move them or loan them out.

Is Bitcoin history a metaphor for "society needs to learn more about technology"?

Not your keys, not your coins.

The toxic bitcoin maximalists have been waiting patiently for years knowing something like this would inevitably happen again.

Not your keys, not your coins.

The Twitter thread from SBF is even better where he admits he messed up. And still trying to throw jabs at Binance here and there like it’s their fault they’re here. Unbelievable.

To me the funniest part is him saying "I should've done better", as if he was attempting something worthwhile, but failed. No, he stole his customers and "done better" would've been doing the opposite.

He also attempted to claim that the problem was due to an issue with the "labelling" of funds...this story leaks, we know he has been telling people he lent the money to Alameda, and in these tweets he is now saying that he has a problem expressing what happened...

...I feel bad for him because he obviously believes his own bullshit, but he should have just said nothing rather than lie about what happened and pull the Mr. Magoo act.

I highly doubt he believes it. He has been living a lie for months now and can't bring himself to come clean about the deception. So he instead is "admitting" to vanilla incompetence and confusion and, most importantly, continuing to tell the lie that this is a liquidity issue at heart and not a solvency issue. That may have been the case a few weeks ago, but is palpably false at this point.

Even Saul Goodman would have told him to shut up.

Suggesting Saul was actually a bad lawyer? He always told his clients to shut up.

In case anyone wants a link to the thread, here it is: https://twitter.com/SBF_FTX/status/1590709166515310593?s=20&...

It was actually in an adjacent paywalled article (https://www.wsj.com/livecoverage/stock-market-news-today-11-...). If anyone knows a way to bypass that paywall, I'd be curious to read the rest.

That article is miniscule and mostly just links to the tweets. After the 3 sentence preview which is visible to anyone it has 1 more sentence (a quote from SBF) then "Other highlights from his series of tweets" followed by 5 short 1 sentence bullet points summarizing things from the tweets. Then an embed of the first tweet wraps it up.

Usually you can get a copy of the article by going to archive.ph and pasting the paywalled link.

It may not be most ethical thing to do but if you want to read an article or two behind a paywall, I don't think it is insane to do.

This article though seems to be some kind of a live feed where there is not really a lot archived - maybe it works better for paying users viewing things live.

Pop it into archive.is or dot tv

This is the part of the thread that killed me: "FTX International currently has a total market value of assets/collateral higher than client deposits (moves with prices!)."

He is counting the 10 billion he loaned to himself and then lost as an asset for FTX that just happens to be illiquid right now. Yeah it's very illiquid lol

I think he's in the anger and bargaining phases of it all. I expect he will either kill himself or go to prison when his fraud laid out. "I messed up" isn't going to get him out of this. This story has just begun.

Reminds me of this: https://youtu.be/HQhmGIW7MVU

Also, does he not have lawyers or public relations?

I'm sure he thinks he doesn't need one because he is 'acting in good faith'. Completely delusional.

For all those who want to draw parallels to the banking industry, Reg O delineates rules for lending to insiders.

https://www.federalreserve.gov/supervisionreg/legalinterpret...

> Reg O delineates rules for lending to insiders

Also, in case this isn't painfully obvious, broker's can't make prop bets using client assets. And exchanges can't make prop bets using their flows.

The Guardian:

"A person familiar with the dealings between FTX and Binance described the books as a “black hole” where it was impossible to differentiate between the assets and liabilities of FTX and those of Alameda Research. This person spoke on condition of anonymity because they weren’t authorized to speak publicly about the matter. This person said Bankman-Fried had committed the “ultimate sin” by tapping into FTX’s custodial assets to fund Alameda Research."[1]

There are people trying to blame Binance for the collapse. That's bogus. If FTX was stealing customer funds, it's entirely FTX's fault.

Interesting info: Bankman-Fried owns part of Robinhood Financial.[2] Which will probably be audited real soon to see if he somehow took money out of there.

This is the kind of thing prosecutors refer to as an "ongoing criminal enterprise".

[1] https://www.theguardian.com/technology/2022/nov/10/ftx-crypt...

[2] https://fortune.com/crypto/2022/11/09/the-winners-and-losers...

> FTX Chief Executive Sam Bankman-Fried told an investor this week that Alameda owes FTX about $10 billion, the person said. FTX extended loans to Alameda using money that customers had deposited on the exchange for trading purposes, a decision that Mr. Bankman-Fried described as a poor judgment call, according to the person.

This raises the question of who else Alameda owes. It's a sign of the times that $10 billion doesn't seem like a lot today, but it's way more than the Long Term Capital Management debacle:

> LTCM was initially successful, with annualized returns (after fees) of around 21% in its first year, 43% in its second year and 41% in its third year. However, in 1998 it lost $4.6 billion in less than four months due to a combination of high leverage and exposure to the 1997 Asian financial crisis and 1998 Russian financial crisis.[4] The master hedge fund, Long-Term Capital Portfolio L.P., collapsed soon thereafter, leading to an agreement on September 23, 1998, among 14 financial institutions for a $3.65 billion recapitalization under the supervision of the Federal Reserve.[1] The fund was liquidated and dissolved in early 2000.

https://en.wikipedia.org/wiki/Long-Term_Capital_Management

When it comes to things like this, the connectivity of the money seems at least as important as the quantity.

Cumulative inflation since 1998 is about ~83%, so that's part of it. There are other parallels to LTCM, too. Once the Alameda balance sheet leaked, people could see exactly what coins they had and where they were vulnerable. And most of the risk came from their FTT token, where their holdings would have taken years to sell at the average daily value traded. Thus other traders could start shorting FTT to catalyze the fall, just like what happened to LTCM's illiquid "off the run" bond positions:

(Source: https://www.wsj.com/articles/SB968629287803799708 ) ____________

Badly in need of a lift, Meriwether called an old friend, Vinny Mattone, who had been the fund's first contact at Bear Stearns, LTCM's clearing broker. Mattone, who had retired, was everything that J.M.'s elegant professors were not. He wore a gold chain and a pinkie ring, and he showed up at Long-Term in a black silk shirt, open at the chest. He looked as if he weighed 300 pounds. Unlike J.M.'s strangely wooden partners, Mattone saw markets as exquisitely human institutions -- inherently volatile, ever-fallible.

"Where are you?" Mattone asked bluntly.

"We're down by half," Meriwether said.

"You're finished," Mattone replied, as if this conclusion needed no explanation.

For the first time, Meriwether sounded worried. "What are you talking about? We still have two billion. We have half -- we have Soros."

Mattone smiled sadly. "When you're down by half, people figure you can go down all the way. They're going to push the market against you. They're not going to roll [refinance] your trades. You're finished."

LTCM was a problem because everyone lent to them since they had lots of government bonds to hock as collateral. So that 4.6 billion loss due to impairment of the value of the Russian loans was a huge problem.

By contrast no bank would have touched Alameda with a ten foot pole. Loan to a crypto fund?

> By contrast no bank would have touched Alameda with a ten foot pole.

Would you believe... a pension fund is involved with FTX?

https://fortune.com/2022/11/10/canadian-teachers-could-have-...

I doubt the full extent of the connections to Alameda (or FTX) have been disclosed.

FTX extended loans to Alameda using money that customers had deposited on the exchange for trading purposes

If that's true, Bankman-Fried should go to jail. It wasn't FTX's money to lend.

Whenever something like this happens, I'm often surprised by the relative lack of outrage. People are too forgiving. I noticed a lot of comments about SBF along the lines of "I know he's a good guy..." or "Everyone makes mistakes" or "Everyone deserves a second chance..."

F that. Society has created an environment where it's better to ask for forgiveness later than it is to ask for permission prior. Our society systematically rewards deception and punishes honesty. There are a large bunch of apologists who keep showing up saying "Oh but deep down, such and such is a good guy" - If we keep going down that path of pretending that people's actions don't define their true character, we will soon run out of actual good guys... Or those that remain will be backed into a corner and forced to fight to survive.

SBF has turned out to be a complete psychopath. It’s scary. Someone who was quite trusted in a number of circles turns out to be a liar, fraud, and just knowingly stealing from retail.

He should be behind bars.

FTX is going into liquidation in Bahamas: https://www.scb.gov.bs/wp-content/uploads/2022/11/Securities...

Mr. Brian Simms, K.C. (Lennox Paton Counsel and Attorney-at Law) was appointed as provisional liquidator. Additionally, the powers of the directors of FDM have been suspended and no assets of FDM, client assets or trust assets held by FDM, can be transferred, assigned or otherwise dealt with, without the written approval of the provisional liquidator.

I have no sympathy for Sequoia et al and the various celebrities that lost their money betting on FTX. I feel terrible for the average retail investor that got duped by the string of endorsements that made FTX seem "legitimate".

I'm hoping the little guy is able to get their money out before investors do, but history makes this seem unlikely.

So they stole 10 billion. It’s always a good deal to invest other people’s money into risky bets then take all the profit. If you lose you stick them with the losses.

A lot of people should go to jail but probably won’t.

They only should go to jail if the US had that actual ideology. Remember, every decision made by the state is political, these people not getting punished is everything working exactly as intended

No idea why you're being downvoted. It is a fact that he donated ~40M to politicians this election cycle.[1] If I had to guess the donations were part of a hedge to avoid accountability for this scam he ran.

[1]https://www.opensecrets.org/elections-overview/biggest-donor...

Where does did all that money go? Is it part of a zero sum game and in someone else's hands now, did it evaporate, or a combination of the two?

Literally ~$50 million went straight to the Democratic Party as direct campaign donations.

He stated he intended to give up to $1 billion to democrats.

Millions more went to various other people in power who will now decide the fate of SBF.

Sources:

https://www.cnbc.com/2022/10/14/sam-bankman-fried-backtracks...

His Wikipedia page.

Interesting. I was reading his bio and noticed the do-gooder activities he and his family are involved with. Funny how they end up defrauding people in the long run.

Could creditors make a case those were stolen funds and try to claw some back?

I didn't know it was that much - do you have a source for it?

That’s the 10 billion dollar question.

I was reflecting on this recently in the Chinese property bubble. I suspect firms that take customer deposits and use them to speculate of future growth grow much quicker in a boom environment than firms that handle the deposits responsibly. Crowding out responsible firms.

This has lead to Chinese property developers spending all the money they collected to build homes on new parcels of lands and even soccer teams instead of finishing those homes. After all there will always be new money coming in.

In the crypto space this has lead exchange firms that speculate with their customers assets to out compete the safe approach providing exchange services and collecting a commission.

How do you lose $10B in a few years trading? That’s truly impressive.

“We lose money on every trade but make it up on volume”

Oversimplification, but: Alameda made a lot of money on paper, kept mostly in incredibly volatile assets. Over the last week, it turned out that those assets were worth very little.

I'll bet they lost 90% of that money in the last 7 months. They were probably doing fine during the bull market.

Some of them are definitely Luna/UST

This seems to be a slam dunk for prison time.

Only thing I can think of is if these companies are international so he doesnt get prosecuted in the US under US laws. Thats his only hope.

Well, his ultimate hedge is that both his parents are Stanford law professors. Slam dunk unlikely.

He was also the 6th largest political donor for the 2022 election cycle.

The CEO of FTX said "we tend not to have stop losses... I'm trying to think of a good example of a trade where I've lost a ton of money... I probably don't want to go into specifics with that"

https://twitter.com/ApeDurden/status/1590912098871435265

How did this place end up managing billions of dollars?

She's the CEO of Alameda Research. SBF is the CEO of FTX.

You're right, thanks for the correction.

That's the exact example why cryptos solved no problems at all. Centralized institutions are there for a reason, and obviously cryptos failed to recognize that. And soon exchanges were created which are in the exact role of banks etc. they swore to remove but with almost no regulations. I would be surprised if no such things happen at all.

Decentralized exchanges exist that process about the same volume as centralized exchanges, without centralizing trust to a single entity.

What do you mean by "Decentralized exchanges"? If decentralization ever worked, I don't believe exchanges would be necessary.

Customers with assets in custodial accounts of an exchange that goes bankrupt are likely general unsecured creditors, and the assets are probably property of the bankruptcy estate. https://www.creditslips.org/creditslips/2022/02/what-happens...

This means that, in the line of people to get paid out of those assets, you're not even at the front. Custodial accounts leave you with little protection.

They aren’t custodial accounts if you have to wait for bankruptcy proceeding to get your assets back assuming they have your assets.

Apparently he was playing league of legends whilst the market was falling apart

What I'd like is a tool on Hacker News, that would allow me to click on a username in a thread and do a quick search for a term related to the thread. For example, I'd like to know how many people in this thread who are posting against SBF praised him in threads from months ago. I think the whole story with him is a testament to what's wrong with tech culture and the media more largely. It's almost Elizabeth Holmes-esque but with a different personality angle.

Something like this[0] ?

[0] https://hn.algolia.com/?dateRange=all&page=0&prefix=true&que...

Not sure what point you're trying to make. I'm pro-crypto, anti-SBF and what he did here.

I don't understand how it can ever be acceptable for a company to risk its customers' deposits, regardless of what kind of company it is (bank, exchange, whatever).

There should be a law that states:

1. Depositors are the most senior creditor (ie. they must be paid first, before any other creditor)

2. Investing depositor funds without explicit approval is a criminal act (because it's essentially using other people's money for your own interests)

There's common law out there to help you if you can establish the funds were to be held in trust, but the bar is very high.

Here's an article where some lawyers speculate about priority:

https://www.coindesk.com/policy/2022/11/10/ftx-violated-its-...

"Because the terms of service specify that customer funds do not belong to FTX, those funds cannot be used to pay back creditors or other stakeholders in the event of insolvency."

When I see names so highly correlated to the event, it really makes me think along magical lines of thinking or we really are playing in a game.

> FTX Chief Executive Sam Bankman-Fried said in investor meetings this week that Alameda owes FTX about $10 billion, people familiar with the matter said.

How ironic that crypto bros (like me) want a libertarian-yet-democratic user-owned form of currency without government intrusion, and then something like FTX not being overseen by the government tanks all cryptos.

When pretty much any company or industry gets to a certain valuation size, it seems that oversight is an absolute requirement lest things go south quickly, whether intentional or negligent. Government oversight isn't a guarantee of fair play, but it can lessen the risk.

This is embezzlement. Mr. Bankman-Fried should be arrested. Now.

We need some lawyer to confirm if he can be arrested or even prosecuted in the US. Since its a business based out of Bahamas.

Bahamas Securities Commission: “The commission is aware of public statements suggesting that clients’ assets were mishandled, mismanaged and/or transferred to Alameda Research. Based on the commission’s information, any such actions would have been contrary to normal governance, without client consent and potentially unlawful.”

The Bahamas Securities Commission just froze FTX's assets in the Bahamas.[1] A provisional liquidator has been appointed. Next stop, bankruptcy.

All the jurisdictions where FTX has a presence are now after Bankman-Fried. US, Japan, Bahamas...

[1] https://fortune.com/2022/11/10/ftx-assets-frozen-bahamas-cry...

He, not the company, his criminal actions victimized Americans.

Arrested by UN? Genuinely curious

Richmond, CA police department. Alameda Research HQ is at 5327 Jacuzzi St Ste 1c, Richmond, CA 94804. Since they were apparently the recipient of the money, and he's apparently the principal beneficiary of all this, that's where to start. Mr. Bankman-Fried may not physically be there, but they have jurisdiction.

Once there's an arrest warrant, getting away becomes much more difficult.

SEC often asserts jurisdiction over anything where American domiciled investors have suffered a large loss. That bar will definitely be met here.

Isn't this what a bank is? The money sitting in your account is not really there, it's being invested by the bank. Bank accounts exist on the gamble that not everyone wants to withdraw money at once.

I was about to mention the reserve ratio but apparently it’s 0% right now in the US…

Matt Levine explains why this is worse:

https://www.bloomberg.com/opinion/articles/2022-11-09/bankma...

tl;dr - the bank can't invest the money in its own stock.

I like Rekt's take on this situation, spicy as usual. Perhaps bigger things to come.

https://rekt.news/ftx-yikes/

Many saw it coming:

Crypto CEO Accidentally Describes Ponzi Scheme https://www.youtube.com/watch?v=C6nAxiym9oc

Countdown to Fried fleeing to Israel begins...

But he said he is sorry

That's the biggest thing!

this dude is Bernie Madoff 2.0

He’s more like Nick Leeson than Bernie Madoff.

Do you even know the story of Nick Leeson?

right to jail, right away.

All these kids should be chucked in jail and seized of their assets. I don't care how smart they are.

all criminals think they are smart because they figure out a way to scam people

and frequently failing to get that the reason that other people aren't performing the scam is that they don't want to rip people off and don't want to suffer the consequences-- not because they couldn't figure out how.

Scam after scam after scam. Welcome to crypto, folks.

Maybe so, but please don't post unsubstantive comments to Hacker News. We're trying for a different sort of forum.

https://news.ycombinator.com/newsguidelines.html

You can contact people directly instead of trying to shame in public. What you're doing here dang is flamebait

I highly recommend reading this article, from 50 days ago.

So many humorous quotes to be had in that article.

https://www.sequoiacap.com/article/sam-bankman-fried-spotlig...

edit: archive https://archive.ph/GQkCp

This was one of the worst written, saddest pieces I have ever read. It's full of idiotic commentary, unjustified praise and just plain ignorance. Out of the dozen+ remarkably stupid quotes I found I'll share this excerpt:

> 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.

> What Sequoia was reacting to was the scale of SBF’s vision. It wasn’t a story about how we might use fintech in the future, or crypto, or a new kind of bank. It was a vision about the future of money itself—with a total addressable market of every person on the entire planet.

> “I sit ten feet from him, and I walked over, thinking, Oh, shit, that was really good,” remembers Arora. “And it turns out that that fucker was playing League of Legends through the entire meeting.”

Lo and behold. The intricate, behind-the-scenes scheming of the highly educated financial elite, revelead at last. All predicated upon the grand vision of... buying a banana with your "super-app". No wonder we're going through a much needed correction, some people need to be weeded out of decision making roles ASAP.

"Among Wall Street’s financial elite, SBF’s Bitcoin arb is mentioned in the same hushed tones as Paul Tudor Jones’s 1987 shorting of the entire American economy, or George Soros’s 1992 raid on the Bank of England, or John Paulson’s 2008 bet against subprime mortgages. Alameda’s capture of the kimchi premium (and other trades like it) gave SBF the grubstake he needed for his next move: founding the crypto exchange FTX—a company that may very well end up creating the dominant all-in-one financial super-app of the future."

The hushed tones of 'that is obviously bullshit'.

> o 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

> 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.

Please tell me someone has this on internet archive.

https://web.archive.org/web/20221109025610/https://www.sequo...

https://archive.ph/GQkCp

archive of google cache (best thing I can do!)

> Alameda’s CEO is Caroline Ellison, a Stanford University graduate who like Mr. Bankman-Fried previously worked for quantitative trading firm Jane Street Capital. Alameda is based in Hong Kong, where FTX was headquartered before relocating to the Bahamas last year.

Are the folks at Jane Street making money because they are smart, or because they use that perception to perpetuate some scam?

I interact with a lot of Harvard kids. Some of them are from Long Island, they know dads who work at that Republican's hedge fund. They are smart kids. They have good cognitive gifts.

But not once - not from word of mouth, or directly from them, or someone, ever, anywhere - have I heard a common sense way these guys make money due to intelligence, instead of due to a scam or due to luck.

It is really frustrating. So much human potential wasted on chasing the dollar sign. They are in denial that it is scams.

It has always been scams. Why is this so hard to believe? Why in the absence of any positive evidence, like "oh here is our genius but nonetheless expired" trading strategy, which anyone could have furnished in the last two decades, they agree, oh it must be real?

The simple answer seems, because if you believe it to be real, you can be this specific kind of Harvard + New York + "X" kid - and seriously, they are all cut from the same jib, superficially and inside their character, it tarnishes the institution - and you can do this scam and pocket your change and eat dim sum with 20 people on the weekends and have a skinny girlfriend and buy a condo. You can do something pretty meaningless with your life in exchange for the burn out.

This scam life lets 20 year olds not hear from their horrible parents that burned them out and gave them no meaning. Eventually they turn 30 and hope that a decade went by without a crash, and then life decides for them to sell before the ponzi collapses. Like you have a baby with your skinny girlfriend and you buy the condo and great, you sell, and it happens to be well timed!

I fucking hate Jane Street, I have hated them since I've known the assholes who intern there, and I don't know why this Bankman-Fried guy got such a big pass for scamming literally millions of people, and why this Caroline girl isn't going to be sent to jail, and it's frustrating because you can actually tell! You can predict this from when these kids are 20!

> But not once - not from word of mouth, or directly from them, or someone, ever, anywhere - have I heard a common sense way these guys make money due to intelligence, instead of due to a scam or due to luck.

Financial markets have a fascinating property: any well-known strategy that can be implemented at reasonable cost [0] stops working. This is because people implement it and the profit goes away. If Jane Street has a common sense strategy or three that makes money, they’re not telling you about it.

(I’m taking about actual market profits here. It is well known that you can make lots of money by charging fees on a lackluster fund as long as you can find investors.)

[0] The cost issue is real, and the relevant parameter is some combination of profit (revenue - opex), capex and risk. For example, one can make money (revenue) by being the fastest market on the block. But the revenue there is approximately bounded and competition has driven the cost up to insane levels, so it is not straightforward to do this profitably.

The original comment addresses that concern:

>Why in the absence of any positive evidence, like "oh here is our genius but nonetheless expired" trading strategy, which anyone could have furnished in the last two decades, they agree, oh it must be real?

I agree that there should be some obviously awesome things these funds did that they can share now given they are no longer able to exploit them. I have no idea if they have done so and I and GP are just not aware of it.

I see a lot of variations on these arbitrage and secrecy themes.

Arbitrage that sticks around for years: those are scams dude. They involve collusion, not intelligence. I understand it might not be illegal collusion, but if either side of the transaction being scammed found out, they would find someone else to work with.

Trust me, I know. I've worked in ad tech.

SBF tried to throw Ellison under the bus in his latest tweet storm saying that he was shutting the fund down and that her tweets (some of which appear to have been either straight lies or attempts to manipulate the market) weren't approved by him.

I would suspect that both of them get into legal trouble.

Btw, I would say generally: quant investing isn't a scam, Jane Street make most of their money from ETF AP...that isn't complex, most of the high capacity strategies are quite simple (index replication being one, stat arb being another). The more complex HFT strategies tend to be (at their root) about detecting when someone is moving the market: for example, XYZ fund gets new money from investors, they deploy that into stocks, and HFT is about detecting that and calculating whether that is going to move the market (and XYZ fund now deploys various execution algos to stop HFT funds detecting that they have a huge order that will move the market).

There is nothing wrong with this work and, contrary to what people think, it is valuable. If you look at what it cost to invest capital even ten years ago, it was expensive. As in: $10-20 for a single trade. That has gone down to pennies, and created trillions of value. Saying they are all scammers because one guy is a scammer is not really a valid criticism.

> The simple answer seems, because if you believe it to be real, you can be this specific kind of Harvard + New York + "X" kid - and seriously, they are all cut from the same jib, superficially and inside their character, it tarnishes the institution - and you can do this scam and pocket your change and eat dim sum with 20 people on the weekends and have a skinny girlfriend and buy a condo. You can do something pretty meaningless with your life in exchange for the burn out.

> This scam life lets 20 year olds not hear from their horrible parents that burned them out and gave them no meaning. Eventually they turn 30 and hope that a decade went by without a crash, and then life decides for them to sell before the ponzi collapses. Like you have a baby with your skinny girlfriend and you buy the condo and great, you sell, and it happens to be well timed!

This is great screenplay material, like a "Millenial Fight-Club on Wall-Street". You should keep writing!

Income is a combination of two main factors:

1. The value you add to the economic 'stream' flowing around you

2. The amount you're able to divert out of that and into your own control

These are influenced by a number of secondary factors:

1. Starting capital to buy tools and resources to increase your ability to contribute

2. The ability to help others increase their contributions, or less charitably, the ability to take credit for the contributions of others

3. A willingness or unwillingness to pillage the commons

A humble farmer can work some acres of land, use his mind to know what best to grow, use his hands to make it happen, trust the sun and rain to grow the crops, and sell the harvest for a value greater than the cost to lease the land and buy the seed. With a million-dollar combine, cultivators, spreaders, center-pivot irrigation systems, an all the other features of modern agriculture, he can reap a much greater - more valuable - harvest.

But when a dealership has negotiated exclusive rights over a region, and the salesmen take a non-negotiable commission of sales, does the salesman who connects the farmer to the combine he knows he needs deserve thousands of dollars for closing that sale, just because he's situated himself between the farmer and the manufacturer?

When Wall Street or Jane Street sees that our massive farm industry needs massive numbers of combines - it's a $500B industry - and they're able to siphon off a percent of that industry's output for "providing liquidity" just because their Daddy knows some people, while the farmer's Daddy worked 18-hour-days every harvest season until he died, and the former is a multimillionaire by age 30 while the latter might make $200k during 4 of 5 seasons and lose $300k in a bad year...it just doesn't feel right.

> 3. A willingness or unwillingness to pillage the commons

This is an important point. As we've pushed the limits of our natural resources, and woken up to the externalized costs of some of our ways of creating value (i.e. respiratory disease from fossil fuel based energy), this is increasingly going to require us to re-evaluate how we define 'value' added to the economic stream.

> But when a dealership has negotiated exclusive rights over a region, and the salesmen take a non-negotiable commission of sales, does the salesman who connects the farmer to the combine he knows he needs deserve thousands of dollars for closing that sale, just because he's situated himself between the farmer and the manufacturer?

I'm not arguing for any value added by middle-men in your example, but sales people provide a service that many of us "maker" types don't want to deal with, which is to engage "socially" with potential customers. Selling and buying an expensive product or service is often a social act. That social act has a value in some spaces.

You're glossing over the fact that part 1 of your income equation is irrelevant if you can get the government on your side.

> 1. The value* you add to the economic 'stream' flowing around you

*Real or imagined value.

But you actually can make money honestly by finding mispricings in the market. Eg Buffet, or Burry during the housing crisis.

You can also make money through arbitrage or other brief financial blips that occur in the market.

These things aren't really scams in the normal sense.

> honestly by finding mispricings in the market. Eg Buffet, or Burry during the housing crisis.

Like who wants to be on the other side of a Jane Street transaction? Absolutely fucking nobody. If you're talking about "mispricings" during the "housing crisis," my dude, nobody wanted to sell their house to these dumb fucks! They were going to starve, they had no choice! How does that not seem like a scam of some sort to you? That's not honest money!

Those 20 year olds with Math degrees from Harvard. They don't fucking know anything dude, they did not discover a model, they did not make a model with a price that says price is lower than this other price, then persuade some people to make some bet. That's a parallel reconstruction, that's to justify whatever actual scam is going on. How do you not see that?

There's no common sense reason Math 55 equips you with some magical vision into pricing that actually winds up meaning anything. When it does, it might as well be random.

If the Mercers were good people, would they be Republicans? No dude. C'mon, use common sense. Don't get hung up on "normal sense." Use common sense.

If Sam Bankman-Fried was a good person, would he fuck $10b out of his own god damned customers' money?

No dude, he's made some unspecific, previously-bankrupt-and-now-literally-bankrupt promise to donate some money to something somewhere in the future, to whitewash the fact that he just went around fucking everyone.

I mean get a grip Effective Altruists, whose guts I hate too, and whose energy is the stereotype of the student I am talking about - the same students! - where they get this readily packaged "religion" that happens to align exactly with their meaning-bankrupt approach to life.

So don't even get on it with the "honest" money. I can find the venture capitalists who take some dumb person's money and then hand it over to something risky and interesting: I see how VC is honest, it's just not necessarily intelligent, but it's redeemable. But the Jane Street people: No dude. Not Warren Buffet, not Burry, none of those vultures.

Jane Street has been purchasing advertisements with popular math YouTubers[1][2] recently, and it really bothers me. Think how many young, mathematically curious people are watching these channels and getting told that working for Jane Street is a worthwhile use of their time and intelligence.

[1]: Numberphile, e.g. https://www.youtube.com/watch?v=rBU9E-ZOZAI

[2]: Stand-up Maths (Matt Parker), e.g. https://www.youtube.com/watch?v=EGoRJePORHs

Jane Street isn't a hedge fund so I'm not sure why you're lumping in criticism of hedge funds with criticism of Jane Street.

I'm sure some hedge funds have been scams, and probably a decent percentage are frauds in the sense that they have no alpha even before fees (this isn't a crime though). There's not much evidence that the fund you're referring to is a fraud. There are published strategies now that if implemented in the 90s and early 2000s would've earned returns of >50% after transaction costs so their results seem attainable though obviously exceptional.

> Alameda’s CEO is Caroline Ellison

Just search for that Ellison young lady online. She's partly responsible for fraud that saw $10 billion of other people's money go into the ether. How come that kid (she looks to be under 30 years of age) was put in charge of a multi-billion dollar company is way, way beyond me.

I take it her last name isn't the Ellison right? If so, that could be a hint.

I work in the industry at a market-maker. Jane Street is a lot more than just these two people. Prop trading firms and some quantitative hedge funds are a lot different than traditional hedge funds. Jane Street is mainly an ETF market maker, and are very good in that. They make their money because some of their core strategies work very well.

Also, JS has low attrition and traders there mostly stay long-term since it's a very trader-first place than some other places like HRT, Jump. Both SBF and Ellison had short tenures at JS.

Hedge fund success comes from better tax treatment to very delayed tac for the 'carry over' part. And they get better trading and much higher margin. Yes skill and good ideas can drive better profitz with lower tax. Scams go easier with lower tax too.

I hear what you're saying but consider we're going on two entire generations of brilliant people being spent largely on just putting an ad on your phone and computer. The stock market isn't the only waste of intelligence.

Payment for Order Flow was invented by Bernie Madoff. I believe many of the technical and complex Wall St. "products" like that are probably scams if it were laid out in laymans terms. Not products that retail/brokerage account holders use like buying a stock, ETF's or those "20XX Retirement Fund" - I'm talking about the obtuse derivatives and other "products" that Wall Street invents for themselves.

Edit to add: PFOF is the mechanism that Robinhood (and others) make money on - back of house Wall St. pays Robinhood for the order flow.

I largely agree, but what does dim sum have to do with any of this

Dude got pranked and had somebody order chicken feet one time, has been living a life of resentment ever since.

This comment, and its posters' subsequent comments, are so filled with anger, much misguided, that it's hard to really respond.

Jane Street has some good people. Harvard has some good people.

Both have some bad people.

I don't know how "scam" is defined, because sometimes people use it for things they just don't like.

Caroline who? What did I miss?

Caroline Ellison - CEO of Alameda Research.

This is a very well articulated comment. Thank you for laying this out so clearly. I don't know any hedge fund types so it is helpful to hear from somebody who does.

Everything in their comment points to them not having a clue about the financial industry in general or about how hedge funds / trading firms generate revenue or even try to.

I think at this point anyone who has any involvement in crypto needs to ask themselves the following question: Are you Molly?

Becuase if not, you're fucked. She's the only one walking out of this shitshow with a reputation.

Based on a claim by one anonymous source, that SBF told them that.

Might be true, but papers (especially ones like the WSJ) should not publish such pap.

There is absolutely 0 chance that the WSJ would run an article with a headline like this without verifying the information with multiple parties. That verification is often off-the-record so you won't read about it in the article.

Are you not aware of how journalism works?

Reply on news.ycombinator.com