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Comment by RC_ITR | Hacker News Reader

A very important nuance for everyone following this.

SBF keeps saying there was a liquidity crisis at FTX, which is 100% not true. A liquidity crisis implies that he took deposits, flipped them into good, but illiquid investments, and ran into trouble because people asked for more cash than FTX had on hand.

FTX actually had a solvency crisis, where he took deposits, put them in completely inappropriate investments (many of which are now worthless, all of which were speculative nonsense) and is now revealed to have done that.

He's using the concepts of "bank runs" and "liquidity crises" because that's sort of an "aww shucks, got caught in an unfortunate circumstance" situation when what he actually did was one of the stupidest and most malicious things anyone in "finance" has ever done.

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> FTX actually had a solvency crisis, where he took deposits, put them in completely inappropriate investments (many of which are now worthless, all of which were speculative nonsense) and is now revealed to have done that.

Who was on the other side of these losing trades? People need to follow the money trail. Where did the money go?

There are people who called the Alameda / FTX scam from day one, before FTX was even created (Alameda already existed). Then there are others, like Marc Cohodes, who realized SBF / FTX was a fraud when they looked into it. It's these people we should listen to. They knew SBF was full of shit back then and he's still full of shit now.

I do not buy the "inappropriate investments" angle. To me it was defrauding both users and investors by any means possible and funneling the money into the Bahamian blackhole. While putting the blame on "leveraged trades without stop-losses gone wrong".

There are just way too many things that do not add up: SBF/FTX bought a bank which belonged to the owners of Deltec in the Bahamas (the bank behind the whole iFinex (tether+Bitfinex) fraud, except that one hasn't blown yet).

And the latest amazing development: the current Bahamas attorney general used to work for... Deltec.

There's only one thing to say: you cannot make that shit up.

I don't think any movie or book writer could ever come up with something that insane.

I mean it's always easy to look for a conspiracy, but is it really so crazy to think that in a market that lost $2tn of "value" (I know crypto market caps are fake, but bear with me) that the most aggressive trader out there lost $8bn?

When I say investments, I don't mean VC investments, I mean Crypto trades.

The default in finance is conspiracy, this is why it has so much regulation. There's not a managed fund on earth that doesn't have a few fund managers that go around winking at 3rd parties and discussing ways to leverage their position and the limits of what they are allowed to accept.

> Who was on the other side of these losing trades? People need to follow the money trail. Where did the money go?

There doesn’t have to be another side to the losses. If Alameda / FTX was holding assets that depreciate in value, they would book losses along with everyone else holding the same assets.

Any time someone loses value, someone else gains it (in the short term), short of destruction of physical or knowledge capital (i.e. WWII bombing raids). We mark things in dollars but real value is measured in resources, physical capital, and intangible capital (rather than USD). Unless any of that was lost, the $ value losses just re-accrue to someone else instead.

This is different from imaginary value inflating and disappearing (i.e. tokens that never had liquidity - where mark to market never made sense, etc). In that case the whole thing is a mirage.

But if $8 billion dollars went into FTX, that money does not just "disappear" from depreciation - someone else's (or many people's) purchasing power increased in relative terms proportional to the losses suffered by FTX's creditors/depositors.

Incorrect.

Value can be created and sent back to ether. It’s not a zero sum closed system.

Let’s look at NFTs, they weren’t ever worth anything but some people thought they were, and counted them like they were, and convinced dumb people to pay for them at these prices, but it was all imaginary. The ones that never sold are just as worthless as the ones that did. The entire market collapsed, the “value” is really just gone, no one “has it”.

But no. Those NFTs never had anything but subjective bubble value to begin with and cost next to nothing to create too. The money transferred in exchange for changing ownership of them passed to other hands but didn't disappear. Its much more concrete value wasn't lost and nothing was destroyed in the process except the wispy perceived value of the digital NFT tokens that had (again) cost nothing to create in the first place.

The point they're making, I think, is that FTX bought various shitcoins from other people in exchange for USD. Value can disappear, but that's not what happened to the actual dollars they spent.

I'm not positive this whole thing was some kind of planned conspiracy, it just seems like idiocy and fraud catching up with them. I don't think any competent fraudster would get caught in such an embarrassing way.

One theory is that it was their users. That is, Alameda lost huge amounts taking the other side of trades on FTX, and then FTX stole customer money and gave it to Alameda to compensate

Given this all happened on the "block chain", wouldn't it be possible to confirm this theory?

Btw, I find this explanation compelling - I'm not challenging it necessarily.

The block chain shows the bitcoin moving from one address to another. That's about it. It doesn't say what was exchanged for it, be that USD, FTT, or any other token, good, or service.

And those addresses are potentially pseudonymous to boot, at least if the BTC is withdrawn. If it ISN'T withdrawn, it's entirely plausible that the transactions took place off chain in the first place -- simply moving numbers around in an internal database while staying right in the same, FTX owned wallet. What you'd call in the trad fi space "holding assets in street name."

> where he took deposits, put them in completely inappropriate investments

It's not just that they were inappropriate, taking assets from FTX to prop up Alameda is fraudulent and should never have happened right? He claimed there was a firewall between the organizations.

Well he accidentally breached the firewall /s

This part of the story is where we are starting to see the MIT grad and former Jane Street trader claim to be actually quite stupid and naive. His excuse is that they took customers' account deposits to FTX via an account Alameda held, then credited the FTX accounts with balances without ringfencing those funds in that Alameda account (or I guess opening an FTX one and moving them there, not sure why they didn't do that in the first place...) so they got double-spent, so to speak. Which would be kinda funny for a crypto-firm, but I don't buy it.

Long Term Capital Management [1] is a good example of a company with “good, but illiquid investments” that failed because they made trades that went the wrong way temporarily, ran out of margin, and had to be rescued with a bailout before the trades recovered. Market prices stabilized after the bailout and the rescuers eventually exited the trades with a small profit.

I agree with your assessment that Alameda / FTX put customer deposits into “completely inappropriate investments” but there is a bit of a judgment call involved. Crypto fanatics could argue that the market will bounce back and those investments will be successful in the end.

[1]: https://en.wikipedia.org/wiki/Long-Term_Capital_Management

> I agree with your assessment that Alameda / FTX put customer deposits into “completely inappropriate investments”

And what about customers deposits that ended up in $300m+ real-estate in the Bahamas (including some for SBF's parents, which they now said they'd be giving back to FTX: how generous once caught with the hand in the cookie jar)?

And what about the $100m or maybe more in political donation? ($40m from SBF to dems, now he says he gave the same account to reps but kept it shadow for it'd ruin his woke image and there's one of his accomplice who gave at least $12m to reps too)

That's already $400m right there that haven't been wiped out due to a market downturn.

And then the naming rights, insane ads, etc.

"Oops sorry we fucked up, we used your funds to gamble with 100x leverage like degens and lost it all (but don't pay too much attention to all the money we actually siphoned out of the system)".

I don't think you can compare LTCM to FTX/Alameda (I'm not saying you explicitely did but it's dubious). We're talking about SBF guy describing his magic ponzi box and Matt Levine answering him (april 2022 I think):

"I think of myself as like a fairly cynical person. And that was so much more cynical than how I would've described farming. You're just like, well, I'm in the Ponzi business and it's pretty good.".

FTX/Alameda is more Enron than LTCM.

> FTX/Alameda is more Enron than LTCM.

FTX makes even Enron look like saints. FTX took money that wasn’t theirs and spent it. Theft on a massive scale. There’s not even a veneer of legality or deniability.

counterpoint: FTX only robbed people doing business with FTX. Enron robbed all of California. Tens of millions of households had to pay sky high electricity bills because of Enron manipulating the electricity market in California. The damage was about $40-50 Billion dollars. FTX owes less than a tenth of that.

Based on what we know how FTX was run internally, it might well be the case SBF simoly doesn't know the difference between liquidity and solvency. Which doesn't mean that FTX wasn't a scam, more than thing can be true at the same tike after all.

The problem with claiming SBF doesn't know the difference between solvency and liquidity, then how come he's figured out which one he needs to claim for his legal defence. If he doesn't know the difference, he wouldn't be so deliberate about claiming one happened not the other.

Maybe he's smart enough to listen to his lawyers. Or maybe he knows the difference. He still seems to be a criminal fraudster and crook, the other questions are secondery concerns mostly driven by curiosity.

We'll have to wait for any verdicts and court rulings so to onow what exactly went down, this thing is far from having reaching the end of the beginning.

> Maybe he's smart enough to listen to his lawyers.

I doubt that his lawyers would be happy with him making public statements about his business dealings right now.

Turtles all the way down. Or in this case, stupidity. He knows one is a thing bad people do and the other isn't. He believes he is not a bad person. Not-bad people don't do bad things. So obviously he couldn't have done the bad thing, because he's not a bad person.

Exactly, shameful framing. But it should be noted that he veered onto the clearly wrong path even sooner than you suggest: by taking user deposits and putting them into anything other than what the users had instructed them to hold with it. In regulated stock brokers, the stocks that are held on behalf of users are put into segregated accounts, meaning that they belong to users even if the broker becomes insolvent. By breaking this 1:1 link between users' funds and the corresponding assets, he's already creating mayhem, even if the investments had turned out to be successful. A broker simply has no business whatsoever to speculate with users' funds.

I have no idea how this plays out.

One question is what was in the agreement for FTX users? Can FTX use deposits for investments and to fund his other businesses?

In my view the path to prison for SBF is likely to come in the form of misleading investors rather than customers, but I dont know what the pitch deck told them at the time of funding. It might not even be against the law regarding what he did to customers despite the immense destruction.

> One question is what was in the agreement for FTX users? Can FTX use deposits for investments and to fund his other businesses?

I doubt you can just put that in the ToS and EULA.

> In my view the path to prison for SBF is likely to come in the form of misleading investors rather than customers

This isn't like Theranos, there is clear and provable monetary harm that was done.

"monetary harm" isnt a broken law. Im wondering what the specific rules are that he broke that could land him in jail for mismanaging customer funds. Its an odd case because the space has little regulation.

Some of that will ultimately be determined by whether or not it's against Bahamian law, rather than US law, which opens up a whole 'nother can of worms. The fact that he had over 100 companies he was operating makes this a dizzying case to speculate on the specifics of from a legality standpoint. I don't envy anyone who gets tapped for jury duty for this case.

100% re the "aww shucks" thing - his only way out of this is to convince everyone he was just a naive little guy with a heart of gold who got too successful for his own good, so we're going to see a lot of this and the "I can't actually code" stuff as the final few chapters of the FTX story play out.

He said something about altruism and funded Democrats for like the entire midterm season… I mean, how can this be a bad guy?

> took deposits, put them in completely inappropriate investments (many of which are now worthless, all of which were speculative nonsense)

I think it's naive to think this is the case. It's reasonable to assume he knows those tokens couldn't have been worth what he claims they're worth, before or after the FTX collapse. The tokens didn't suddenly drop in value. He has experience as a market maker and remaining delta-neutral. We must assume all of what he claims is deception and/or preparation for the court battle.

Remember that there was a pamphlet for Alameda investors that promised something like "15% return with no risk." FTX also had an "earn" product that was paid out from a marketing budget. These were deliberate actions. They knew what they were doing.

> The tokens didn't suddenly drop in value.

May I point you to a chart showing the price of Solana (SBF's preferred token)? Down 80% in four months is a pretty sudden drop in value. To be clear, I think the fraud started then, but that was after the damage had been done.

>He has experience as a market maker and remaining delta-neutral

Yeah, but market makers in unexpectedly lopsided markets lose all the time. It's the risk that enables them to 'earn' a take rate.

These were the top tokens they held in order of how they marked them on their balance sheet:

FTT $5.9B

SRM $5.4B

SOL $2.2B

MAPS $865M

Found here:

https://images.squarespace-cdn.com/content/v1/596a07c029687f...

>May I point you to a chart showing the price of Solana (SBF's preferred token)? Down 80% in four months is a pretty sudden drop in value.

FTT, SRM, and MAPS are the garbage tokens they claimed were worth more than they actually were. They each had major drawdowns more than 4 months ago. SOL even had a 60% drawdown by March. None of this was sudden. My point is they knew they were in trouble long before any of the solvency/liquidity issues.

It's thought that their trouble started in May during the Luna/Terra collapse. Alameda's loans were pulled when 3AC blew up. That's when they minted more FTT. SRM also had similar supply increases out of nowhere. They weren't investments as you said. They were tokens they could mint at any time to collateralize new loans.

Maybe they thought the same could be done with SOL? It is known to be highly centralized. There are also known issues with the Solana ecosystem where TVL for layer 2 tokens were double counted, making it seem more valuable.

I'm not sure what point you're trying to make by showing me they held $2bn of Solana in Nov-22 (itself, like all crypto, a made up and useless/worthless thing) that was worth $10bn in Nov-21.

Like sure, to make themselves feel better when they stared at Excel, they minted FTT to fill the gap, but so what?

To your point, just because I mint 1bn coins and sell one to my roommate for $1, it doesn't actually change the fact that I lost $700mn on $TSLA (the true problem).

EDIT: Maybe to make my point more clear - the one good thing about finance is that if I sell a Orange juice futures contract, I need to get the oranges from somewhere, or I can go to jail.

Crypto's innovation is eliminating the need for oranges, but turns out that's not an innovation at all

> (itself, like all crypto, a made up and useless/worthless thing)

oh... I see what's happening here. Good luck on your crusade.

Ignoring all the other points then are we?

And please share crypto's use-case with me. I'd love to be the first to find one.

>That's when they minted more FTT.

Can you explain how exactly they did this? I want to understand, on a technical level, how they "minted" more of these tokens.

When/who can unlock/mint token supply is defined in a smart contract. It's different for each smart contract.

Here's the code for the FTT Deployer contract:

https://etherscan.io/address/0x50d1c9771902476076ecfc8b2a83a...

I'm not familiar enough with the Ethereum's Solidity programming language to give you an explanation.

It looks like it's an OpenZeppelin template. I've seen these re-used elsewhere. You can look through their docs to understand it better.

https://docs.openzeppelin.com/contracts/4.x/erc20-supply

maybe its hard to be delta neutral in crypto where all the coins are like 95% correlated.

I think it's likely he initially was using other investments that were similarly worthless, but which may not have been quite so obviously worthless to him at the time. Don't forget about the Luna/Terra debacle back in May, and the fact that he was running around buying up failing firms in the crypto space. The house of cards was already crumbling, and he was sitting on top in a panic trying to prop up the base before his pinnacle fell. The results were what we'd expect in that situation.

Well technically it is a liquidity crisis, as being insolvent is a liquidity crisis. (If you have no assets, you have no liquid, class 1 assets by definition.) It is similar to the extreme example of "bombing a building to the ground and then saying we lacked a roof."

Is it at all possible that SBF is "merely" inept (yet still culpable)? Or is there any way to know whether SBF knew what he was doing was making FTX insolvent?

No. His resume shows he's smart enough to understand how market-making and trading works, he just bought into his own mythos and thought he could out-trade the world.

If he was actually as skilled as he thought, his strategy could have made him unimaginably wealthy, but he wasn't.

I'd compare it to a magician throwing swords at an assistant on stage. You better be sure that you know what you're doing before you do it.

So that bonkers "magic box" interview he gave - was he deliberately planning a naivety defense while executing theft of the deposits?

no he was bragging - a lot of the "trading" alameda did was participating and orchestrating "boxes" like what he so smugly described in the interview, which was horrifying to listen to.

The problem with claiming he was just inept is that he was actively doing things to hide the insolvency - pumping the value of assets in which he controlled the market, doing deals with other insolvent entities to hide any defaults, and conditioning deals on collateral being held on FTX. It was very clear many months back that Alameda was underwater, and that whoever was their lender was going to face a massive default. SBF was both the issuer, borrower and lender of the FTT tokens - and none of that money was meant to be associated with customer assets. There are some simple questions of "Why did SBF do a load of deals in the spring which were clearly money losing?" and the answer is "The only possible reason to do those deals is to hide the massive losses he'd incurred".

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