28 November 2022

The History FTX

I find this whole thing fascinating. How the "smartest guys in the room" got taken to the cleaners. FTX Post Mortem Part 2 Of 3: How Did We Get Here?

And we know that they are the smartest guys in the room, because they almost never miss a chance to tell us that. Well, they have been suspiciously quiet on the subject since FTX imploded. I'm sure that they will start telling us that again as soon as they think that we've forgotten about FTX and Steve Bankman-Fried (SBF).

The history goes back all the way to 2021. Well, 2021 is when it gets interesting.

What if Alameda’s goal wasn’t to make money, but to lose money to other traders in a perverse growth hack used to attract the next round of “smart money” investors?

After all, at best Alameda had been making a few hundred million from trading over the course of its existence and likely much less than that. As spreads closed with more market makers flooding into the asset class it’s much easier to take money from Sequoia and Softbank than it is to make money trading.

Running an unprofitable casino is a terrible business, but selling an unprofitable casino that looks extremely busy to a private investor is a fantastic business.

There is so much in that article about SBF, about the corporate structure of Alameda and FTX, and the overlap between the two, about loans and the quest for venture capital and more. There is even a bit about how the son of two compliance lawyers, one of whom specializes in tax havens, engineered a system where he apparently believed that he could legally access client funds. You should click thru and read the entire thing.

And though Zero Hedge says that SBF was apparently using FTX as his personal slush fund, that really doesn't explain the 6 to 10 billion in missing assets. Bad management does, however.

here is no way that Alameda could have sold off all of those liquidated customer positions as the token collapsed. This type of liquidation transaction is known as “toxic flow” and is a surefire way to bankrupt a market maker.

If FTX’s famously specialized liquidation engine simply meant that customer positions were shunted onto the Alameda balance sheet to be cleared at a later date, then the amount of toxic flow from junk tokens in the last year would build up quickly.

This seems to be the only way the size of the hole makes any sense.

I find this fascinating in the same way I found the implosion of Bernie Madoff's empire engrossing. "The smartest guys in the room" (they will tell you that!) fell for one of the oldest cons in finance. I'm not sure whether or not you can call FTX a Ponzi Scheme, but it isn't far removed. It was certainly a house of cards, and not the Sure Thing™ that the venture capitalists, the Pundits were telling us it was.

The week before Thanksgiving Twitter was reminding everyone what Jim Cramer of CNBC's Mad Money said about SBF back in June. And some people were bring up other statements by Cramer on other topics.

And then there are the political questions. Like I said, click thru.

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