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DebtDeflation

> Most news accounts seem to portray the scale of the bankruptcy as relatively small.

This is a key point.

They lost $16B in customer deposits.

LTCM lost $4.6B in investor funds.

Enron lost $11B in shareholder capital.

Interestingly, while Madoff is widely quoted as having lost $65B, that was almost all fabricated paper wealth, actual losses were around $18B and $14.4B of that was recovered and returned.

All of these situations are obviously somewhat different, but if what we're starting to hear is correct, FTX may be one of, if not the, biggest financial frauds/scandals in history. The media doesn't seem to be treating it as such.

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>LTCM lost $4.6B in investor funds. [...] All of these situations are obviously somewhat different, [...] biggest financial frauds/scandals in history.

LTCM shouldn't be in that list because that wasn't fraud. That hedge fund had a flawed math model of volatility of their holdings when a cascade of events got triggered by Russia defaulting on their bonds. LTCM losses were magnified by their over leveraged positions.

A bunch of PhD traders lost their wealth and got their reputations tarnished but it wasn't criminal activity.

Correct. Arrogance is not illegal (yet).

Taking customer money and using it for something else is absolutely a crime. And it has nothing to do with the regulatory status (or lack thereof) for crypto. If a car dealership takes customer down payments on cars and instead of ordering the cars they gamble the money away in Vegas, they don't get to just declare bankruptcy and say "too bad so sad", they go to jail.

To be clear, SBF/FTX total fraud.

The PhD guys from LTCM, not so much. Just arrogant.

Not just PhD. World famous economists with Nobel prizes.

I can't find which Nobel prize were in, do you have any names?

Robert C. Merton got the nobel prize, but it seems 3 years later (ironic)

Myron Scholes and Robert Merton, Economics 1997.

LTCM imploded in 1998.

It had the potential to cascade to the rest of the market because of how they used leverage, and the only reason it didn’t was because of emergency Fed intervention.

That does not make it a fraud. They took investor money and leveraged it and made bets on basis of their mathematical models. Their models didn't work out.

I don't think their intention was to rob / hide / betray / hoodwink.

I was replying to this:

> A bunch of PhD traders lost their wealth

That is, the only reason the losses were limited to them was because of special intervention. Otherwise, it would have caused losses for many others.

right, but if a counter-party ends up losing money because of incorrect assessment of credit or liquidity risk, isn’t that their own responsibility? It’s like when someone can’t pay the mortgage loan a bank lent them - the borrower isn’t performing under the terms of the contract, but part of the payments that borrowers make to the lender is to account for that credit risk - what matters is if the lender has accurately priced this over their portfolio, taking into account how “independent” (or otherwise…) the individual loan risks really are. The liquidity problem is usually when it turns out that the individual loans credit and liquidity risk are NOT independent at times…

Yes, I understand how financial contracts work. But like I said in my original comment[1], at the top of this subthread, that provides vital context for the point I'm making, this was big enough to have the potential to cascade, i.e. be such a big loss -- against such a formerly-safe capital buffer -- as to spill over to other financial institutions, bankrupt them, then spill over to their counterparties etc, and eventually to the broader markets that are many degrees removed.

The kind of situation they were worrying about and rushed to prevent in 2008, IOW.

You are correct, in a trivial sense, that maybe the entire market should have just not trusted anyone else, except perhaps under extreme constraints, which would have amounted to almost no financial intermediation and thus almost no financial industry whatsoever. But even the most hardcore "you should have vetted your counterparty" finger-waggers aren't willing to go that far.

[1] https://news.ycombinator.com/item?id=33608638

this is exactly what happended at FTX/Alameda. A bunch of "smart" guys who backstopped and over-extended loans to players, and their losses were magnified with their over-leveraged positions, that was backed up with assets with no values. That's exactly what happens in just about every financial scandal.

FTX took customer deposits (which were supposed to be held in custody and untouched, according to their TOS) and loaned them out to Alameda to gamble with. That is entirely different from being over-leveraged and having your debts default.

>FTX took customer deposits (which were supposed to be held in custody and untouched, according to their TOS)

Can you provide the exact wording? At least when it comes traditional finance, if there's margin involved (FTX most definitely has margin), your deposits/holdings are fair game for your broker to use as they please.

https://www.sec.gov/oiea/investor-alerts-and-bulletins/ib_ma...

>Some margin accounts allow the brokerage firm to lend out securities in the account to a third-party, at any time without notice or compensation to the account holder, if the investor has any outstanding margin loan in the account

"You control the Digital Assets held in your Account," says Section 8.2 of the terms. "Title to your Digital Assets shall at all times remain with you and shall not transfer to FTX Trading." The terms continue: "None of the Digital Assets in your Account are the property of, or shall or may be loaned to, FTX Trading; FTX Trading does not represent or treat Digital Assets in User’s Accounts as belonging to FTX Trading."

https://www.axios.com/2022/11/12/ftx-terms-service-trading-c...

> FTX took customer deposits (which were supposed to be held in custody and untouched, according to their TOS) and loaned them out to Alameda to gamble with

This is what I initially suspected. But we can see FTX's balance sheet [1]. There is no loan to Alameda. "FTX shot its customer money into some still-unexplained reaches of the astral plane" is the best explanation we have for billions of missing dollars [2].

[1] https://www.ft.com/content/0c2a55b6-d34c-4685-8a8d-3c9628f1f...

[2] https://www.bloomberg.com/opinion/articles/2022-11-14/ftx-s-...

I have a hunch that:

>negative $8bn entry described as “hidden, poorly internally labled ‘fiat@’ account”

probably had something to do with the loan as that seems to be roughly the amount and the description literally makes no sense.

It's also possible that the one hastily thrown together excel spreadsheet the CEO himself chose to release doesn't include the full accounting. Maybe Sam decided to leave off an illegal off-book loan?

> doesn't include the full accounting

I think the running bet is there is no full accounting.

> we can see FTX's balance sheet [1]. There is no loan

The problem with this is that the customer funds are also not present on their balance sheet. Levine opined about this yesterday; Like 3 of the biggest assets are coins ftx didn't pay for - so where did the money go?

That's why the Alameda explanation is likely, in one way or another. Money had to go somewhere.

That balance sheet is a total joke and of course it doesn't include an extremely illegal loan explicitly written on it

The information about a loan from was taken from the NYT interview [0]:

> Meanwhile, at a meeting with Alameda employees on Wednesday, Ms. Ellison explained what had caused the collapse, according to a person familiar with the matter. Her voice shaking, she apologized, saying she had let the group down. Over recent months, she said, Alameda had taken out loans and used the money to make venture capital investments, among other expenditures.

> Around the time the crypto market crashed this spring, Ms. Ellison explained, lenders moved to recall those loans, the person familiar with the meeting said. But the funds that Alameda had spent were no longer easily available, so the company used FTX customer funds to make the payments. Besides her and Mr. Bankman-Fried, she said, two other people knew about the arrangement: Mr. Singh and Mr. Wang.

[0] https://www.nytimes.com/2022/11/14/technology/ftx-sam-bankma...

"Alameda had taken out loans and used the money to make venture capital investments." - translation: We took all the money and gambled it all away. Again.

Aaaand it’s gone: https://m.youtube.com/watch?v=-DT7bX-B1Mg

I think the "gambling" you referred to was their point, not the accounting games they subsequently played to try and get back into the black.

My point is that the real problem isn't that Alameda was over-leveraged or gambling, it's that SBF stole user funds from FTX to try to rescue Alameda. This is not what (some of) those other companies did.

from SBF perspective Alameda & FTX are the same. Yeah yeah they are separate legal entities, but in actual practise, one market-made for the other, and he treated them like one is left hand, the other is right hand So yeah Alameda gambled, overleverated and lost money just like nearly every other financial crises in history, SBF then fraudulently moved money from FTX to cover Alameda's gambling losses. I won't be shocked if FTX has alway been the source of funding for Alameda's gambling, just that Alameda was winning when everything was rosy. then the crypto market turned

>this is exactly what happended at FTX/Alameda. A bunch of "smart" guys [...]

No, they're different situations.

The current details trickling out of the FTX scandal is that CEO Samuel Bankman-Fried secretly used customer funds to prop up Alameda which is unethical and criminal. This is fraud.

In contrast, the LTCM guys lost billions honestly and transparently via flawed math models based on overconfident assumptions of price spread behavior. That wasn't criminal fraud. There was no illegal transfer of investor funds.

ignore the fraudulent part of covering up the money, how Alameda lost money is the same as how LTCM guys lost money. guys who think they are too smart and made wrong predictions about the market. That part is very very similar. SBF then compounded it by layering fraud on top of the "im too smart to fail" losses by using customer funds to cover up the losses.

The book about LTCM’s failure, “When Genius Failed”, is a fascinating account of what happened, and a quick read.

Highly recommend reading it, one of the greatest books I've read from a perspective of understanding the financial industry.

The financial news (WSJ, FT, Bloomberg) is definitely less blasé about it. There's definitely a sense that a scam is slowly being unearthed.

I don't know if it's SBF previous political connections that are making most media outlets hesitant to delve into the details, but the scale of the failure is going to be unavoidable as more details emerge.

Too many institutional investors got burned and they will no doubt be eager to prove fault lest they themselves be blamed for poor judgement.

> I don't know if it's SBF previous political connections that are making most media outlets hesitant to delve into the details, but the scale of the failure is going to be unavoidable as more details emerge.

The Ryan Salame part of it may be making both parties not want to look into it too much.

They lost roughly $8B in customer deposits. The $16B cited in the article is the total amount of money they lost which includes a sizable profit that they were supposed to have made on their legitimate business activities.

I wonder how much of those $16B in customer deposits were actually lightly-traded altcoins that could never have been liquidated at anything close to that value? There is no doubt they defrauded people of a lot of (real!) money, but my guess is a huge chunk of that $16B top-line figure is fantasyland dog-coin nonsense. Whereas the LTCM and Enron investors at least started with real cash.

But those coins were most likely purchased with real money?

Yes, but how much real money is the question. I'm not doubting that real money was lost, just wondering if $16B of actual customer dollars ever flowed into the exchange.

Exactly, I always wondered what the real numbers looked like. It's so easy to mint 100 coins, get a friend to buy one at $100, and say you "have" $9,900.

I wouldn't be surprised if the number of actual dollars was less than $100 million.

It’s more than 100M. I know someone who moved 2-300M of btc/eth to ftx and lost all of it

That’s gotta sting. Hopefully only a small portion of their portfolio?

It's easy to see how FTX's assets could be "worth" $16B in the absence of any real money coming into play, but I don't see how they could get to $16B in liabilities that way. The most obvious possibility would be if their liabilities were also denominated in thinly-traded shitcoins, but at this point it seems clear that that wasn't the case.

I think his point is that while it was bought with real money, it couldn't be sold for real money.

If I buy 50 RandoCoins for $1 today, tomorrow it shows that it's now valued at $2, and then the next day RandoCoin is hacked and all the coins are stolen, I didn't really lose $100, I only lost $50.

So he's wondering if the value of loss is being expressed as the money used the purchase the coins or the perceived value of the coins.

Fair enough, that makes sense.

Dog-coin nonsense has a 24hr trading volume of $669M. There's actually quite a bit of liquidity in crypto since it lends itself to HFT.

BTC for instance has a 24hr TV of $37B, making it one of the most exchanged assets in the world.

Exchanged for other crypto. The inflow and outflow of real money is on a much smaller scale, about $200 million per day for BTC.

citation?

You can just look at SBF's excel spreadsheet describing his own liabilities, they are mostly in dollars

I think it's likely that a significant portion of those liabilities were generated from magic beans and ought to be ignored when comparing the size of the collapse with other things.

To give a hypothetical example: Alameda, as a customer, deposits magic beans with a mark to market value of a billion dollars. Then Alameda trades the magic beans for a billion dollars of BTC-perp (FTX paper bitcoin), with FTX acting as the counterparty (which I believe they typically were for trades of the perpetuals). Now FTX's balance sheet reflects $1 billion in Bitcoin liability (plus being long $1 billion worth of magic beans)-- but in this example no bitcoin had been deposited at all-- just magic beans.

When sizing up the losses, all liability ultimately resulting from magic beans ought to be backed out. This is exit complicated because some of the magic-bean derived paper assets have presumably been withdrawn using customer deposits, and those funds are actually lost even if the depositors that brought them in never traded (and simply deposited in FTX because of the ponzi-scheme grade yields they were paying depositors).

Was that $16B in "real money" (dollars), $16B in "pretend money" (astronomically overvalued cryptocurrency), or some of each?

Considering that "pretend money" is purchased with "real money", this distinction doesn't matter much. I guess it just depends on if you consider property valuable despite not having a green tint and dead political figure on it.

The question being asked is if the pretend money has risen in value subsequent to purchase, then is the amount lost the real money used to purchase it, or the pretend money at peak (or another) valuation.

With both the 16 billion figure being preceded by the U.S dollar sign, and FTX being an exchange for many different cryptocurrencies at drastically different values, they were probably adding up the dollars invested by stockholders and the dollars input into the website. After all, their FTT coin crashed and burned completely, and many other currencies are also dipping to record lows. If they valued the dollar based on current prices, then it would be multiples of $16B instead.

Either way, the inclusion of "astronomically overvalued cryptocurrency" as a descriptor definitely makes it seem more like a slight towards crypto than an honest question of the valuation. Put simply, a lot of people lost a lot of money.

This is a great point. I guess I am skeptical that everything will be lost, but even if it's only half it will still be an absolutely enormous bankruptcy and loss.

If all of the actual cash, the real liquid assets were withdrawn leaving only illiquid, relatively valueless crypto tokens, and those tokens are sold down over the coming months then the percentage losses as a percentage of the max or total value they managed will be very high indeed. Sorry for the run-on sentence.

The secondary market for claims against FTX is pricing those claims at about 5c

I'm wondering if the numbers are believable. That's because I think they are doing "paper valuation," like when a drug bust happens, and the value of the kilo is broken into "street-level" packets; quadrupling the value.

I am not a crypto expert, but from the bit I do know, it seems as if it's fairly difficult to correlate fiat with crypto.

The Matt Levine article looks at that and claims quite a lot of it is just tokens issued by FTX themselves or related trading entities. In the words of Walter Sobchak from the Big Lebowski : "Mark it zero!"

Perhaps "only" $5bn was real and much of that was from institutional investors. Not yet clear how many retail rubes have been caught up in this.

They haven’t lost 16b though.

Unclear if we have accurate info from Sam but the situation is more like 9b in liabilities with 70% of that in liquid and illiquid assets. People getting back that much is highly optimistic but the 16b doesn’t seem accurate at all. FTX already paid users out $5b btw

It's pretty clear that "info from Sam" can't by trusted

> 9b in liabilities with 70% of that in liquid and illiquid assets

They have $9B in liabilities, and realistically they have about $1B in realisable assets. On the balance sheet Sam has included about $7B worth of Serum and FTT, both of which vastly exceed their circulating market cap and are also effectively worthless as the businesses they represent have lost all credibility and/or are insolvent (Serum is a decentralised exchange created by FTX)

The starting point is the assumption that FTX's equity sales left them with a few billion and Alameda's trading left them with a few billion. You have to burn through these billions and then dig a ten billion dollar hole.

If they lost it through bad bets, who was on the winning side of those bets?

Crypto shorts

Ironically keeping a short position to benefit from this collapse is pretty risky. Shorting requires leverage by necessity, which means you'll have to turn to an exchange like FTX, which has the possibility of collapsing. Decentralized lending protocols aren't much better, as collapses a few months ago has shown.

CME offers micro futures at globex: METX2 and MBTX2. You can short those with your typical margin rates; my broker gives me the same leverage as legally defined by my gov.

You can short by borrowing and selling as well. Even on-chain, though you're then susceptible to defi hacks that would affect your collateral

>You can short by borrowing

that's leverage.

Or just to people losing money who would have lost more had Alameda not bought from them on the way down.

> The media doesn't seem to be treating it as such.

FTX has been the lead story on the front page of the Wall Street Journal for days now.

If only these calls for regulation from the two persons in this interview, could have been heard on time. Most interestingly, and as it's obvious from the interview, regulators were watching these children playing and only poking gently.

At correct time: https://youtu.be/2ozjiX1E7ZA?t=25

May have something to do with FTX having paid off both US political sides and having close ties to SEC's chair.

They were trying to push through a legislation that would make most of their competitors illegal

The secret is that regulators can only have a fairly limited effect, and retrospectively. As well as the inherent jurisdiction difficulties in operating out of the Bahamas. Mind you, that's something crypto investors wanted: freedom from government!

There's a real "accountability overhang" not just in crypto but so many other things. Justice is slow and getting slower.

> The secret is that regulators can only have a fairly limited effect

Not in this case.

A momentary glance from a distance at the balance sheet by a semi competent bank supervisor would have noticed the fraud.

The question: do you hold your users' assets in segregated account is easily asked and easily answered with no.

Unless there is some sort of event horizon in financial systems, it is wrong to use the word "lost" as if it is impossible to find out who got these kingly sums. Billions of dollars were "blown" and the question we should be asking, very forcefully, is who got that money.

It's crypto! Once it's transferred off the exchange, it's in a pseudonymous wallet.

Just to confuse matters, it appears that both the exchange was hacked and an insider was draining funds just before it shut down. But before that, there was a lot of "money" that went out the door in legitimate trading losses.

(I thought these [addresses] could be watched.)

> there was a lot of "money" that went out the door in legitimate trading losses.

Let's not give them easy pass on this. I could be wrong so correct me on this:

Easy setup is to have a bunch of people setup 'shitcoins' and shell companies, scam people to put actual money into the scheme to pump the price, and then pay inflated prices for your fellow scam artists' shitcoins, so they clean out, but the chumps who bought your coin are holding the bag.

It could be that no one "got that money." If a stock is trading at $2X and the value of all of the shares is $1 billion, no one gets the money if the stock opens the next day at $X. That's the problem with thinking of stock prices as real money. (And, indeed, real cash can also lose value through inflation.)

I can't think of any possible reason.

https://fortune.com/2022/11/10/sam-bankman-fried-ftx-joe-bid...

Ryan Salame, the co-CEO, donated heavily to the GOP.

Don't fall for the red-blue trap. There is one establishment, which uses social issues to divide and conquer and create the illusion of choice.

Be careful, they'll call you an 'enlightened centrist' to convince others this position is irresponsible

And I suppose snidely preempting the response somehow makes it false?

As I've explained to others here before, there's a difference in magnitude which is relevant here. SBF pledged to donate _$1 billion_ to the Democrat party. The only person to spend more money on the Democrats this cycle was the dear George Soros.

Who knows what's in store for SBF, but it's important to look at the facts here and acknowledge that this operation was heavily invested in the success of the Democratic party.

There's an even bigger difference between donating and pledging to donate.

Salame donated $26.4M to individual GOP politicians and another $2-3M to GOP political organization.

SBF donated $39.8M to Democratic politicians and organizations.

Not all that different.

The $1B pledge was realistically never going to happen, just as his offer to loan Musk $3B to buy Twitter was never going to happen. Even in the best of times he never would have been able to extract that kind of real money from his operation within a short time.

Pledged, but it sounds like it never happened.

But he didn’t donate that much. He was never going to have that money. The other person is showing how close the other guy was to the GOP. You’re being partisan here.

An interesting part of Madoff recoveries were through settlements against originators/feeder funds because they « ought » to have known it was a ponzi.

Unsure if FTX creditors will be able to do the same.

But mostly, Madoff himself didn’t really spend much money. Just did nothing with it. The few pieces of fancy real estate he lived in were actually profitable because he didn’t build some gawdy illiquid palace.

But there was a lot of time-value loss that isn’t accounted for. Even 14 years later there are still distributions. Even getting $1 back on your 1995 $1 is still a big loss.

> An interesting part of Madoff recoveries were through settlements against originators/feeder funds because they « ought » to have known it was a ponzi.

Did the judge say that? I would think the logic was that they were effectively getting stolen money as gifts. Like when a scammer gives their victims' money to their own family. Doesn't matter if they were in the dark or even spent it already.

As I understand it, if stolen/scam money is used to buy something it's not the seller's responsibility because money is legal tender. On the other hand, if a stolen item is sold, the issue of knowing where it came from does becomes important.

No, but I think they were all settlements, so one needs to read between the lines.

But maybe you’re right and it’s just recoveries of their commissions etc.

Strangely, I am not hearing many stories from retail of big losses. There were tons of people coming out of the woodwork on Reddit and Twitter after the LUNA collapse. Not sure what that’s all about.

Their s*tokens were mainly held by Alameda - serum and ftt. So probably not a ton of exposure among real users. Now when people won’t get to withdraw their money/tokens from FTX.. ever? That’ll become a huge problem. Sounds like all the money is just gone on stupid gambles

Madoff’s investors “lost” more than $14.4B. Many of them were invested in his funds for 20-30 years and received 0.77 on the dollar per your comment.

> The media doesn't seem to be treating it as such.

The massive links to the Democractic party probably have something to do with this.

I'm not aware of this. A y reading/listening material you can link to?

Are those 2022 dollars?

> if what we're starting to hear is correct, FTX may be one of, if not the, biggest financial frauds/scandals in history. The media doesn't seem to be treating it as such.

I think the media treats anything to do with crypto as much more buyer beware than eg Enron

How much shareholders capital did FTX lose? I assume they lost billions of investor capital.

For another reference, 16B is Spotify's entire market cap. The amount lost here is staggering. And given what's leaked from their balance sheet, I don't see how people avoid jail time.

I'll also add, if you want to really dig into FTX details, simply read Matt Levine's newsletters.

I think a lot of people are missing that it was not 16 liquid USD that was lost here. It was 16B of various assets on paper. That's different from a pretty liquid stock traded on the NYSE.

The 16B could've never been liquidated as 16B in cash because the liquidity for many of these assets is too low. Selling even just a small fraction would have crashed the market for many of these assets. It's impossible to know what the liquid worth of these assets was, but it was probably 5-10x less than what's on paper.

They may have lost $16B but, as they were converting customer deposits into coins the customer did not buy, such as FTT but also many others, then it seems bad math to value the customer deposits at $16B - prior to essentially shorting against their customers, perhaps those deposits were worth 5x more. And it doesn't seem unreasonable to believe more deposits would have been made, if the price of the assets their customers hoped to buy (Bitcoin is far and away the market leader) were not being shorted in this manner. I'm not a mathematician but their activities may have amounted to many tens of billions of sell pressure against Bitcoin. Elon Musk purchased $1.5B and the price of this finite asset rallied tremendously, what might these tens of billions have resulted in?

Also 1MDB seems t9 be somewhere between 16-50 B usd

What's LTCM?

A hedge fund that went bust: Long-term Capital Management.

Thanks

> FTX may be one of, if not the, biggest financial frauds/scandals in history. The media doesn't seem to be treating it as such.

Most of that wealth was manufactured in the crypto bubble, not actual money people worked for and put into crypto, just early stage ponzi investors that kept rolling their investment. The wealth, while apparently substantial, was never actually there, I think most understand that the mirage would have collapsed anyway if most investors would have attempted to exit earlier.

Basically, any early holder of Bitcoin today, while losing 70% or so of the peak value, is still a bazzillion basis points in the black, because they can get real dollars for what is essentially an early and rudimentary shitcoin with arcane limits, slow transaction times and extreme volatility, which is only used in the real world for speculation, money laundry and trading other shitcoins. Pretty ironic that's the "gold standard" of the crypto world, followed by an entire brown spectrum of shittier and scammier tokens.

This is simply not true. Their liabilities are in dollars because their customers wired them dollars.

Many of their customers (if not most, on volume) wired USDT obtained from other parts of the ponzi ecosystem, then traded them internally for dollars. This way, FTX could accumulate internal USD liabilities without ever having those dollars wired into their accounts. Even if we were to take at face value the $5 billion liabilities from SBF's "Excel ballancesheet", that's still less than a third of the loses.

Sure, Tether should have a 1:1 backing to real dollars or dollar denominated assets - but it's like the ponzi-world's worst kept secret that they don't, as we'll soon find out.

If most of the losses are USDT, how do we know Tether didn't just print them out of thin air to lend to FTX / Alameda as their "Commercial Paper"?

That would be my first guess.

> Most of that wealth was manufactured in the crypto bubble, not actual money people worked for and put into crypto

Its real money.

https://twitter.com/Travis_Kling/status/1592198107734876160?...

https://www.coindesk.com/business/2022/11/14/ikigai-asset-ma...

So the assets of a "crypto hedge fund" that somehow kept "a large majority" of the fund's total assets on a 3rd party centralized exchanged is "real money" now?

That's the very definition of fake wealth, hot money seeking 50% returns in the hot risky mess that is the crypto market. The recursively leveraged self-licking icecream is melting down.

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