He gambled. Lost. Gambled more. Lost bad "even when times were good". My guess is he figured if he could borrow from Peter to pay Paul one more time... one more time that he would eventually be back in the black. I think he personally set up those "positions" over and over, but he's not good at gambling so now it's all gone.

https://www.nytimes.com/live/2022/11/30/business/sam-bankman...

You forgot stole. He stole, gambled, lost.

Let’s say Amazon bet your $100 order money on WSB stocks and lost, and said “excuse blah insolvent blah accounting blah”.

this sounds like a tragic version of the film Uncut Gems

The basic idea is this: If he just sent customer funds from FTX to Alameda, that would definitely be fraud/theft as the FTX TOS said they wouldn't do that. But instead he did something else. You know how you can take a margin loan in your brokerage account against the value of your stocks? You can use the money from the loan as you wish, but if your stocks go down X% then they will "margin call" you and liquidate your assets to pay back the loan. SBF's claim is that Alameda took a margin loan as an FTX customer just like any other customer might, and then lost their money gambling. But unlike other customers, Alameda was not subject to any margin requirements (??) and could not be automatically liquidated (??). These facts(?) probably ruin this defense, which otherwise might hold some water, as it's not at all a defensibly arms length transaction. IANAL.

So they took a margin loan using all their FTT as collateral, then lost all the money. Normally you wouldn't be able to lose more than you've left as collateral, but they weren't like other customers (see above). But there's also the fact that the collateral was semi-BS, so FTX can't sell it to get the money back anyway. FTX printed the FTT out of thin air and then sent it to Alameda (surely for some purported reason). Alameda then used this semi-fake collateral to loot all FTX's customer deposits. (It was fake in the sense that you can't sell all of it at the mark-to-market/last-match price). You can see how FTX is involved at every step of the way here, and is at the root of the scheme, not merely a criminally negligent player.

But honestly it just keeps going deeper and deeper, as it sounds a lot like funds were missing prior to any of this happening, and that even if they could pay all this money back, there wouldn't be enough money, and that the margin loan wasn't just used for investing but also frivolous spending. Don't try to make sense of SBF's actions, they don't make much sense (Why go on a shopping spree that worsen's your already-insolvent exchange? Why tie up withdraw-at-anytime depositor's funds into 10-year-time-horizon VC funds? IDK, why talk so much publicly against your lawyer's wishes and your own best interest?)

Thank you for explanation these mechanisms! I was very confused by his characterization of this.

> Normally you wouldn't be able to lose more than you've left as collateral, but they weren't like other customers

Market prices aren't continuous, so you cannot guarantee that you can close the customers position at the point where they are wiped out. So a cryptocurrency casino that offers margin to users cannot guarantee that they won't just suddenly be insolvent.

They also accepted magic beans as collateral no just their own FTT but all manner of other dogshit where there couldn't be a realistic realtime market price.

The key point is that these bucketshops end up as the counterparty to their customers trades the net result was that FTX itself was essentially long all manner of illiquid scamcoins and massively short Bitcoin.

This complicates accounting for the total loss-- if you deposit $1000 but then turn it into $100k worth of "bitcoin" using trades with 100x leverage-- though the bitcoin never existed it was just an entry on FTX's books-- and then FTX implodes what the amount lost? Arguably closer to $1000, but right now the figures about FTX all use the highest number. But the customer didn't actually lose that full amount-- it was just a fantasy.

A lot of the dialog about the fraud at FTX centers on diverting company assets for personal/family use-- which indeed doesn't appear to be good, but so far that doesn't appear to have happened at a scale that they couldn't have operated out of if not for the fact that the entire business itself-- basically selling people paper assets which weren't even backed by meaningful collateral-- was fraudulent.

And this is an important distinction because it changes what risk people should be looking for... The 'crypto' ecosystem is highly volitile at best-- full of garbage that is sure to fail. Business offerings that aren't provably implosion proof will almost all eventually implode.

Compare to your typical US retail brokerage-- margin is available, but 2x leverage at the absolute most, highly controlled, regulated, and risk managed, riskier assets either can't be used as collateral or count far less. The assets and customers are diversified (and when they become less so, leverage is further reduced), and there is industry provided insurance mechanisms to backstop. In the crypto space things are massively more correlated, unregulated, customer are all over the world so there is seldom any recourse against them, no one has every (AFAIK) gotten in trouble for manipulating a cryptocurrency market, and instead of 2x leverage _20x_ is common at these casino services (and 20x isn't even the limit).

> SBF's claim is that Alameda took a margin loan as an FTX customer just like any other customer might, and then lost their money gambling.

Is it normal for margin loan funds to come from customer deposits? For example, if I deposit on Charles Schwab, is the cash held in my Schwab account used as capital for margin loans to other Schwab customers? I would think not (unless I'm misunderstanding how finance works). Like of course the money is probably lent out like banks do, but FDIC insured banks have rules about what types of things they can lend money to, right?

I would think that using customer deposits to make margin loans to other customers would be fraud even if Alameda wasn't in the picture. That's what I fundamentally don't understand about SBF's mumbo jumbo; how would Alameda (or any other customer) take a margin loan out of customer funds if customer funds are supposed to be segregated from FTX company funds? Isn't the admission that a margin loan to Alameda led to the loss of customer funds an admission that depositors were defrauded?

> For example, if I deposit on Charles Schwab, is the cash held in my Schwab account used as capital for margin loans to other Schwab customers? I would think not (unless I'm misunderstanding how finance works). Like of course the money is probably lent out like banks do, but FDIC insured banks have rules about what types of things they can lend money to, right?

Traditionally, lending deposits out as loans (especially mortgages) was seen as the most important thing that banks did, their core function. Nowadays things are more abstract and regulations are different, but it wouldn't surprise me if margin loans could still be at least partly funded (at least in an abstract capital-ratio sense) from deposits.

FTX was a brokerage though, not a bank. While banks may be inherently allowed to accept and lend out customer funds, brokerages seem to be largely forbidden from doing so.[0] SBF appeared to act as if the typical rules of operating a security brokerage didn't apply to FTX 'because crypto.'

[0] https://www.finra.org/rules-guidance/rulebooks/finra-rules/3...

My assumption was that depository banks are limited in what sorts of investements they can make, but maybe I'm wrong in that assumption.

You are sort of correct.

Brokers and exchanges are obligated to park customers' money in an escrow, and may even be required to insure them [1] for a good measure. Under no circumstance are customers' funds lent out. So where do they get money from to lend? Brokers lend either their own money or get into arrangements with liquidity providers. These are big institutions/hedge-funds etc., who offer to lend money in exchange for attractive returns. They get into a different agreements and are fully aware of risks they are taking on.

[1] https://www.sipc.org

This is a core business line of broker dealers. However I believe in the US your risk is limited to 140% of the value of your margin loan. If you have no margin loan then your securities need to kept in a separate/segregated client account.

This all was a big problem I. The us up through Great Depression, and then the securities exchange act of 1934 was implement to regulate these practices quite successfully over the years.

I spoke to a few Alameda/FTX people over drinks before summer. They were delighted to brag about the lack of separation between the two entities. Really there wasn’t any.

Is the outward exterior of earnestness and sincerity (I have to admit I’m almost falling for it) a facade? It seems like he actually believes everything he is saying and there is an absence of malice in how he projects in the interview. He’s either a psychopath who is faking (very well) this earnest persona, or he actually is fully deluded by his own fantasy creation/dollhouse that is FTX.

He could also just be a good actor. Or actually earnest. Any of these things are possible.

But it's always very dangerous to try to determine someone's honesty based on public appearances. Anyone appearing in public will have decided exactly what they're going to say, will have decided on what sort of image they want to project, etc. They will have practiced. In a situation like his, triply so.

People appearing in public are rarely their authentic selves. They are playing a role of some sort to some degree. Even ordinary, normal people do this. The information quality you get from how they appear is too low to base any sort of judgement on.

Does claiming ignorance help him at all?

It's a common human experience: Normalization of deviance. [0]

You take a (what you think is) calculated risk, nothing bad happens immediately and it worked out - which reinforces the belief that your risk estimate was correct and not just pure luck.

Then you take the same sort of risk all the time and it becomes your new normal - you take another risk (which is now a larger step, since the previous risk-taking is just business as usual) and so on until the probability of failure is 1.

Obviously this can easily happen to people who have no advisor they respect more than their own opinion.

[0] https://en.wikipedia.org/wiki/Normalization_of_deviance