It’s honestly unbelievable to see a man torpedo his own credibility by making direct statements. We’re not even at the cross yet and the judge has already instructed him to answer the question his own lawyer is asking him.
The jury is watching all this carefully.
What’s clear from Bankman-Fried’s statement so far is that the man truly loves the sound of his own voice. So far, the count of “Objection, Narration!” to Bankman-Fried’s responses, followed by “Sustained,” is at three.
Also, sometimes when he says “we,” Bankman-Fried only means himself.
Yesterday, during an evidentiary hearing, Bankman-Fried was repeatedly berated by Judge Lewis Kaplan for failing to answer prosecutor Danielle Sassoon’s questions during cross-examination. Today, Bankman-Fried was scolded by Kaplan for not answering his attorney Mark Cohen’s questions during direct examination. Bankman-Fried also occasionally interrupted Cohen with “yes” and “yes.”
We spent much of the morning explaining vocabulary. I’ll spare you the full list, although I have to say that the explanation of “Amazon Web Services” and “database” was a bit too detail-oriented. Then Bankman-Fried tried to define “market manipulation.” After Bankman-Fried gave his definition, Kaplan told the jury that he was the final authority on the matter, thank you.
To be fair to Bankman-Fried, he was clearer and much easier to understand than at yesterday’s evidentiary hearing. Today there was a minimum of word salad. I don’t know if he was more relaxed or if he was just more rehearsed, but I’ll definitely be watching to see if he suddenly becomes a lot less coherent when Sassoon brings him to the cross.
Here is the story of FTX from his perspective.
Bankman-Fried, who told us he was “a bit of an introvert by nature,” gave us a pretty extensive tour of his life before Alameda Research, which I’ll skip. In 2017, during a crypto bull run, he founded his cryptocurrency trading company. He explained that he knew “basically nothing” about cryptocurrencies at the time, but he still wanted to do arbitrage.
Alameda Research was named after Alameda County, California, where the first office was established. Regarding the name, Bankman-Fried said the following on the stand:
In fact, we wanted to stay under the radar at that point. I didn’t want to call it Sam’s Crypto Trading Firm or anything like that. We – there are a lot of competitors and people that we didn’t necessarily want to know what we were building because they would be vying for it. “Research” was a kind of generic word that completed the company name. And that was – it was far better than the internal name that we had at that point, which was Wireless Mouse.
I would find this much more credible if I hadn’t already watched a video of Bankman-Fried on a podcast explaining that the name makes it easier to get 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.
Anyway, Bankman-Fried went looking for Alameda. He rounded up his merry band of suspected co-conspirators. First, Wang to program the computers. Then Nishad Singh, about a month after founding Alameda Research. Finally, Caroline Ellison.
Not having a risk team is certainly a choice when doing any financial work
Although Bankman-Fried was CEO and majority owner, he wanted to be clear: He did not oversee Wang’s direct work. Anyway, after a series of highly successful arbitrage trades – according to him, he achieved annual returns of 50 to 100 percent – he decided to start a cryptocurrency exchange, FTX. He thought he would fail; that the chance of success was only 20 percent. Bankman-Fried did not define what time frame he expected for this estimate, but 20 percent was arguably a much higher chance of success than FTX would have if Alameda dipped into customer deposits.
By the way, because he was such a good guy, Bankman-Fried made it a point to handle support tickets himself “on a regular basis.” “I was afraid that otherwise I would lose touch with the actual concerns of customers,” he testified. What he didn’t do was create a risk team, which he now describes as a “big mistake.”
Risk is an integral part of a futures exchange, which is more like a casino than a regular cryptocurrency. Not having a risk team is certainly a choice when doing any financial work. This is especially a choice if you are telling everyone that your crypto exchange is very good and safe.
FTX’s big selling point was its “risk engine,” which was designed to prevent large losses that would then be distributed among all remaining customers. But Bankman-Fried testified that in 2020, “the risk engine virtually gave out under the weight” of the stock market’s rapid growth. This increased the time to liquidation – it took minutes to determine which accounts needed to be liquidated. As a result, the risk engine eventually became stuck in a catastrophic feedback loop that would have resulted in “trillions of dollars” in losses, Bankman-Fried testified. As part of this feedback loop, Alameda was on the verge of liquidation, which would have “catastrophic consequences” for FTX.
“At the time I wasn’t quite sure what was going on.”
Based on this experience, Bankman-Fried proposed a “warning” or “delay” that would prevent Alameda from being liquidated through a mistake. This is the alleged origin story of allow_negative, which Bankman-Fried says was the ultimate result of that conversation and which he was unaware of until recently.
There is a problem with this story. “Allow_negative” was coded and enabled in 2019. I saw the code in court, as did Bankman-Fried, who was also present at the deposition. You may be wondering: Was the jury there too? Reader, that’s it.
Bankman-Fried denied knowing about the effectively unlimited credit line that Alameda Research received from FTX. This argument was peculiar; Essentially, I concluded that the CEO of a financial company simply wasn’t paying attention to finances.
FTX was unable to obtain bank accounts immediately. Bankman-Fried assumed it would take a year or two. Instead of waiting, he decided to use Alameda as a “payment provider” for bank transfers. “My understanding at the time was that there were teams managing the process,” he said. “At the time I wasn’t quite sure what was going on.”
Of course, understandable! He’s an introvert!
Bankman-Fried definitely didn’t know that Singh, his employee, had backdated interest payments to get FTX “over the limit” to $1 billion
In 2021, FTX grew to millions of users and generated $1 billion in revenue. Bankman-Fried said he worked 12 to 22 hour days and took a day off every few months. Because FTX has grown so much, he can no longer run both companies, he said. Bankman-Fried handed the company over to Caroline Ellison and Sam Trabucco, who promptly took early retirement immediately after being named co-CEO. (Quiet resignation, King!) However, Bankman-Fried continued to be involved in hedging and risk at Alameda.
On the $1 billion in 2021 revenue: Bankman-Fried definitely didn’t know that Singh, his associate, had backdated interest payments to get FTX “over the limit” to $1 billion. You see, he had just asked his staff to see if there was a missing source of funding to get to $1 billion. This statement was particularly long-winded.
Oh, also that MobileCoin loss? What Wang said Alameda took to keep FTX’s balance sheet away? So yes, it was a completely innocent thing when Bankman-Fried saw fit for Alameda to take over the position as backstop liquidity provider, that’s all.
In June 2022, Bankman-Fried heard about the account called “fiat@ftx” that tracked how much money Alameda owed FTX, he testified. He didn’t know what it was and didn’t bother to find out. He was busy! At that time, Bankman-Fried ordered Ellison to repay Alameda’s lenders because he thought Alameda was good for it. For good measure, he also gave some capital injections to BlockFi and Voyager, two crypto lenders.
He was “very surprised”!
Remember Adam Yedidia’s statement about a conversation with Bankman-Fried in August 2022 about the huge amount of money Alameda owed FTX? Well, Bankman-Fried remembers it differently. See, Yedidia only asked about Alameda’s risk profile, and Bankman-Fried didn’t talk about bankruptcy at all.
When Singh and Bankman-Fried had the dramatic balcony conversation in their penthouse, Singh also felt that Alameda’s liabilities had become too high and that FTX was spending too much money on marketing. But Bankman-Fried still believed that Alameda had more assets than liabilities, so everything was fine, and besides, he could take it over if Singh thought he would be better at marketing. It had absolutely nothing to do with the money Alameda owed FTX.
Of course not! Bankman-Fried only learned of the $8 billion liability associated with Alameda in October 2022, he said. And he learned it all on his own by looking at a computer database. When he found it, he was “very surprised!”
Aside from the two obvious lies Bankman-Fried told on the stand – about the name of Alameda Research and about “allow_negative” – I was struck by how little he seems to know about his own companies. Apparently Singh, Wang and Ellison were out there just doing whatever their little hearts desired. Because Bankman-Fried was a CEO, but definitely not the type to care about money at his crypto trading company and futures exchange.
We had to pause for a day, but I’m very excited to hear on Monday what new surprises Bankman-Fried has in store in November 2022 when FTX falls.