Thread by @0xdoug

1/ There's a lot of debate and speculation on crypto Twitter about how Alameda managed to lose so much money. But this may give a false impression of ambiguity in other aspects

There's one thing that's unambiguously and indisputably true. SBF and Alameda committed fraud. Period.

2/ For anyone who's been close to the chaos, this will seem so obviously true that it may seem laughable that I even have to make a thread to drive the point home. Not a single credible voice in the industry would tell that this wasn't naked, malicious and criminal fraud

3/ But Sam is engaging in a coordinated attempt to whitewash his crimes by painting a picture. It's a picture that many in the finance industry will quickly pattern match to. A picture of a stereotypical over-leveraged over-confident hedge fund where risk gets out of control

4/ The most famous is LTCM. And there's a lot to criticize about the hubris, maybe even negligence, in that story. But what Sam did is far worse. LTCM may have bet recklessly but they never outright stole money

Alameda is not LTCM. Alameda is Madoff

en.wikipedia.org/wiki/Long-Term…

5/ And we can go back and forth debating theories about what happened to the money and how they lost it. Frankly it may be a very long time before we know. But regardless of how they ended up losing it, we already know that they fraudulently stole the money from FTX customers

6/ The core of Alameda's pathetic defense is customer funds were borrowed at "arms length" from FTX reserves. Just as it's not criminally illegal to default on your mortgage, Alameda's default (and subsequent loss of customer funds) was unfortunate, but non-criminal, bad debt

7/ This defense has more holes than a sieve. In the first place FTX was never legally authorized to loan out its customer deposits. The FTX terms of service clearly state that the depositor retain title to their assets, and rehypothecate of customer assets is explicitly forbidden

8/ This shouldn't be confused with the fact that FTX is a derivatives exchange. Customers could trade perpetuals where there is no upper bound to the potential for loss. Like any derivative exchange customers post collateral as a risk buffer to their potential derivative losses

9/ There is always the possibility a client's losses exceeds their collateral. In which case the exchange eats the loss

However FTX's terms of service prohibits it from dipping using one customer's deposits to cover another customer's losses (even if that customer is Alameda)

10/ Second, let's even pretend that FTX could lend out client deposits. There's a crystal clear breach of fiduciary duty to clients to enrich himself in a clear conflict of interest.

11/ Sam (FTX CEO) lent money to Sam (Alameda owner). With terms that would never be approved at "arms length" in a million years

Rehypothecation of customer deposits *always* creates a fiduciary duty. This is true of every financial institution in every jurisdiction

12/ A fiduciary's duty is to minimize in worse case scenarios. In the case of collateralized loans (i.e. the "loans" from FTX to Alameda), that means the lender must be very confident that in a distress scenario the collateral can be liquidated to recover the principal

13/ Sam and the senior management at Alameda had a bizarre obsession with expected value (EV) to the detriment of any risk management

For a prop trader, EV is important. For a lender, EV is *irrelevant*. Lenders only care about downside, because they don't participate in upside.

14/ Imagine going to the bank for a $100,000 loan to buy Powerball tickets. Try to tell the bank the EV of the Powerball tickets is $100k, so you're good for it.

99% of the time you have zero to pay back. 1% you have $10 million, but the bank only gets the $100k face value back.

15/ The asset may have an EV of $100k, but as loan collateral it's essentially worthless.

Now imagine a bank that loans its CEO money (from customer deposits) so he can go out and gamble on Powerball tickets.

16/ FTX wasn't accepting Powerball tickets as collateral but it might as well have been. And this is where the "semi-liquid" tokens come into place.

The majority of Alameda's loans were collateralized highly illiquid "shitcoins".

17/ Again, remember the fiduciary duties to depositors is not about EV or last price or market cap. It is solely how much can I sell this thing for in a hurry if I'm in a distressed scenario.

A lender should *never* extend credit beyond a conservative estimate of that number

18/ With that being said, let's talk about the "less liquid" section of FTX's balance sheet. ("Less liquid" is a pretty flattering description, similar to how one might describe Osama bin Laden as "less alive".)

19/ Two tokens, FTT and SRM, collateralized $11 billion of loans to Alameda the week before the collapse. Even after the markdowns during the collapse these tokens SRM alone was still collateralizing $2 billion of loans.

20/ Let's discuss SRM specifically. (It's a pretty similar story for the rest of the "less liquid" assets)

Serum (SRM) is the most notorious project crypto for predatory "tokenomics". It was directly created by Alameda for the sole purpose of pumping top line market cap

21/ The playbook is to create a "low float" token, where the vast majority of supply is locked and therefore unavailable to buy or sell on the market.

SRM was created with 99% of the token supply locked. Even today, years after its debut only 4% of the token supply is float

22/ This creates a "down only" dynamic where the price of the token is continuously crashing because massive every unlock is a massive percentage increase in the supply of floating tokens.

SRM's entire price history has been nothing but a straight line down.

23/ This was the token that Sam (FTX CEO) decided was more than safe to collateralize $5 *billion* in loans to Sam (Alameda owner). All at arms length of course.

To reiterate a token where the entire floating supply was less than $300 million collateralized $5 billion in loans

24/ Of course, Sam (FTX CEO) thinks this is perfectly fine because Sam (Alameda owner) has assured him that it's +EV.

But that raises the question of how exactly did Sam (FTX CEO) think users would recover that $5 billion in liquidation.

25/ Sam, who traded crypto for 7 years, clearly knew there's no way to liquidate $5bn into a market with less than $300mn of liquidity. Recovery would be literal pennies on the dollar

(Not to mention they shouldn't even technically be able to liquidate locked tokens)

26/ There is no way to "organically" stumble into lending $5 billion on a token with less than 1/10 that amount in the entire floating supply. All to enrich his personal slush fund (*ahem* Alameda)

This was premeditated and deliberate fraud committed with full awareness

27/ Mean, motive and opportunity.

Despite the picture his coordinated PR campaign is trying to paint, Sam is not a boy genius who flew too close to the sun. He's a low brow criminal who fraudulently and knowingly stole billions from millions of people. End of story.