I first saw this post on Monday - it is dated November 15 but I think the author is in Japan - anyway, I saw it a second time at a Japanese-owned blog when a commenter linked to it. I skimmed it, saw a reference to Kelly (of the Criterion) and read the whole thing. This has the ring of, at minimum, verisimilitude and more probably, veracity.
From Milky Eggs, November 15:
What happened at Alameda Research
If you want to read a poorly researched fluff piece about Sam Bankman-Fried, feel free to go to the New York Times (PDF). If you want to understand what happened at Alameda Research and how Sam Bankman-Fried (SBF), Sam Trabucco, and Caroline Ellison incinerated over $20 billion dollars of fund profits and FTX user deposits, read this article.
To be clear, we still don’t have a perfect understanding of what exactly happened at Alameda Research and FTX. However, at this point, I feel that we have enough information to get a grasp on the broad strokes. Through a combination of Twitter users’ investigations, forum anecdotes, and official news releases, the history of these two intertwined companies becomes progressively less hazy, slowly coalescing into something resembling a consistent narrative.
Of course, without witness testimonies and a full financial investigation, our claims only remain tentative at best. Any given piece of information may be flawed or even fabricated. However, if they are assembled together and put in context, they together lend credence to the following timeline:
- SBF, Trabucco, and Caroline were (probably) initially well-intentioned but not especially competent at running a trading firm
- Alameda Research made large amounts of book profits via leveraged longs and illiquid equity deals in the 2020-2021 bull market
- Although Alameda was likely initially profitable as a market maker, their edge eventually degraded and their systems became unprofitable
- Despite success with some discretionary positions, on net, Alameda & FTX jointly continued to lose large amounts of money and liquid cash throughout 2021-2022 as a result of excessive discretionary spending, illiquid venture investments, uncompetitive market-making strategies, risky lending practices, lackluster internal accounting, and general deficiencies in overall organizational ability
- When loans were recalled in early 2022, an emergency decision was made to use FTX users’ deposits to repay creditors
- This repayment spurred on increasingly erratic behavior and unprofitable gambling, eventually resulting in total insolvency
Details follow below. (Many thanks to all those who have contributed to this article, be it through private discussions or through public content that I’ve quoted or otherwise relied upon.)
Alameda Research probably lost >$15 billion dollars
To understand the FTX bankruptcy, we have to first understand the scope of the problem at hand. Most news accounts seem to portray the scale of the bankruptcy as relatively small. For example, the New York Times suggests that user deposits were used to make up for money that had gone into venture investments:
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.
Similarly, Matt Levine’s column seems to imply that the drop in the value of FTT used as collateral resulted in an enormous imbalance between assets and liabilities:
Now let’s add one more crypto element. If you are a crypto exchange, you might issue your own crypto token. FTX issues a token called FTT. The attributes of this token are, like, it entitles you to some discounts and stuff, but the main attribute is that FTX periodically uses a portion of its profits to buy back FTT tokens. This makes FTT kind of like stock in FTX: The higher FTX’s profits are, the higher the price of FTT will be. It is not actually stock in FTX — in fact FTX is a company and has stock and venture capitalists bought it, etc. — but it is a lot like stock in FTX. FTT is a bet on FTX’s future profits.
But it is also a crypto token, which means that a customer can come to you and post $100 worth of FTT as collateral and borrow $50 worth of Bitcoin, or dollars, or whatever, against that collateral, just as they would with any other token. Or something; you might set the margin requirements higher or lower, letting customers borrow 25% or 50% or 95% of the value of their FTT token collateral.
Both of these accounts miss a crucial part of the story. First, FTX is missing about $8 billion dollars’ worth of users’ collateral. Even if you consider the sum total of venture investments made by FTX and Alameda together, as well as a marginal drop in collateral value as a result of an FTT price decline, it simply does not make sense for FTX to be $8b in debt. The losses would be significant, yes, but they alone do not constitute a sufficient explanation for FTX’s bankruptcy.
In addition to that, it was popularly believed that FTX and Alameda together were enormously profitable, as a result of:....
....MUCH, MUCH MORE
