The NYT-SBF Interview, Sharp China on China Protests and the Path to Re-Opening

Good morning,

This week’s Stratechery Interview fell through; I do have a brief Update about that New York Times interview with Sam Bankman-Fried.

On to the update:

The NYT-SBF Interview

From the New York Times:

Sam Bankman-Fried, the founder of the FTX cryptocurrency exchange, made his first public appearance on Wednesday since his business empire imploded this month, insisting that he “did not ever try to commit fraud” and repeatedly saying he didn’t know the extent of what was going on within his crypto businesses. In a live interview at The New York Times’s DealBook conference in Manhattan, Mr. Bankman-Fried blamed “huge management failures” and sloppy accounting for the collapse of his $32 billion company, which has sparked civil and criminal investigations.

Those investigations are focused on whether FTX broke the law by lending its customers’ funds to a trading firm, Alameda Research, which Mr. Bankman-Fried also owned. Speaking via a video feed from the Bahamas, where FTX was based, the 30-year-old said he didn’t “knowingly commingle funds.” At another point, he said, “I didn’t know exactly what was going on.” Mr. Bankman-Fried also took responsibility for the collapse. “Look, I screwed up,” he said. “I was C.E.O.”

That last sentence was the only shred of accountability taken by Bankman-Fried for what was — let’s be super clear here — fraud. Moreover, this fraud has nothing to do with cryptocurrency: FTX promised it would not take user money; it took user money to make speculative investments; that money is now gone. That’s fraud!

To be specific, FTX’s terms of service state:

All Digital Assets are held in your Account on the following basis:

(A) Title to your Digital Assets shall at all times remain with you and shall not transfer to FTX Trading. As the owner of Digital Assets in your Account, you shall bear all risk of loss of such Digital Assets. FTX Trading shall have no liability for fluctuations in the fiat currency value of Digital Assets held in your Account.
(B) 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.
(C) You control the Digital Assets held in your Account. At any time, subject to outages, downtime, and other applicable policies (including the Terms), you may withdraw your Digital Assets by sending them to a
different blockchain address controlled by you or a third party.

Assets held under these terms can not, by definition, be subject to a bank run. A bank takes in deposits and lends them out; if too many people come calling for their deposit before the loans can be collected, the bank will run out of money — that’s a bank run. FTX, though, specifically promised customers that their funds would not be lent out. The fact that they were was fraud, and it is mystifying that so much of the media refuses to state what is, without question, a fact.

As for Bankman-Fried’s responsibility, as I noted that sentence was the only accountability taken in the interview with Andrew Ross Sorkin; the rest of the time was spent trying to deflect questions and paint a picture of accounting mistakes and mishaps that had the unfortunate side effect of losing billions of dollars of users’ money for which Bankman-Fried is very sorry. Here was his answer when asked specifically about the co-mingling of funds between FTX and Alameda Research:

SORKIN: But I think the bigger question is where Alameda got the loan from, which is to say there is a view that this is about commingling of funds. And in that letter that I just read you, this gentleman actually copied and pasted the terms of service for FTX into the email. I want to read you this.

It says, “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 users’ accounts as belonging to FTX Trading.” So, how is it possible that Alameda had this loan of such a large size?

BANKMAN-FRIED: So, there is that piece from the terms of service. But there were a number of other parts of the terms of service and a number of other parts of the platform on top of that. There is the borrow/lending facility, where users were lending billions of dollars of assets to each other, collateralized by assets on the exchange. And you had, obviously, futures contracts where there were leveraged positions on. Of course, all of this — it’s meant to be the case that these are positions where FTX could, if it needed to, margin-call those positions and close them down in time, such that it would cover all those shorts, all those liabilities. Obviously that wasn’t the case here, and that’s a massive failure of oversight of risk management and of diffusion of responsibility from myself running FTX.

SORKIN: Make this very straight: Was there commingling of funds? That’s what it appears like. It appears like there’s been a genuine commingling of funds that are of FTX customers that were not supposed to be commingled with your separate firm.

BANKMAN-FRIED: I didn’t knowingly commingle funds. And again, one piece of this, you have the margin trading. You have, you know, customers borrowing from each other. Alameda is one of those. I was frankly surprised by how big Alameda’s position was, which points to another failure of oversight on my part and failure to appoint someone to be chiefly in charge of that. But I wasn’t trying to commingle funds.

SORKIN: Let me ask you this. The Wall Street Journal reported that Carolyn Ellison told Alameda staffers that Alameda used FTX client funds to cover loans that were being recalled because of the Luna-triggered credit crunch. Carolyn says that she, Sam, Gary were aware of this. How do you square that with what you originally said over Twitter — that this was an $8 billion accounting mistake?

BANKMAN-FRIED: So, I will point to two things.

First of all, I obviously don’t know what anyone else is thinking here. I can only talk about it from what I know and from what I knew. A lot of this is reconstructing it over the last month. I have limited access to data. But what it seems like happened is in the middle of the year, a lot of — most of the borrow/lending desks in the space blew out or closed down. And it seems like Alameda had margin positions opened with them, and that it likely moved a bunch of that over to FTX this year when they shut down. And that means — I think it was overcollateralized positions, but positions that involved substantial size and substantial U.S. dollar size on the borrower side. In terms of the accounting mistake, again, looking through what happened, I think that there is a substantial discrepancy between what the financials were, what the auditing financials were, the true financials, what the exchange understood — all of that was consistent — versus what the dashboards that we had displayed for Alameda’s account there, which substantially underdisplayed the size of that position. That’s one of the reasons that I was surprised when we dug into everything — at how big that position had become.

This isn’t a coherent answer; it also directly contradicts what Bankman-Fried reportedly told investors when he was seeking a bailout of FTX in early November. From the Wall Street Journal on November 11:

Crypto exchange FTX lent billions of dollars worth of customer assets to fund risky bets by its affiliated trading firm, Alameda Research, setting the stage for the exchange’s implosion, a person familiar with the matter said. FTX Chief Executive Sam Bankman-Fried said in investor meetings this week that Alameda owes FTX about $10 billion, people familiar with the matter said. FTX extended loans to Alameda using money that customers had deposited on the exchange for trading purposes, a decision that Mr. Bankman-Fried described as a poor judgment call, one of the people said. All in all, FTX had $16 billion in customer assets, the people said, so FTX lent more than half of its customer funds to its sister company Alameda.

So in November it was a poor judgment call; yesterday it was an accounting mistake. What it definitely was was fraud, and from where I’m sitting it very much looks intentional — and Bankman-Fried looks like a serial liar. At a minimum, it certainly seems past time for the question of intent to be decided in a court of law, not a Zoom interview.

This, by the way, isn’t the only probably-criminal activity undertaken by Bankman-Fried and company: Coindesk has an excellent overview of all of the problematic activity that we know about above-and-beyond taking customers’ money.

Sharp China on China Protests and the Path to Re-Opening

I’ve gotten several requests to comment on the protests that happened in China over the weekend; I think the best place to go is this week’s episode of Sharp China. Andrew and Bill cover the protests and China’s rocky path to re-opening, which, by the way, appears to be officially underway. From Bloomberg:

Beijing will allow some virus-infected people to isolate at home, starting with residents of the city’s most-populous district, a landmark shift that reflects the pressure officials are under from a record outbreak and public opposition to Covid Zero. Low-risk patients can do home isolation for a week if they choose, people familiar with the plans said, dialing back a nationwide policy that has seen everyone with Covid sent to government quarantine sites regardless of severity, to halt transmission chains. The shift has already begun in Chaoyang district — home to some 3.5 million people as well as foreign embassies and company offices — and it will act as an example for other districts to follow, the people said, asking not to be identified discussing an order that’s not yet public.

This isn’t completely a surprise: cases in China have been sky-rocketing over the last several weeks to the highest levels of the pandemic; it’s unlikely that the virus could be contained with strict lockdowns at this point, even if there weren’t the concern for further unrest.

However, as discussed on this episode, that doesn’t mean that China will be open for business in a matter of days or weeks: expect a very rocky few months where China attempts to slow the spread to allow its medical system — which is both smaller and less capable than the U.S.’s, despite serving a much larger population that is almost entirely naive to COVID-19 (in terms of infection) — to try and keep up. However, the direction is now, finally, clear.

To listen to Sharp China use the link at the bottom of this email to add it to your podcast player.

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