Annotated: Sam Bankman-Fried's "FTX Pre-Mortem Overview"

This simply doesn't jibe with the fact that, per their own reporting in 2021 tax returns, FTX and Alameda appear to have been wildly unprofitable enterprises, ⁷ even during periods of crypto mania when it seemed nearly impossible to lose money.

Later on in the blog post, SBF reveals that he's still incorporating completely illiquid tokens when estimating Alameda's net assets.

SBF is apparently leaving it to the reader to mentally insert scare quotes around all of these dollar symbols and the word "liquidity".

We already know that the insolvency predated November, and was entirely a predicament of their own making, ^{1 2} but SBF's certainly got the tenacity of a kid with a face smeared in chocolate continuing to not only claim they have no idea what happened to the candy in the jar, but blame it on someone else. CZ must have eaten it all.

It's certainly accurate that this FTX/Alameda contagion has spread far and wide, but SBF is again claiming that everything was fine and dandy at FTX up until the November Alameda explosion, as if FTX hadn't been lending billions in customer funds—amounts exeeding FTX's total lifetime revenue—to Alameda in exchange for a pile of magic beans $FTT tokens. ^{8 9}

SBF also notably fails to mention that this same contagion impacted FTX and Alameda. Even though they may have escaped direct exposure to Three Arrows Capital, the fallout from this collapse resulted in lenders recalling billions of dollars in loans from Alameda. The SEC identifies this as one event that caused SBF to direct FTX to "divert billions more in customer assets to Alameda". ²

This links to a tweet about a press release by the Securities Commission of the Bahamas, where they claimed to have seized FTX crypto assets "valued at more than US$3.5 billion". ¹⁰

The US legal team overseeing the FTX bankruptcy described this estimation as "reckless in the extreme", saying that if the seized assets are what they believe them to be, the Bahamian authorities are talking about illiquid assets (primarily $FTT) likely sellable at $167 million at the very most. ¹¹

This link is at least a bit more reliable, pointing to the US legal team's announcement in court on January 11 that they had recovered $5 billion in cash and liquid assets. However, the attorneys were also careful to tell the judge that the total shortfall remains unclear.

That's his story, and he's sticking to it.

Meanwhile, FTX's new CEO overseeing the bankruptcy, John J. Ray III, has testified in front of Congress that there is "clearly not" evidence backing SBF's various statements that FTX US is completely solvent. ¹²

The CFTC complaint says that FTX executives were not able to establish that FTX was solvent on November 7, shortly before the collapse. "Bankman-Fried quickly indicated that he would fill the hole at FTX US from liquidation of Alameda assets," says the complaint ¹³ —holes being things that only tend to exist at insolvent companies.

Many billions of assets sounds great, but it's less great when there are many more billions of liabilities. I also question SBF's definitions of words in this sentence, including "has", "many", and "dollars".

How selfless. Except that on January 5, he filed an objection to the FTX debtors' motion to retain control over ~$450 million in Robinhood shares, arguing instead that the shares belonged to him personally (not the bankruptcy estate, which would eventually disburse them to creditors) and should be available for his legal defense. ¹⁴ Nevermind that the shares were acquired thanks to $546 million in personal loans from Alameda Research, ¹⁵ who themselves were improperly borrowing customer funds from FTX.

The argument here is, I guess, is "give me the shares and then I will give the money I don't use on my legal defense to customers, I promise".

SBF has also previously claimed that he only had $100,000, that he didn't know how he was going to pay for his legal representation, and that "basically everything I had was just tied up in the company", so something's not adding up here. ¹⁶

Conspicuously missing: any explanation of why FTX's current management isn't so sure of this. ¹⁷ He also fails to argue why, in the face of overwhelming evidence (including his own admissions ¹⁸ ) that FTX was improperly commingling funds left and right, anyone should believe that they were doing things properly over at FTX US.

This is another one of those fun things that SBF likes to refer to as a "balance sheet" that is actually nothing like a balance sheet.

Dear @SBF_FTX. This is not a balance sheet. A balance sheet doesn't record "balances", it records assets on one side of the sheet and liabilities plus equity on the other. The "balance" is whether the totals on the two sides agree. #basicaccounting pic.twitter.com/WqabBjmLli

— Frances 'Cassandra' Coppola (@Frances_Coppola) January 20, 2023

SBF seeks to show that FTX US was solvent when he resigned as CEO, but doesn't address whether more than $185 million in assets were madly shuffled (at his direction) into FTX several days prior to fill a shortfall, as alleged by the CFTC. ¹⁹

This sentence was added to the post sometime between 5:02am January 15 and 11:53pm January 16 (Pacific Time), three to four days after SBF originally published it.

This, along with the repeated claims of FTX US's solvency, seems to me to be the primary thrust of SBF's argument here. "Sure, maybe things went pear-shaped at FTX International [as a result of massive fraud], but FTX US was fine, I'll give the money back, and then you won't have jurisdiction to prosecute me".

Even if we suspend disbelief for a moment and take SBF at his word that FTX US is solvent and could repay customers at any moment, I still don't think this holds water. US prosecutors seem to be pretty good at finding jurisdiction if they wish, and this high-profile case where a substantial number of Americans are clamoring for the justice department to do something, dammit seems like a case where they would. John J. Ray III has also already confirmed that there were some US citizens using FTX International, ²⁰ so that would likely help with jurisdiction issues.

This is the same argument that Bahamian liquidators were using to try to argue that the bankruptcy should be primarily handled there. ²¹ SBF wants that too.

The US legal team has gone so far as to accuse the Bahamian government and liquidation team as being in cahoots with SBF: "the Debtors continue to uncover information indicating that the [joint provisional liquidators] and the Bahamian government colluded to deplete the Debtors' estate assets." ²²

They've objected to the idea that FTX Digital Markets was the primary nexus of FTX, referring to it as "a virtual nullity within the FTX group": "It was nothing more than a short-lived provider of limited 'match-making' services for customer-to-customer transactions, on the cryptocurrency exchange built, owned, and operated by Debtor FTX Trading, its immediate corporate parent. FTX DM operated for just under six months, from May 13, 2022 to November 10, 2022. Over 90% of customers who used the FTX.com exchange were customers before FTX DM even became operational. Once operational, FTX DM never earned a dollar of third-party revenue." ²¹

There are certainly reasonable concerns about Sullivan & Cromwell's involvement with the FTX bankruptcy given their past work with FTX (where they presumably should have spotted some of the massive fraud happening, or at least the lack of controls to ensure it didn't). On January 20 (subsequent to the publication of this blog post by SBF), Judge Dorsey ultimately overruled objections to their retention by two individual FTX creditors. ²³

The GC (general counsel) that SBF is avoiding naming here is Ryne Miller.

SBF has claimed several times—including in his planned Congressional testimony—that he was forced to declare bankruptcy by Sullivan & Cromwell. ²⁴ In the draft, he says he believes this is due to the fees that S&C could earn from a bankruptcy, citing $700 million in legal fees that went to law firms including S&C in the Enron bankruptcy. ²⁵

However, the idea that everything would be just fine if he'd never resigned and brought in the bankruptcy team is ludicrous. It's wild for him to argue that the issue is the bankruptcy, not all the fraud.

This presumably includes FTT and various other tokens, which were not just "illiquid", but whose price was intentionally and fraudulently manipulated by Caroline Ellison at SBF's direction (as alleged by the SEC). ²⁶

Any claim by SBF where he describes his former companies' assets denominated in USD should be treated with extreme skepticism, given his past willingness to claim that FTX at one time had $FTT worth $5.9 billion real US dollars, despite the token having nowhere near the kind of liquidity that could support that. ²⁷

We know about one signed LOI (letter of intent), which was from Binance. ²⁸ They ran screaming after one day of due diligence. While it might be believable that there was early interest in an acquisition (though questionable how many interested companies would have that kind of firepower), all hopes of bailout-by-acquisition went out the window when companies discovered they would first be spending billions of dollars to pay back all the money SBF & co. stole.

No one wanted your pile of artificially pumped $FTT then, either, Sam.

Can't imagine why the restructuring teams might have abandoned a plan that requires first asking companies, "hey, would you be interested in pouring around $10 billion into this gaping hole?"

"I believe that if FTX International were to reboot, there would be a real possibility of customers being made substantially whole."

Couch that a little more, won't you? The money's gone.

This sentence was added to the post sometime between 5:02am January 15 and 11:53pm January 16 (Pacific Time), three to four days after SBF originally published it.

SBF himself has admitted that assets of customers who were solely spot trading were not segregated from assets of those trading with leverage (as they were supposed to be), ¹⁸ so this statement appears purely based on the belief that the debtors could scrape together enough assets from somewhere to prioritize making the spot traders whole first.

I'm honestly not sure I follow the argument here. "Look, Alameda made up such a small percentage of FTX's trades... and yet was still able to completely torpedo the company"? Yeah, that's what happens when you decide to set up a backdoor to lend practically limitless capital to the trading firm whose strategy appeared to be 1) making shady loans to employees and 2) lighting the money on fire.

Via Bennett Tomlin at Protos: "The chart also reveals that, at the beginning, Alameda Research was half of FTX's volume. I for one am extremely curious to know how Alameda Research ensured that it never violated wash trade rules when it was that large of a proportion of volume. I mean, it's not like SBF would end up confessing to crimes he hadn't even been charged with, right?" ²⁹

Nearly all of your assets... which were stolen from FTX customers. This statement may well come true, assuming he is found guilty and his assets are seized and ultimately disbursed.

"My personal shares" being the shares which were, again, acquired thanks to $546 million in personal loans from Alameda Research, who themselves were improperly borrowing customer funds from FTX. ¹⁶

The same shares that were signed over to BlockFi in a desperate move to try to get them not to recall $600 million in loans to Alameda amidst the FTX collapse, in an agreement by Caroline Ellison that SBF reportedly knew about and encouraged. ³⁰

SBF is referring here to directors' and officers' indemnification, which would require FTX to pay his legal fees and various other costs. These agreements do not typically apply in cases where the officer committed blatant and massive fraud.

Again, FTX's and Alameda's 2021 tax returns suggest they were massively unprofitable. ⁷

A revenue chart is not terribly useful without information on expenses, or their outstanding liabilities.

Furthermore, this chart shows FTX bringing in between $2 and $4 million per day in the past year or so. If we look at the $8 billion hole estimated to exist in the FTX balance sheet, even if FTX was consistently making $4M a day, it would take them more than five years to plug a hole of that size.

This paragraph was added to the post sometime between 11:21pm January 15 and 1:53am January 16 (Pacific Time), three days after SBF originally published it.

In an Antiguan court filing, SBF attests that he and Gary Wang borrowed $546 million from Alameda in order to buy shares in Robinhood. ¹⁶ In a filing in the US bankruptcy case, SBF argues the shares belong to him, and that he should be allowed to dip into them to pay for his criminal defense. ¹⁴

If SBF is not outright lying (and he almost certainly is), then he is engaging in some Olympic-level mental gymnastics along the lines of "the investments of a shell company I created, for which I own 90% of the shares, and into whose assets I can dip to pay my own personal expenses, are not technically 'my investments'".

This is an odd redirection. No one really cares about FTX's branding and marketing spend, they care about the fraud! "But Coinbase spends a lot on marketing too!" isn't all that compelling of an argument unless Coinbase was also dipping into customer funds to do it.

FTX reportedly spent around $256 million on real estate in The Bahamas. ³¹ If SBF thought that's 10% of what Coinbase pays its employees, then he estimated Coinbase spends $2.56 billion on its employees per year.

Except SBF did a tweet thread last summer about Coinbase's most recent (Q2 2022) earnings report, where he estimated Coinbase spends $4.4 billion annually on employees. ³² So is he saying that FTX actually spent $440 million on real estate? Or has he revised his Coinbase estimate (which was quite high—he was estimating an average of around $884,000 per year in compensation for all employees)? The other possibility is that he was saying Coinbase spends $2.56 billion a year specifically on real estate for employees, but that seems like an outlandish claim even by SBF's standards.

Setting aside that the numbers don't add up, it's weird to try to justify spending by comparing your company's expenses on real estate for employees to total employee expenses for a company that also has 10 times as many employees (which was more like 17 times as many earlier this year, before Coinbase performed two rounds of layoffs). ³³

If I was going to try to pick out a crypto firm that suffered large losses in an attempt to say "look, it was happening to everyone!", I might not pick the one whose founders have allegedly been in hiding for the last six months. ³⁴

SBF is once again suggesting that CZ brought down FTX in a "targeted attack".

Voyager was "impacted" by 3AC's collapse because 3AC defaulted on a massive loan. FTX was "impacted" by Alameda's decline because they had fraudulently loaned billions of dollars of customer assets to Alameda in exchange for magic beans.

But yeah, for sure!

This paragraph and the one following it were added to the post sometime between 11:21pm January 15 and 1:53am January 16 (Pacific Time), three days after SBF originally published it.

Would these be the ones cooperating with the investigations by any chance?

"Fuck regulators, they just make everything worse." – SBF, November 15, 2022 ³⁵

If SBF thinks FTX customers would be outraged at the idea of the bankruptcy team depleting their assets via bankruptcy fees, imagine how they'd feel if they found out those fees were going towards feeding SBF data for his new Substack.

SBF seems to still be hoping that he can pin all of this on Caroline Ellison, Alameda's CEO. Unfortunately for SBF, both she and Gary Wang (FTX co-CEO) are cooperating with authorities, and have testified that SBF was deeply involved in Alameda operations even after he claims he had stepped away.

The CFTC claimed in its complaint that SBF "maintained direct decision-making authority over all of Alameda's major trading, investment, and financial decisions" and had "regular, often daily participation in various in-person and mobile chat communications with senior personnel at Alameda". ³⁶ The SEC made similar allegations, claiming that SBF "remained the ultimate decision-maker" after stepping down as CEO, and that he "directed investment and operational decisions, frequently communicated with Alameda employees, and had full access to Alameda's records and databases." ³⁷

What do you mean "even if"??? It should be a given that you ignore assets that could never be liquidated at even a small fraction of their supposed "value". It's alarming that SBF is still incorporating these assets when outlining his company's supposed financial state, even when he acknowledges they're throwing off his estimates by a full $50 billion.

We know from the leaked balance sheet published by the Financial Times in November that SBF's definition of "less liquid" is... very generous. ²⁷ Among the assets he listed there as "less liquid" was FTT, an extremely illiquid token that was created by FTX, and whose price was actively manipulated by Alameda Research at SBF's direction (as alleged by the SEC). ²⁶

Other tokens SBF listed as "less liquid" were SRM, OXY, MAPS, and FIDA, which are all referred to as "Samcoins" because they were so tightly linked to SBF and his companies. Alameda held far more of those tokens than were in circulation, making it impossible for Alameda to liquidate substantial amounts of those tokens for anywhere near market price. ³⁸

We can see from this estimation that the significant majority of Alameda's assets were "less liquid" or "illiquid" tokens, many of which were closely tied to, if not actively manipulated, by Alameda—hardly the solid financial footing SBF is trying to portray.

All of his math, and his statements about how reasonable Alameda's positions were, are predicated on the idea that these magic beans cooked up by FTX itself were worth billions of dollars.

This is ultimately somewhat unimportant, since it's simply a rhetorical attempt by SBF to describe how reasonable he thought Alameda's position was, but: in the leaked balance sheet published by the Financial Times, SBF had estimated Alameda's SOL tokens as worth $2.25 billion before the events surrounding the crash—certainly not enough to cover $8 billion. ²⁷

Once again attempting to distance himself from Alameda with "I was told".

It's clear that SBF's definition of "accurate" differs from most people's. SBF seems to think that if you tell someone that you have $1,000, and then later you say "...in monopoly money", it was still an accurate and defensible statement.

It's not yet clear to what extent counterparties to FTX and Alameda understood that those businesses were propped up on illiquid tokens that they themselves had created, but there may be some blame to be laid with the counterparties as well. The SEC is already investigating whether FTX investors performed proper due diligence; ³⁹ it would not be unreasonable to expect similar questions to be posed to their lending partners. Genesis, Voyager, and Celsius are all undergoing bankruptcy proceedings at the moment, and I am sure their many creditors will be interested to know those firms properly evaluated lending risk when extending loans that ultimately resulted in bankruptcy. Indeed, Celsius CEO Alex Mashinsky described the company's lending strategy to customers as low-risk, and those are among the statements over which he is now facing criminal fraud charges. Those criminal charges specifically call out Mashinsky's decision to lend a total of around $1 billion to Alameda, the fact that much of Alameda's assets were held in FTT, and his decision to accept FTT as collateral for the loans. ⁴⁰

Conspicuously missing: any mention of what these assets were. The CFTC has helpfully filled in the blanks for us, though: "[Alameda] CEO [Caroline Ellison] indicated that FTX had always allowed Alameda to borrow customer funds, and that FTX did not require collateral from Alameda, though in practice the collateral was Alameda's FTT." ⁴¹

GAAP refers to "generally accepted accounting principles". FTX US was audited by Armanino, and the offshore FTX groups were audited by Prager Metis. It's not clear why two different firms would perform the audits. "With the benefit of hindsight, we can see it perhaps suggested that Bankman-Fried didn't want any firm to see the whole picture," says Francine McKenna, an investigative journalist, professor, and accounting expert. Neither Armanino nor Prager Metis is a "Big Four" accounting firm, and McKenna describes them as "two small outfits, not even on the next tier to the Big Four". ⁴² Armanino has since announced they will no longer audit crypto clients. ⁴³

McKenna detailed a list of red flags that probably ought to have been noticed by the auditors, including including hiring two separate auditing firms, lack of scrutiny into FTX's internal accounting and reporting controls, lack of federal income taxes paid despite reported profits, and the "number of complex, roundtrip and utterly confounding related-party transactions documented in just these two years". ⁴²

Or massive fraud. Fraud probably would've worked then too.

SBF likes to talk about all the things Alameda did or didn't do, because it's a useful way to distract from the fact that Alameda had free reign to wreak havoc on FTX thanks to the effectively unlimited line of credit that he extended to the company. Alameda should never have had access to FTX customer funds, nor the ability to bring the whole company down with its bad trades (which should have been getting liquidated like anyone else)—that's the important part.

SBF did shady stuff in the hopes that nothing bad would happen at Alameda, and no one would notice. Now that that's blown up in his face, he's trying to redirect focus to Alameda's bad trades rather than all the shady stuff he did.

The New York Times recently reported that New York federal prosecutors are looking into whether SBF manipulated prices of TerraUSD and Luna for his own benefit, ultimately leading to the Terra/Luna crash. ⁴⁵

This is kind of a weird thing to call out amidst what is otherwise a list of major financial impacts to Alameda or the crypto market as a whole. It seems he is trying to suggest that CEO Caroline Ellison was solely responsible for Alameda's failure spiral, and the loss of co-CEO Sam Trabucco allowed it to happen. This is consistent with SBF's apparent attempts to pin the whole thing on Ellison.

Wow, that sure sounds like a lot of opportunities in which FTX could have looked into what was happening with Alameda's positions and reduced their risk instead of digging a deeper hole!

Per the SEC: "At the same time that Bankman-Fried was positioning himself as a hero in the industry, however, the plummeting value of crypto assets was impacting Alameda, and as a result impacting FTX. As discussed above, as a result of the same market conditions impacting BlockFi's liquidity, many of Alameda's lenders demanded repayment of loans they had made to Alameda. Bankman-Fried directed Alameda to draw down billions of dollars from its 'line of credit' from FTX to repay some of its loans—money that came from FTX's spot market funded by FTX customers. Thus, in the summer of 2022, Bankman-Fried knew, or was reckless in not knowing, that FTX was in a precarious financial condition. However, he continued to spend hundreds of millions of dollars to purchase and support other crypto companies, and allowed Alameda to use FTX customer funds to repay its debts. In addition, Bankman-Fried and other FTX executives continued to withdraw customer funds in the form of the poorly documented and undisclosed 'loans' described above." ⁴⁴

Crucially, FTX is the only crypto platform in this list that was not a crypto lender.

Customers of Voyager, Celsius, BlockFi, Genesis, and Gemini understood that they were handing over their funds to the company to lend to other entities, and they accepted that there is some risk that comes with that. There are absolutely open questions surrounding all of these platforms, some of which may result in criminal charges, but crucially, it was not news to these customers that their funds were being used for lending.

On the other hand, FTX's terms of service promised customers that "Title to your Digital Assets shall at all times remain with you and shall not transfer to FTX Trading... 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." ⁴⁶

It's true that when you offer highly leveraged trading (as FTX did), there is a risk that sudden and major market movements can get you into a sticky situation.

However, if you're running a highly leveraged trading business, and you wax poetic at every opportunity about your top-notch risk management engine and careful controls, and then the business collapses because you don't have those things, that is still fraud. The SEC seems to feel the same way. ⁴⁷

Crucially, though, it was not a sudden drop in the broad crypto markets that caused FTX to collapse—in fact, Bitcoin had been trading pretty flat for months before FTX collapsed (causing Bitcoin to tank on November 7–9, not the other way around). It was the collapse of tokens that were so tightly tied to FTX that they effectively represented sentiment in FTX's stability, and which SBF had used to prop up the whole operation, that brought down FTX. And the token collapse itself was kicked off by the leak of an Alameda balance sheet on November 2. ⁴⁸ Basically, FTX collapsed because people learned what was going on at FTX.

I wondered if SBF was aware that MF Global's CEO, Jon Corzine, had been accused of malfeasance surrounding the MF Global collapse, until I noticed that SBF seems to have (inadvertently?) linked to the specific section of the Wikipedia article titled "Corzine's possible role in the firm's collapse". That section explains that Corzine paid a large fine and was banned from CFTC markets after the collapse, settling charges that he failed to prevent employees from using customer funds to shore up liquidity. ⁴⁹

Perhaps someday SBF will take a moment to wonder how it came to be that FTX was so fragile that a single tweet from CZ could bring it crashing down.

As for CZ's "extremely effective months-long PR campaign", his various jabs at FTX did not seem terribly different from the standard crypto infighting, or the types of tweets SBF occasionally lobbed at CZ. ⁵⁰

Were they? Matt Levine:

[T]o hedge the market risk that that stuff would lose value, it shorted "some combination of BTC, ETH, and QQQ," that is, an exchange-traded fund of Nasdaq stocks. If the market — Solana and FTT and Bitcoin and the Nasdaq — went up, Alameda would make money on its positions but lose money on its hedges. If the market — all that stuff — went down, Alameda would lose money on its positions but be cushioned by its hedges.

If Solana and FTT went down a ton, but Bitcoin and the Nasdaq did not, Alameda would get vaporized and the hedges wouldn't help. The hedges were only as good as their correlation to Alameda's assets. ...

FTX loaned billions of dollars to Alameda against assets that could, and did, evaporate because CZ tweeted mean things about them. Oh but Alameda was hedged! It hedged by shorting Apple. It could only go bankrupt if its assets lost their value — because of a mean tweet — but Apple did not. What were the chances of that? Incredibly high! Come on." ⁵¹

A major reason that Credit Suisse didn't go under was that, being a fully regulated bank, they were required to hold high-quality, liquid assets that would support larger-than-usual withdrawals. ⁵²

No such regulation applied to FTX, and they clearly were not doing so.

Putting that aside, though, FTX's customers who were not trading with leverage expected that FTX was simply holding on to their crypto for them—not sending it off to Alameda to trade with. A "bank run" (exchange run?) should not have been possible, because FTX should have just been holding on to customer crypto.

If you promise to do nothing besides hold on to your customers' funds, and then you break that promise, that is stealing.

If you take out billions in "loans" from your company that you never pay back, that is stealing.

This was not a liquidity problem, this was a solvency problem. If FTX had plenty of assets that were just not sufficiently liquid to meet withdrawals, then they feasibly could have raised liquidity (or paused withdrawals, as some exchanges are wont to do), and things would have been a-ok.

But to raise funds, FTX would have to either a) show potential investors a balance sheet with a massive, multi-billion dollar hole in it, and say "hey can we have your money to throw into this hole too?" or b) lie to them.

Yeah, and I have a girlfriend who you haven't met because she goes to a different school. No, you can't see a picture.

It blows my mind that SBF is linking to and apparently standing by this dumpster fire of a "testimony", in which he devotes an entire page to addressing conspiracy theories about Ukraine, allegations that he's abused drugs, and speculation that he's Jewish.