(Kitco News) -
Sam Bankman-Fried published a lengthy ‘pre-mortem’ of FTX on Thursday morning, detailing his claims about the activities, solvency, and possible recovery options of his former cryptocurrency exchange. He used the opportunity to place the blame for the collapse of FTX on his hedge fund Alameda Research and the CEO of rival exchange Binance, and blamed the bankruptcy on law firm Sullivan & Crowell.
While the substack post echoes many of the defenses and justifications SBF has mounted since FTX declared bankruptcy on Nov. 11, it also includes many new lines of attack, and can be read as a preview of the legal defense his team is preparing ahead of his Oct. 2023 criminal trial.
In the post, Bankman-Fried claimed that the collapse of FTX was primarily caused by three things: Alameda’s Net Asset Value (NAV) ballooning to $100 billion by the end of 2021 (with $8 billion in leverage and $7 billion in liquidity on hand), Alameda’s failure to “sufficiently hedge its market exposure” until the summer of 2022 as these assets lost approximately 80% of their value during the crypto winter, and “an extreme, quick, targeted crash precipitated by the CEO of Binance” in early November which “made Alameda insolvent.”
Alameda’s declining assets and rising leverage
He wrote that FTX’s liquidity had started off “largely dependent on Alameda” in 2019, but the hedge fund represented only “around 2% of volume on FTX” by 2022. Bankman-Fried also shared numbers representing what he claimed to believe were Alameda’s declining NAV during 2022, which raised their relative leverage and the proportion of illiquid assets on their balance sheet.
“In the summer of 2022, Alameda finally put on substantial hedges, in some combination of BTC, ETH, and QQQ (a NASDAQ ETF),” he wrote.
Bankman-Fried did concede that all the numbers he was sharing were his own. “I haven’t run Alameda for the past few years,” he said, and added that his numbers were created “from models and approximations, generally based on data that I had prior to resigning as CEO and modeling and estimations based on that data.”
Still, he claimed, as of October 2022, he believed that Alameda was sufficiently hedged.
Binance and Changpeng Zhao
Bankman-Fried said the turning point was the tweet from Binance CEO Changpeng Zhao (CZ) on Nov.6, in which he announced that Binance had “decided to liquidate any remaining FTT on our books.” This sparked a mass selloff of the FTX token and prompted FTX customers to begin withdrawing billions in assets custodied on the platform.
Bankman-Fried characterized the November collapse of Alameda and FTX as “a targeted attack on assets held by Alameda, not a broad market move,” saying that Alameda’s assets lost 50% of their value while Bitcoin lost only 15%. “As a result, the larger hedge that Alameda had finally put on that summer didn’t end up helping,” he wrote.
“Over the course of November 7th and 8th, things went from stressful but mostly under control to clearly insolvent. By November 10th, 2022, Alameda’s balance sheet had only ~$8b of (only semi-liquid) assets left, versus roughly the same ~$8b of liquid liabilities.”
Bankman-Fried wrote that Alameda’s insolvency then impacted FTX and other firms “similarly to how Three Arrows etc. ultimately impacted Voyager, Genesis, Celsius, BlockFi, Gemini, and others.” He wrote that these insolvencies and bankruptcies were “fairly common on margin platforms,” listing LME, MF Global, and Lehman Brothers as examples from traditional finance of leveraged firms failing during market downturns.
SBF again made a distinction between FTX International, which he acknowledged was insolvent by November 2022, and FTX.US, which he claims was always solvent and “should be able to return all customers’ funds.” He claimed that when new FTX CEO John Ray assumed control, FTX.US had “$350m net cash on hand beyond customer balances” and both its “funds and customers were segregated from FTX International,” going so far as to say, “It’s ridiculous that FTX US users haven’t been made whole and gotten their funds back yet.”
Bankruptcy and Sullivan & Crowell
Turning to the bankruptcy itself, Bankman-Fried placed the blame for the Chapter 11 filing squarely on the law firm Sullivan & Crowell (S&C), which he claims has a conflict of interest.
“Contrary to S&C’s statement that they ‘had a limited and largely transactional relationship with FTX’, S&C was one of FTX International’s two primary law firms prior to bankruptcy, and were FTX US’s primary law firm,” he wrote. “FTX US’ GC [General Counsel] came from S&C, they worked with FTX US in its most important regulatory application, they worked with FTX International on some of its most important regulatory concerns, and they worked with FTX US on its most important transaction.” Bankman-Fried said that when he visited New York, he would sometimes work out of S&C’s offices.
Bankman-Fried claimed that S&C and the GC of FTX.US “were the primary parties strong-arming and threatening” him into naming John Ray as the new CEO, “who then filed for Chapter 11 and chose S&C as counsel to the debtor entities.”
He referred to yesterday’s reports that FTX has recovered over $5 billion in liquid assets as proof that FTX could have been rescued. He said the exchange had a total of “roughly $8b of assets of varying liquidity as of when Mr. Ray took over,” and claimed that there were also a number of outside funding offers including signed letters of intent totaling over $4 billion. “Since S&C pressured FTX into Chapter 11 filings, however, I worry that those pathways may have been abandoned,” he wrote.
Innocence and more to come
Bankman-Fried insisted that he didn’t steal funds, and that he didn’t stash billions away for himself. “Nearly all of my assets were and still are utilizable to backstop FTX customers. I have, for instance, offered to contribute nearly all of my personal shares in Robinhood to customers–or 100%, if the Chapter 11 team would honor my D&O legal expense indemnification.”
He concluded by saying that he has much more information to share about Alameda, S&C, the bankruptcy process, and other aspects of the collapse of his erstwhile crypto empire. “But at least this is a start.”
