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Welcome to CryptoGod-1's blog on all things crypto. Today I will be looking at one of the most notorious crypto characters from the previous year, non other than Sam Bankman-Fried. The disgraced former CEO of FTX is facing multiple charges and potentially life time behind bars while he currently remains on house arrest at his parents mansion in California. He has repeatedly gone against the advice of those around him and is determined to paint both himself and his former companies as innocent parties in the wrong place at the wrong time.
Sam Bankman-Fried Substack Post
On the 12th of January 2023 SBF published a blog post, within which he takes no responsibility for the events and actions which took place at FTX or Alameda. He is affirmative in his denial and SBF also focuses the blame upon CZ of BINANCE and the bankruptcy team currently handling FTX. This came after he pleaded not guilty to the litany of criminal charges, including fraud, meaning his trial is now scheduled to begin in October of this year.
In his first post on his new Substack newsletter, titled FTX Pre-Mortem Overview, SBF gave his version of events that led up to his cryptocurrency exchange’s meltdown. This is an extremely unusual event for someone facing eight counts of U.S. criminal charges and living under house arrest due to the fact prosecutors may use their comments against them in court. However, against what would be his attorneys advice, SBF proceeded to release what can only be described as an ill advised attempt at giving his story, which varies quite differently from the public rumours and knowledge of FTX defrauding more than 9 million customers.
SBF builds a narrative which would shed the light on FTX being similar to so many other cryptocurrency exchanges in 2022 and finding itself on the wrong side of a market downturn. His post is simply broken down into three separate categories:
- Why FTX went Bankrupt
- How SBF is innocent
- Who are the real guilty parties
Also SBF feels that the situation could have been remedied by himself had he not been pressured by the FTX legal team at the time to push ahead with their Chapter 11 Bankruptcy filing.
Why FTX Went Bankrupt
At the beginning of 2022 SBF claims that Alameda had in and around 100 Billion in assets, mostly invested in a variety of cryptocurrencies including Solana and FTT. He shares a screenshot of an estimate of what he believes were Alameda's positions at the beginning of 2022, as shown below:
According to this, Alameda had deposited about $28.5 Billion in collateral on FTX in return for a $3 Billion loan, which would equate to their position needing to reduce by 90% before going into liquidation.
While SBF makes no mention of his former associates, both of whom have pleaded guilty, it has come to light that she had invested a hefty sum into a variety of crypto altcoins. As the crypto winter ensued, these position began to reduce in value.
In an attempt to recover her overall balance, Caroline Ellison decided to short both Bitcoin and Ethereum, along with the Nasdaq. The profits from these short positions was intended to cover any losses from their altcoin positions. A look at 2018 however would have made it clear that altcoins tend to drop much faster and by larger amounts in value than Bitcoin, meaning that by October of 2022 the balance sheet for Alameda was along the lines of this:
As we look at the figures, it is clear to note that the level of assets remaining on FTX from Alameda had reduced by just over half to $14.2 Billion. Similarly, the amount loaned to Alameda from FTX had increased up to $10 Billion! Of this $10 Billion, as much as $8 Billion of this was "underwater" compared to Alameda having just $2 Billion in liquid funds.
The reasoning behind this? According to SBF there was a "malfunction" and "glitch" which understated the amount of loan when monitoring customer leverage positions. This had allowed so much funds to become available to Alameda, basically confirming the suspicion of the 'infinite credit card' that Alameda had available to it from FTX.
"As Alameda became illiquid, FTX International did as well, because Alameda had a margin position open on FTX," Bankman-Fried wrote."
Alameda went bankrupt after CZ push which made the value of FTT, of which Alameda held a large proportion of their assets in, crash. This is claimed by SBF to have been part of an overall sabotage tactic, which saw CZ and Binance do their due diligence on FTX in November 2022 before pulling out of the deal.
How SBF is innocent
SBF goes on to protest his innocence, stating that banks go bankrupt all the time therefore it should be no different with his financial institutions. He points out Lehman brothers, where CEO Dick Fuld was not prosecuted after they filed for bankruptcy in 2008. At the time Lehman was the fourth-largest investment bank in the United States and was reported to have around 25,000 employees worldwide. While it is true that a typical bankruptcy of a financial institution does not warrant arrest or potential jail time, FTX is not a typical bank or financial institution, which I will delve further into below.
His next excuse was that the ongoing bank runs and rate hikes meant any financial firm could have collapsed in the conditions of the market. Taking an example of Credit Suisse, SBF stated:
"Credit Suisse fell nearly 50% this autumn on the threat of run on the bank. At the end of the day, its run on the bank fell short. FTX's didn't."
The main difference would be that if a customer had money held in a Credit Suisse account and applied for it to be withdrawn even when the share price was down 80% or more, or went bankrupt, the customer would still retain full legal right and no creditor would ever have any claim against those funds. This is because Credit Suisse does not spend its customers funds on their own gambles, unlike what happened at FTX. Also, Credit Suisse diversifies amongst a variety of assets, not just focused on crypto, and when it trades on its customers behalf it is with consent and generally in stocks and bonds. The only way a claim could be made against customer funds would be if someone within Credit Suisse used customer funds to purchase Credit Suisse stocks prior to the crash, with is a very uncommon practice. This in essence is exactly what FTX was doing but taking its customers funds and allocating them for loans and investments elsewhere.
SBF goes on to claim that the funds of FTX were lost due to Alameda loosing funds in a market crash which had not been properly or adequately hedged for, stating:
"No funds were stolen."
This is the claim by SBF, and looking from the outside without fully knowing the details, one could merely point to the fact SBF himself has gone from a net worth of about $20 Billion down to about 100 thousand dollars. On top of that about $8 Billion of customers funds is not allocated for. However, just because the money is not there does not mean it was not stolen.
When considering the money was taken from the FTX exchange and gambled via Alameda on other investments, just because those gambles failed and the money was lost does not mean it was stolen. In fact it does not matter what happened with the money in this instance, what matters is that the money was taken off the FTX exchange without customers permission, or so it should be. On the flip side, had those gambles paid off, FTX and Alameda would have happily retained the profits.
SBF claims he was unaware of the goings on at his companies, having reduced his working hours from 18 hours a day in 2019, down to 12 hours a day in 2022. Some point to the extradentary amount of time SBF has been seen playing "League of Legends," which reportedly also happened during business hours and meetings.
Who are the Real Guilty Parties
From here, SBF points out who he feels are the real culprits in the demise of FTX. The lawyer representing SBF when Chapter 11 was filed for FTX, FTX US, and Alameda on November 11th 2022 was Ryne Miller, right before SBF stepped down as CEO.
John Ray, who previously oversaw the Enron liquidation, was brought in to handle proceedings and hired the law firm Sullivan and Cromwell LLP to represent the victims of the bankruptcy process. Ryne Miller was a former employee of Sullivan and Cromwell LLP.
According to SBF he was in the process of arranging a bailout for FTX International and FTX US had the funds available to make user whole. The reason SBF went ahead and filed Chapter was allegedly because Ryne Miller and Sullivan and Cromwell LLP had applied pressure to SBF via his friends and family. The pressure being put on those closest to him was apparently too much and resulted in SBF caving and filing Chapter to put and end to it all and give his friends and family peace. Allegedly.
SBF also claimed that the sheer level in fees to be made by bankruptcy lawyers meant they basically saw a cash cow and could not resist. This tactic used by SBF is to paint himself as a pariah, a saviour and man who cares about those around him, and the greater community at large.
However, this does not explain the $8 Billion "underwater" of funds that Alameda had basically taken from customers of FTX. Of this, apparently $3 Billion was spent acquiring the FTT which Binance sold, $4 Billion was spent on investing in altcoins and smaller cryptos, and $1 Billion of interest payments to lenders. Considering how the market went over the past year, it is almost certain that the FTT and altcoins are worthless at this stage, or a mere fraction of their original value.
Another startling piece of evidence brought to light by John Ray was that both FTX and FTX US had their crypto stored in the same database, meaning it is almost impossible to distinguish between hem both and truly know if FTX US is solvent as SBF claimed. Overall this raises more questions about the goings on of SBF and FTX than it answers.
Positive Signs?
With all the goings on, some positive news has emerged. The bankruptcy lawyers had located more than $5 Billion in liquid, and the company intends to sell off another selection of investments with a book value of $4.6 Billion. There are also the seized assets in the Bahamas, totalling $170 million. Once this news emerged, SBF was quick to get on Twitter and post about it, replying to a user as shown below.
Finally, below is a video I watched on YouTube which makes some very compelling arguments regarding the 'real' Sam Bankman-Fried and what his blog post really meant. Feel free to watch and hopefully you will enjoy it like I did.
Tough times ahead for everyone involved, whether or not you had funds on FTX. One way or another, SBF should do the sensible thing and keep quiet as anything he says or does will only be used against he once the case goes to trial. Understandably, it is a long 10 months for him until then, however, he should count his graces that he can spend it at his parents mansion and he should likely make the most of this free time. It may be his last.
Have a great day.
CryptoGod-1.
** This article was first Publish by myself on Medium om the 26th of January 2023, which can be found here https://medium.com/@1r3n9project/sbf-the-master-of-deflecting-blame-ba178759e90b
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