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FOCUS: a€oeWea€™re Aze New York Times1. & We Must Write Something! But We Dona€™t Know Anything! & 
We Wona€™t Learn! & Wea€™re Scared to Say Anything!a€d:


quantum financial destruction and sam bankman-fried in the Bahamas, via mid journey

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 Timesa€™ s 
reporters and editors are pig-ignorant about crypto, or they are actively working extremely hard to 
bury the lead for incomprehensible reasons. A a€oesurprisingly
calma€D ex-billionaire who had a€oeexpanded too fast and failed to see warning signsa€D 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-Frieda€™ s FTX Crypto Empire Collapsed: a€~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 customersa€™ 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. a€ceYou woulda€™ ve thought that Ia€™ d be getting no sleep right now, and instead Ia€™ m 
getting some,a€D he said. a€oelt could be worse.a€D

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 a€oemargin positiona€D on FTX, essentially meaning it had borrowed 
funds from the exchange, Mr. Bankman-Fried said. a€oelt was substantially larger than I had thought 
it was,a€D he said. a€oeAnd in fact the downside risk was very significant .a€D He said the size of 
the position was in the billions of
dollars but declined to provide further detailsa€!

But there is literally a€“ and I really mean literally a€“ nobody in this fallen sublunary sphere 
who is at all "familiar with the matter" in even a basic way who thinks a€oean overleveraged 
billionaire whose financial bets went badly wrong because he had not kept on top of risks, and 
perhaps cut some legal-technical cornersa€D is what happened.
But why?

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 a€oefamiliar with the matteraOlU?
Does it get better lower down? What information is there lower down?

a€oeWarning 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’,

a€oewasna€™ t sharing information with key staffa€U,
a€oeresisteda€! suggestionsa€D;

a€oepushing an ambitious regulatory agenda while speaking critically about Changpeng Zhaoa€D,

a€oea sometimes cloistered existence, surrounded by a small coterie of colleagues, some of whom 
were in romantic relationships with other FTX employeesa€D;

a€oe [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 companya€™ 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. a€~Sam, Ia€™ m sorrya€™ , he wrote, a€~but we wona€™ t be able to 
continue this deal. Way too many issues. CZa€™ a€D.

We are now at paragraph 32.

In paragraph 33 there is actual information'.

Ms. Ellison explaineda€! her voice shakinga€! apologizeda€! had let the group downa€!. Alameda had 
taken out loans and used the money to make venture capital investments, among other 
expendituresa€!. This springa€! 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-f
unds-II668264238?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:

Share

MUST-READ: Matt Levine on A%e FTX Balance Sheet:

Matt Levine: FTX's Balance Sheet Was Bad: Broadly speaking your balance sheet is still going to 
look roughly like:

a€”Liabilities: Money customers gave you, which you owe to them;

a€”Assets: Stuff you bought with that money.

And then the basic question is, how bad is the mismatch. Like:

a€”$16 billion of dollar liabilities and $16 billion of liquid dollar-denominated assets? Sure, 
great.

a€”$16 billion of dollar liabilities and $16 billion worth of Bitcoin assets? Not ideal, incredibly 
risky, but in some broad sense understandable.
a€”$16 billion of dollar liabilities and assets consisting entirely of some magic beans that you 
bought in the market for $16 billion? Very bad.

a€”$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 didna€™ t do that, 
and couldna€™ t have, because there wasna€™ 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 a€oewell we do have $5 billion of this Serum 
token we made up, thata€™ s something?a€D No it isna€™ t!...

I am not saying that all of FTXa€™ 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 FTXa€™ 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 cana€™ t do that! Thata€™ s not how balance sheets work! Thata€™ 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 
Bloomberga€™ s Odd Lots podcast last


year, asked him a question about yield farming, and in the course of his answer he said:

See 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 a€~Protocol X,a€™ it's a box, and you take a token. a€!

a€oeSo you've got this box and ita€™ s kind of dumb, but like what's the end game, right? This box 
is worth zero obviously. a€! 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 sensesa€!a€D

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 FTXa€™ s balance sheet as it spiraled 
into bankruptcy. But, as I said, there is something important missing in that account. Whata€™ s 
missing is the money. Whata€™ 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.[7] 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 dona€™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 a€” during the crypto-market meltdown of this spring and summer, when markets were 
crazy and Alameda spent money propping up other failing crypto firms a€” 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...

Share Brad DeLong's Grasping Reality

Very Briefly Noted

•  Tyler Cowen: A simple point about existential risk a€~Hardly anyone associated with Future Fund 
saw the existential risk toa€[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 distanta€!.
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 a€~Weirda€™ Walk in the Park With the Star 
Bloomberg Columnist: a€~From Elona€™ s follies to cryptoS™ s a€oedeath-spiral convertibles,a€D the 
SoeMoney Stuffa€D writer has become an indispensable translator of the complex, arcane and 
bizarrea€!

•  O&GOG: a€~$TWTR capital structure thread: dY§//Elon had commitments for $13 billion in credit 
facilities to help finance the Twitter buyouts!. $12.5 billion was likely funded at close with 
undrawn $500mil revolvers! floating rate loansS!. 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 
didnS™ t). 2 of the tranches also have punitive margin escalation/ratchetsS!

•  Byrne Hobart: Money, Credit, Trust, and FTX: S~Was the utilitarianism stuff just bluster to 
defend a sociopathic money-making scheme? Probably notS!

Sc Dan Davies: S~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 
lessonsS!. See 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 BahamasSDS!

•  Sam Trabucco (from April 2021): S~Two years ago, Alameda maintained pretty strict delta 
neutralityS!. Today not so muchS!. What changed: A thread about super powersS!

•  Matthew Yglesias: Two years of strong and slow boring of hard boards: S~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 groupthinkS!. It did succeed, enormouslyS!

•  Mary Branscombe: S™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 thingS!

•  Cory Doctorow: Even if youS™re paying for the product, youS™re still the product: S~Incentives 
matter, but impunity matters moreS!. The theory behind Soeif youS™ re not paying for the 
productSJSD is that old economists™ s saw: Sceincentives matterSD 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 powerS!. Reality is a lot uglierS!

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