SBF tells his side of the story

Twitter was a buzz today. Sam Bankman-Fried who ran FTX, the now bankrupt crypto exchange, emerged to tell his version of events to an emerging web content creator.

In the world according to Sam, it was more a case of a few errors, rather than anything malicious. We would of course take everything Sam says at this point with a pinch of salt, given that (as implied by his own admissions) his primary concern now seems to be for his safety and, we speculate, avoiding (US) jail time.

In the world as perceived by SBF, this entire unfortunate episode originates with a few minor 'accounting oversights', that date back to the inception of the business. As they were setting up FTX, they accepted funds meant for the new exchange, into the already incorporated Alameda Research. There the nascent exchange's funds inadvertently sat there until Sam would notice the oversight quite recently in the midst of the market turmoil.

He dismisses the idea, floated in a Reuters article, of a deliberately engineered 'backdoor' to allow funds to pass from FTX (the exchange) to Alameda Research (the trading firm), on the basis that he doesn't 'know how to code', and so it couldn't have possibly been him. Of course, his co-founders and management team do know how to code. For those of us in the UK this sounds eerily similar to an uncomfortable Prince Andrew's, 'I can't sweat', defence.

This inadvertent parking of FTX user funds (which appears to run into the billions) at Alameda, made the trading firm 'much more leveraged than he thought'.

As for the seemingly overvalued FTT tokens (crypto coins issued by FTX) that also made up part of FTX's balance-sheet, he defends those as more 'legit than most tokens'. Talk about throwing his fellow crypto bros under the proverbial bus.

At least they are backed by a business that generates cashflow, SBF argues, and further they have a 'buy and burn' mechanism, that limits their supply. Finally, he claims that half of it was free floating, and that there was no doubt about its trading volumes.

'Liquidity wasn't what caused the crash,' SBF explained. 'The crash was caused by something very embarrassing that I under-estimated, which is the massive correlation of things during market moves, when they are triggered by a fear over the position itself and the massive size of those moves. And we see that again and again in finance. I mean Long Term Capital (Management) similar thing, where you have a bunch of positions which are correlated by virtue of all being held by the same entity.'

And so SBF's defence is unveiled. It was a mis-modelling of correlation and liquidity in unprecedented times. It sounds remarkably similar to some of the defences in the UK's LDI Pensions crisis.

There is of course a kernel of truth. The low interest rate environments of the past decade have no doubt introduced leverage into many sectors of the economy, and so as that leverage unwinds, losses follow. However, we doubt that blaming 'embarrassing risk oversights' explains the majority of the failings, either in FTX or the plethora of other areas of interest to litigators.

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