Sam Bankman-Fried’s Written Testimony Notes Dec 12, 2022, is part of
This is part 3 of 11.
Feature Image: HackerNoon’s Stable Diffusion AI, prompt “classic hedge fund risks”
What went wrong?
A large number of things had to go wrong for this to happen. Because I was not running Alameda, I was not aware of some of the critical events at the time. But I was running FTX, and that means it was ultimately my responsibility to do right by FTX’s customers.
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Alameda Research became insolvent when the economic environment changed.
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Alameda put on a margin position that was sustainable in the economic environment of late 2021, with roughly 10% leverage. As tightening monetary policy, a war, and supply chain problems hit throughout 2022, asset prices crashed: I believe that Alameda’s assets fell by roughly 90% over the course of the year, and so even 10% leverage was too much.
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A run on the bank forced immediate liquid delivery from FTX. i) This meant that FTX had only a few days to margin call a substantial, fairly illiquid margin position.
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A failure of hedges.
- As best as I can reconstruct looking back, in late 2021, Alameda Research was not sufficiently hedged; I believe that it had a total margin position, much of which was not on FTX, that was roughly $8b in size, and likely had on roughly $2b of hedges.
- By the fall of 2022, I believe that Alameda Research had a margin position of roughly $8b, and likely had roughly $8b of hedges. However, the crash that occurred in November 2022 was not a broad market crash, or even a broad crypto market crash. From November 7th to November 9th, Bitcoin was down roughly 17% and equities markets were roughly flat, but many of Alameda’s assets were down more than 50%. And so Alameda’s hedges didn’t work.
- This is the classic ‘hedge fund risk’--that all of a firm’s positions can become highly correlated, even if some are thought to be hedges, as happened with e.g. Long-Term Capital Management and in the 2008 financial crisis.
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Uses of capital:
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Piecing together what data I can, in retrospect, Alameda Research’s roughly $8 billion net short margin position in liquid assets lined up with the following approximate expenditures:
(1) Interest payments to lenders: ~$1b
(2)VC investments: ~$4b
(3) Buying back Binance’s stake in FTX: ~$3b
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