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Comment by jasode | Hacker News Reader

>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.

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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.

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

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.

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.

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