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The jury finally hears Sam Bankman-Fried

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Honestly, it’s pretty incredible to see a man torpedo his own credibility. on direct testimony. We’re not even at the cross yet, and the judge has already asked him to answer the question posed to him by his own lawyer.

The jury is watching all this carefully.

The main thing that’s clear from Bankman-Fried’s testimony is that the man really likes the sound of his own voice. So far, the countdown of “Objection, story!” to Bankman-Fried’s responses, followed by “Sustained” is at three hours.

Plus, sometimes when Bankman-Fried says “we,” he’s only talking about himself.

During an evidentiary hearing yesterday, Bankman-Fried was repeatedly reprimanded by Judge Lewis Kaplan for failing to answer prosecutor Danielle Sassoon’s questions under cross-examination. Today, Bankman-Fried was reprimanded by Kaplan for not answering questions from his attorney Mark Cohen during direct examination. Bankman-Fried also occasionally interrupted Cohen with “yes” and “yeahs.”

We spent a large part of the morning explaining the vocabulary. I’ll spare you the full list, although I will say that explaining “Amazon Web Services” and “database” was a bit too detailed. Bankman-Fried then attempted to define “market manipulation.” After Bankman-Fried gave her definition, Kaplan told the jury that he was the final authority on this, thank you.

To be fair to Bankman-Fried, he was clearer and much easier to understand than he was at yesterday’s hearing. There was minimal word salad today. I don’t know if he was more relaxed, or just been more rehearsed, but I’ll definitely be watching to see if he suddenly becomes a lot less consistent when Sassoon looks for him for cross country.

This is the story of FTX, from its perspective.

Bankman-Fried, who informed us that he was “somewhat introverted, naturally,” gave us a fairly extended overview of his life before Alameda Research, which I’ll skip. In 2017, during a bull run in cryptocurrencies, he launched his cryptocurrency trading company. He knew “virtually nothing” about cryptocurrency at the time, he explained, but he still wanted to arbitrage on it.

Alameda Research is named after Alameda County, California, where its first office was established. As for his name, here is what Bankman-Fried said on the stand:

In fact, we wanted to go unnoticed at that time. I didn’t want to call it Sam’s Crypto Trading Firm or something like that. We – there are a lot of competitors and people that we didn’t particularly want to know what we were building because they would rush to do it. “Research” was a sort of generic word, which complemented the name of the company. And it was much better than the internal name we had at that time, which was Wireless Mouse.

I would find this much more credible if I hadn’t already watched a video of Bankman-Fried explaining on a podcast that the name made it easier to open a bank account. This happened on the first day of Gary Wang’s testimony. Bankman-Fried was there too. Do you know who else was there? The jury.

Regardless, Bankman-Fried went on a hiring spree for Alameda. He rounded up his merry band of alleged co-conspirators. First, Wang, to program computers. Then, Nishad Singh, about a month after founding Alameda Research. Finally, Caroline Ellison.

Not having a risk management team, when you are in a financial field, is certainly a choice

Even though Bankman-Fried was the CEO and also the majority shareholder, he wanted to be clear: he did it. not supervise Wang’s direct work. Regardless, after a series of extremely successful arbitrages – annualized returns of 50-100%, according to his testimony – he decided to found a cryptocurrency exchange, FTX. He thought he would fail; that there was only a 20 percent chance of success. Bankman-Fried didn’t put a time frame on this estimate, but arguably 20% represented a much higher chance of success than FTX would enjoy once Alameda tapped into customer deposits. .

By the way, because he was a very good guy, Bankman-Fried made it a point to “periodically” handle support tickets himself. “If I didn’t do this, I feared losing touch with the real concerns of customers,” he testified. What he didn’t do was create a risk management team, which he now calls a “big mistake.”

Risk is an inherent part of a futures exchange, which is even more like a casino than a regular cryptocurrency. Not having a risk management team, when you are in a financial field, is definitely a problem. choice. It is especially a choice when you tell everyone that your crypto exchange is very good and safe.

FTX’s main selling point was its “risk engine”, which was supposed to prevent big losses that would then be distributed to the rest of the customers. But Bankman-Fried testified that in 2020, “the risk engine was effectively collapsing under the weight” of the stock market’s rapid growth. The liquidation time therefore increased: it took a few minutes to determine which accounts needed to be liquidated. As a result, at one point, the risk engine became stuck in a catastrophic feedback loop that would have generated losses in the order of “trillions of dollars,” Bankman-Fried testified. As part of this feedback loop, Alameda was on the brink of liquidation, which “would have disastrous consequences” for FTX.

“At the time, I wasn’t entirely sure what was going on. »

Because of this experience, Bankman-Fried suggested an “alert” or “delay” that would prevent Alameda from being liquidated by a bug. This is the supposed origin story of “allow_negative,” which Bankman-Fried says was the end result of that conversation, and which he says he was unaware of until very recently.

There is a problem with this story. “Allow_negative” was coded and activated in 2019. I saw the code in court, as did Bankman-Fried, who was also present for the testimony. You may be wondering if the jury was also present? Reader, it was.

Bankman-Fried denied knowledge of the effectively infinite line of credit that Alameda Research received from FTX. This argument was particular; My main takeaway is that the CEO of a financial company simply doesn’t pay attention to finances.

FTX couldn’t get bank accounts right away. Bankman-Fried predicted it would take a year or two. Rather than wait, he decided to use Alameda as his “payment provider” for bank transfers. “At the time, I understood that there were teams that managed the process,” he said. “At the time, I wasn’t entirely sure what was going on. »

Well, of course, that’s understandable! He’s an introvert!

Bankman-Fried had no idea that Singh, his employee, had backdated his interest payments to grow FTX to $1 billion.

In 2021, FTX had millions of users, with a revenue of $1 billion. Bankman-Fried said he works 12 to 22 hours a day and takes a day off every two months. Because FTX had grown so much, he could no longer run both companies, he said. Bankman-Fried turned the company over to Caroline Ellison and Sam Trabucco, who, immediately after being named co-CEOs, promptly took early retirement. (Leaving King Quietly!) Bankman-Fried, however, remained involved in hedging and risk in Alameda.

About that $1 billion in 2021 revenue: Bankman-Fried certainly didn’t know that Singh, his employee, backdated interest payments to get FTX “over the line” to $1 billion. You see, he had just asked his employees to check if there was a missing source of funds to reach $1 billion. This testimony was especially hiking.

Oh, also that MobileCoin loss? The one Wang said Alameda took to keep it off FTX’s balance sheet? Yeah, so it was a completely innocent thing where what actually happened was that Bankman-Fried thought it was appropriate for Alameda to take the position of security liquidity provider, that’s all .

In June 2022, Bankman-Fried learned about the account called “fiat@ftx” that tracked the amount of money Alameda owed FTX, he testified. He didn’t know what it was and didn’t bother to find out. He was busy! That’s when Bankman-Fried ordered Ellison to pay off Alameda’s lenders, because he believed Alameda was good for that. It also gave BlockFi and Voyager, two crypto lenders, capital injections for good measure.

He was “very surprised!” »

Remember Adam Yedidia’s testimony about a conversation with Bankman-Fried in August 2022 about the enormous amount of money Alameda owed FTX? Well, Bankman-Fried remembers it differently. You see, Yedidia was just asking about Alameda’s risk profile, and Bankman-Fried wasn’t talking about insolvency at all.

Furthermore, when Singh and Bankman-Fried had a dramatic conversation on the balcony of their penthouse, it was simply that Singh thought Alameda’s liabilities had become too high and that FTX was spending too much money on marketing. But Bankman-Fried still thought Alameda had more assets than liabilities, so everything was fine, and besides, if Singh thought he was going to get better at marketing, he could take over. This had nothing to do with the money Alameda owed FTX.

Of course not! Bankman-Fried did not learn of the $8 billion liability associated with Alameda until October 2022, he said. And he learned everything on his own, by consulting a computer database. When he found it, he was “very surprised!” »

Besides the two obvious lies Bankman-Fried told on the stand — about Alameda Research’s name and about “allow_negative” — I was struck by how little he seems to know about his own companies. Apparently, Singh, Wang and Ellison did whatever their little hearts desired. Because Bankman-Fried was a CEO, but certainly not one to pay attention to the money in his crypto trading company and futures exchange.

We had to stop for the day, but I’m very excited to hear on Monday what new surprises Bankman-Fried will have in November 2022 when FTX drops.

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