CCasual observers could be forgiven for seeing the collapse of cryptocurrency exchange FTX as another typical tale of financial mismanagement. Its founder, Sam Bankman-Fried, puts it this way: a liquidity crisis turned into solvency.
FTX had deposits and loans, and when depositors tried to get their money back, FTX didn’t have it. Of course, the loans were in fancy digital money, not old dollars, but at first glance it looks like another big company fail.
Then you look closer and it becomes clear that the entire building is actually the corporate equivalent of three kids in trench coats pretending to be grown men.
It’s a story involving a financial black hole within a once-$32bn (£27bn) company, a Byzantine group structure with unclear ownership lines and a management with a highly unorthodox approach to management and interpersonal relationships.
The chaos was revealed in a bankruptcy filing Thursday by John Ray III, who took over as Bankman-Fried’s chief executive following the Nov. 11 bankruptcy of FTX. “Never in my career have I seen such a complete failure of corporate control and complete absence of reliable financial information as occurred here,” he said. Mind you, this is the man who was parachuted in to oversee the collapse of the energy company Enron after its fraud was exposed.
“From the integrity and misregulatory oversight of compromised systems abroad, to the concentration of oversight in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals, this situation is unprecedented,” Ray said.
According to him, the company did not have a simple liquidity crisis, or even ordinary bankruptcy. On Wednesday, Bankman-Fried claimed that FTX.com’s “semi-liquid” assets were still worth $5.5 billion, a significant portion of the $8 billion it owed to depositors. Ray gave a different price for these assets: $659,000. Including $1 billion in “stablecoins” and $483 million in cash, FTX’s total holdings were just under $2.5 billion.
But FTX.com is only one part of the business. The wider group comprises a vast network of more than 100 affiliated companies, all shared through the common ownership of Bankman-Fried and its two co-founders, Gary Wang and Nishad Singh. Other than the co-founders, no investor group owns more than 2% of the capital of any of the four main “silos” that make up the group: FTX’s US cryptocurrency arm, its hedge fund Alameda, its venture capital arm and its international exchange.
The documents Ray provided detail every way you can imagine that a multi-billion dollar company run by a trio of inexperienced hedge fund graduates could go wrong, and then some.
The Alameda silo was loaned $2 billion to “related parties,” including Bankman-Fried’s private company Paper Bird, and an additional $1 billion to Bankman-Fried itself. The international exchange owed money to its depositors, but did not track it in its financial statements. The group as a whole “did not maintain centralized control of funds”, did not have an accurate list of bank accounts and did not pay attention to the creditworthiness of its banking partners.
It gets worse. Ray said no one was able to compile a list of FTX employees. He had “significant concerns” about the financial statements compiled under Bankman-Fried’s leadership and said they should not be relied upon. The group used to buy houses for workers; digital assets were managed through an “unsecured group email account”.
“The use of software to hide the misuse of client funds is an unacceptable management practice,” the document added. “Very significant transfers” of property may have occurred “days, weeks and months before” the bankruptcy, he continued, while “at least $372 million in unauthorized transfers” took place on the day of the bankruptcy.
It emerged on Friday that these latest unauthorized transfers were made at the behest of the Bahamian government, which claimed it took the money for “safekeeping” and launched a legal battle to wrest control of the bankruptcy case from the United States. . In a response from FTX (pdf), the company accused the Nassau government of violating a freeze on FTX’s assets that had been put in place specifically to prevent the funds from being delayed, and implied that the country was working with Bankman-Fried. “Effectively under the control of the Bahamas authorities” to undermine the bankruptcy case.
Ray’s report ended on a final, personal note. “Mr. Bankman-Fried, who is currently in the Bahamas, continues to make erratic and confusing public statements. Mr Bankman-Fried, whose connections and financial holdings in the Bahamas remain unclear to me, recently told a reporter on Twitter: “F*** the regulators are making things worse” and that the next step for him was to “win jurisdiction”. . Battle against Delaware.’”
The paper makes for fascinating reading, but barely scratches the surface of FTX. Take Caroline Ellison, her fourth baseman. The 28-year-old, Bankman-Fried’s one-time boyfriend, was head of Alameda trading before being promoted to co-manage the hedge fund in the summer of 2021, and was in sole charge this year when colleague Sam Trabucco quit abruptly to spend more time. with his boat.
If Bankman-Fried was FTX’s public face on Twitter, Ellison was its Tumblr equivalent. In the posts on his account after it was deleted, he wrote about the traditional concept of finance (“it’s very unlikely that you will lose all your money”), his ideal man (“who controls the largest governments in the world”). [and having] enough power to overpower you physically”) and her discovery of polyamory. In 2020, he wrote: “When I took my first step with poly, I thought of it as a radical break from my past,” he said, “but I’ve decided that the only acceptable style of poly is best characterized by something like ‘Imperial Chinese Harem.’ “None of this non-hierarchical bullshit. Everyone should have a ranking of their partners, people should know where they fall in the rankings, and there should be brutal power struggles for ranks.”
It’s hard to know where to stop. Ellison, Bankman-Fried and eight others in the group’s inner circle shared a luxury penthouse in the Bahamas, according to a report on Coindesk, which the inner circle was called “polycool” by Elon Musk, among others. (The penthouse is now on the market for $40 million.) According to one report, a psychiatrist at the home was on hand to administer prescription stimulants; Bankman-Fried’s photos on his desk show an empty box of such a drug.
In the days leading up to the company’s collapse, co-founder Wang continued to code, making changes to a private repository hosted on the coding platform GitHub. Wang could not answer questions about what the urgent programming job was.
In the days that followed, Bankman-Fried took to Twitter to defend her reputation, which she did in part by tweeting the word “what” and the letters “HAPPENED” in nine separate posts over a 36-hour period. At the same time, he sent a direct message to Kelsey Piper, a journalist at Vox, giving a completely different side of the story.
Some of those direct messages included the line “damn regulators” that Ray quoted in the filing. Others contain the clearest explanation yet of what happened — the trigger that overturned years of mismanagement.
FTX did not have a bank account where customers could send money; Alameda, hedge fund did. So they will transfer the cash to Alameda and FTX will add it to their account. And in all these years, Alameda never transferred any money. No one noticed, and the firm traded and lost $8 billion in client funds it probably never should have had in the first place.
“Each individual decision looked good, and I didn’t realize until the end how big they all added up,” Bankman-Fried told Piper. “Sometimes life sneaks up on you.”