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“We’re Þe New York Times! & We Must Write Something! But We Don’t Know Anything! & We Won’t Learn! & We’re Scared to Say Anything!”, &
BRIEFLY NOTED: For 2022-11-15 Tu
FOCUS: “We’re Þe New York Times! & We Must Write Something! But We Don’t Know Anything! & We Won’t Learn! & We’re Scared to Say Anything!”:
As you know, I have been flummoxed by a lot of things in the collapse of FTX, Alameda, SBF, and so forth. But this is the thing that has flummoxed me the most. Either the New York Times’s reporters and editors are pig-ignorant about crypto, or they are actively working extremely hard to bury the lead for incomprehensible reasons. A “surprisingly calm” ex-billionaire who had “expanded too fast and failed to see warning signs” tries to figure out his next move. And The New York Times is on it! With a wide-ranging interview!!.
Someone who is not terminally cynical about The New York Times reading the first paragraphs of the story would come away with an impression of an overleveraged billionaire whose financial bets went badly wrong because he had not kept on top of risks, and perhaps cut some legal-technical corners.
David Yaffe-Bellany: How Sam Bankman-Fried’s FTX Crypto Empire Collapsed: ‘Mr. Bankman-Fried said in an interview that he had expanded too fast and failed to see warning signs. But he shared few details about his handling of FTX customers’ funds: In less than a week, the cryptocurrency billionaire Sam Bankman-Fried went from industry leader to industry villain, lost most of his fortune, saw his $32 billion company plunge into bankruptcy and became the target of investigations by the Securities and Exchange Commission and the Justice Department.
But in a wide-ranging interview on Sunday that stretched past midnight, he sounded surprisingly calm. “You would’ve thought that I’d be getting no sleep right now, and instead I’m getting some,” he said. “It could be worse.”
The empire built by Mr. Bankman-Fried, who was once compared to titans of finance like John Pierpont Morgan and Warren Buffett, collapsed last week after a run on deposits left his crypto exchange, FTX, with an $8 billion shortfall, forcing the firm to file for bankruptcy. The damage has rippled across the industry, destabilizing other crypto companies and sowing widespread distrust of the technology.
Besides some Twitter posts, messages to employees and occasional texts to reporters, Mr. Bankman-Fried, 30, has said little publicly over the last week. In the interview on Sunday, he voiced numerous regrets over the collapse of FTX.
But he would offer only limited details about the central questions swirling around him: whether FTX improperly used billions of dollars of customer funds to prop up a trading firm that he also founded, Alameda Research. The Justice Department and the S.E.C. are examining that relationship.
Alameda had accumulated a large “margin position” on FTX, essentially meaning it had borrowed funds from the exchange, Mr. Bankman-Fried said. “It was substantially larger than I had thought it was,” he said. “And in fact the downside risk was very significant.” He said the size of the position was in the billions of dollars but declined to provide further details…
But there is literally – and I really mean literally – nobody in this fallen sublunary sphere who is at all "familiar with the matter" in even a basic way who thinks “an overleveraged billionaire whose financial bets went badly wrong because he had not kept on top of risks, and perhaps cut some legal-technical corners” is what happened.
Why all the fluff in the lead?
Why work so extremely hard to create a very misleading impression on the part of casual lead-readers?
And why make yourself an object of such extraordinary potential mockery among the community of those even semi-informed and “familiar with the matter”?
Does it get better lower down? What information is there lower down?
“Warning signs had emerged that [SBF] business empire was in trouble and his ambitions exceeded his grasp, according to interviews with nine of his colleagues and business partners, as well as internal messages obtained by The New York Times;”
“wasn’t sharing information with key staff”,
“pushing an ambitious regulatory agenda while speaking critically about Changpeng Zhao”,
“a sometimes cloistered existence, surrounded by a small coterie of colleagues, some of whom were in romantic relationships with other FTX employees”;
“[Changpeng] Zhao initially agreed to buy the exchange in what would have amounted to a bailout. But soon the deal fell through, after Binance found problems in the company’s financials. In a Signal group chat that included Mr. Bankman-Fried and other FTX representatives, Mr. Zhao posted a curt note, according to two people familiar with the matter. ‘Sam, I’m sorry’, he wrote, ‘but we won’t be able to continue this deal. Way too many issues. CZ’”.
We are now at paragraph 32.
In paragraph 33 there is actual information:
Ms. Ellison explained… her voice shaking… apologized… had let the group down…. Alameda had taken out loans and used the money to make venture capital investments, among other expenditures…. This spring… 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. The meeting was previously reported by The Wall Street Journal…
The Wall Street Journal article <https://www.wsj.com/articles/alameda-ftx-executives-are-said-to-have-known-ftx-was-using-customer-funds-11668264238?mod=latest_headlines> by Dave Michaels, Elaine Yu, and Caitlin Ostrof was published three days ago, about a meeting held three days earlier.
That information should have been the lead. The first paragraph of The New York Times article should have read:
Sam Bankman-Fried, Caroline Ellison, Nishad Singh, and Gary Wang took roughly $10 billion of customer money from Bahama-located crypto exchange FTX and used it to pay off lenders to their trading firm Alameda Research, according to Alameda CEO Ellison in an internal video meeting last Wednesday that was previously reported by the Wall Street Journal. In an interview, Sam Bankman-Fried expressed regret but offered only limited details. He declared FTX bankrupt last Friday,.
read stories like this one by David Yaffe-Bellany, and I think: these people think this is the way to gain a reputation as a journalist and have a career? And yet they do so think. And, worse, they are right: they do and will have careers.
Instead, you should go to Bloomberg:
MUST-READ: Matt Levine on þe FTX Balance Sheet:
Matt Levine: FTX's Balance Sheet Was Bad: Broadly speaking your balance sheet is still going to look roughly like:
—Liabilities: Money customers gave you, which you owe to them;
—Assets: Stuff you bought with that money.
And then the basic question is, how bad is the mismatch. Like:
—$16 billion of dollar liabilities and $16 billion of liquid dollar-denominated assets? Sure, great.
—$16 billion of dollar liabilities and $16 billion worth of Bitcoin assets? Not ideal, incredibly risky, but in some broad sense understandable.
—$16 billion of dollar liabilities and assets consisting entirely of some magic beans that you bought in the market for $16 billion? Very bad.
—$16 billion of dollar liabilities and assets consisting mostly of some magic beans that you invented yourself and acquired for zero dollars? WHAT?
Never mind the valuation of the beans; where did the money go? What happened to the $16 billion? Spending $5 billion of customer money on Serum would have been horrible, but FTX didn’t do that, and couldn’t have, because there wasn’t $5 billion of Serum available to buy. FTX shot its customer money into some still-unexplained reaches of the astral plane and was like “well we do have $5 billion of this Serum token we made up, that’s something?” No it isn’t!...
I am not saying that all of FTX’s assets were made up. That desperation balance sheet lists dollar and yen accounts, stablecoins, unaffiliated cryptocurrencies, equities, venture investments, etc.... That desperation balance sheet reflects FTX’s position after $5 billion of customer outflows last weekend; presumably FTX burned through its more liquid normal stuff (Bitcoin, dollars, etc.) to meet those withdrawals, so what was left was the weirdo cats and dogs. Still ... its balance sheet consisted mostly of stuff it made up! Stuff it made up! You can’t do that! That’s not how balance sheets work! That’s not how anything works!
Oh, fine: It is how crypto works. This might all sound familiar not just because we talked about FTT last week, but because we talked about the collapse of TerraUSD and Luna earlier this year.... Or it might sound familiar because Bankman-Fried said it himself, to me, on a now-infamous episode of Bloomberg’s Odd Lots podcast last year. asked him a question about yield farming, and in the course of his answer he said:
“You start with a company that builds a box and in practice this box, they probably dress it up to look like a life-changing, you know, world-altering protocol that's gonna replace all the big banks in 38 days or whatever. Maybe for now actually ignore what it does or pretend it does literally nothing. It's just a box. So what this protocol is, it's called ‘Protocol X,’ it's a box, and you take a token. …
“So you've got this box and it’s kind of dumb, but like what's the end game, right? This box is worth zero obviously. … But on the other hand, if everyone kind of now thinks that this box token is worth about a billion dollar market cap, that's what people are pricing it at and sort of has that market cap. Everyone's gonna mark to market. In fact, you can even finance this, right? You put X token in a borrow lending protocol and borrow dollars with it. If you think it's worth like less than two thirds of that, you could even just like put some in there, take the dollars out. Never, you know, give the dollars back. You just get liquidated eventually. And it is sort of like real monetizable stuff in some senses…”
The box, it turns out, was FTX (and Serum). It looked like a life-changing, world-altering business that would replace all the banks. It had a token, FTT (and SRM), with a multibillion-dollar market cap. You could even finance it, or FTX/Alameda could anyway: They could put FTT (and SRM) tokens in a box and get money out. (From customers.) They could take the dollars out and never, you know, give the dollars back. They just got liquidated eventually. And those tokens, FTT and SRM, were sort of like real monetizable stuff in some senses. But in other senses, not.
I tried, in the previous section, to capture the horrors of FTX’s balance sheet as it spiraled into bankruptcy. But, as I said, there is something important missing in that account. What’s missing is the money. What’s missing is that FTX had at some point something like $16 billion of customer money, but most of its assets turned out to be tokens that it made up. It did not pay $16 billion for those tokens, or even $1 billion, probably. Money came in, but then when customers came to FTX and pried open the doors of the safe, all they found were cobwebs and Serum. Where did the money go? I don’t know, but the leading story appears to be that FTX gave the money to Alameda, and Alameda lost it.... The most sensible explanation is that Alameda lost the money first — during the crypto-market meltdown of this spring and summer, when markets were crazy and Alameda spent money propping up other failing crypto firms — and then FTX transferred customer money to prop up Alameda. And Alameda never made the money back, and eventually everyone noticed that it was gone...
Very Briefly Noted:
Tyler Cowen: A simple point about existential risk ‘Hardly anyone associated with Future Fund saw the existential risk to…Future Fund, even though they were as close to it as one could possibly be. I am thus skeptical about their ability to predict existential risk more generally, and for systems that are far more complex and also far more distant…. Invest in talent and good institutions, rather than trying to fine-tune predictions about existential risk itself. If EA is going to do some lesson-taking, I would not want this point to be neglected.
Abram Brown: Matt Levine Explains the World: A ‘Weird’ Walk in the Park With the Star Bloomberg Columnist: ‘From Elon’s follies to crypto’s “death-spiral convertibles,” the “Money Stuff” writer has become an indispensable translator of the complex, arcane and bizarre…
O&G OG: ‘$TWTR capital structure thread: 🧵Elon had commitments for $13 billion in credit facilities to help finance the Twitter buyout…. $12.5 billion was likely funded at close with undrawn $500mil revolver… floating rate loans…. Just the move in SOFR from announcement in April to close in Oct cost Elon an extra $435 million per year in interest. Total interest expense appears to be $1.286 billion today, but all of the loans are subject to increases in SOFR which Elon will bear unless he swapped rates (my gut says he didn’t). 2 of the tranches also have punitive margin escalation/ratchets…
Byrne Hobart: Money, Credit, Trust, and FTX: ‘Was the utilitarianism stuff just bluster to defend a sociopathic money-making scheme? Probably not…
• Dan Davies: ‘FTX is neither Enron nor Lehman: It's MF Global. If there is a party who is responsible for prop trading and who is also able to authorise movement of client funds, you are putting temptation in the way. Funds segregation and front office/back office split are hard won lessons…. “We have multiple levels of authorisation for transactions involving client funds, all of whom are currently having sex with each other in a compound in the Bahamas”…
Sam Trabucco (from April 2021): ‘Two years ago, Alameda maintained pretty strict delta neutrality…. Today not so much…. What changed: A thread about super powers…
Matthew Yglesias: Two years of strong and slow boring of hard boards: ‘I launched this website with a lot of enthusiasm about the editorial mission of re-establishing a direct personal relationship with readers and declaring independence from algorithmic content distribution and media groupthink…. It did succeed, enormously…
Mary Branscombe: ’This may or may not work for you because Twitter is a distributed system built from a lot of microservices that are now in indeterminate states; take any report of something working or not working as just a point in time thing…
Cory Doctorow: Even if you’re paying for the product, you’re still the product: ‘Incentives matter, but impunity matters more…. The theory behind “if you’re not paying for the product…” is that old economist’s saw: “incentives matter.” Companies that monetize attention are incentivized to manipulate and spy on you, while companies that you pay just want to make you happy. This is a theory of corporate behavior grounded in economics, not power…. Reality is a lot uglier…