In the latest installments of Sam Bankman-Fried’s (SBF) media tour, he ‘proved’ further explanations for how much of FTX’s client money ended up at Alameda Research, the market-making company he owns. The answers don’t hold up because there is one question that, oddly enough, someone has yet to ask.

In a Wall Street Journal (WSJ) interview, SBF said that about half of the balance owed by Alameda to FTX came from wire transfers customers made to FTX through Alameda in the early days before FTX had a bank account. . He claims that some customers continued to use that route after FTX had a bank account. SBF said the figure was above $5 billion, implying that Alameda owed FTX more than $10 billion, which WSJ previously reported.

However, when SBF put together its emergency balance sheet while FTX was imploding, the figure was $8 billion instead of $5 billion for the “internally mislabeled trust account.”

the missing question

A Bloomberg interviewer asked how the $8 billion was spent, and the answer was everything we’ve read about VC investing, paying for Binance, buying real estate, etc. But that’s how Alameda spent it.

The real question is what happened at FTX.

From FTX’s perspective, when a customer transferred $100 to FTX through Alameda’s bank account, the customer would have received a positive FTX balance and the equivalent amount was deducted from Alameda’s account. Everyone has been focused on the balance of Alameda, which we will return to.

Let’s say FTX clients wired $8 billion to Alameda and imagine for a second that the money was actually paid out to FTX, not just as an accounting entry. Clients then told FTX, ‘buy me some Bitcoin, Ether’ or whatever. And FTX uses the client’s cash to buy the cryptocurrencies on their behalf. Everything’s fine.

But what if the $8 billion was never transferred to FTX, which is what SBF says? There was only one accounting entry.

Without receiving the cash, how could FTX have bought the cryptocurrencies belonging to the clients?

Where would that money have come from to buy the cryptocurrencies on behalf of the clients?

If Alameda handed over the crypto to pass on to customers, then the intercompany balance would not have been $8 billion. Everything would have been honey on flakes. And FTX was not profitable enough to buy $8 billion worth of crypto out of its own pocket.

Could the explanation be that FTX sold some of its own FTT tokens or Serum tokens to buy the tokens for clients? No. In October, the combined market capitalizations of FTT and SRM were around $3.3 billion.

Neither of these explanations holds water.

So the most important question is: was there a fictitious accounting? Did the system fraudulently show clients that they held Bitcoin or ETH, when in fact, FTX had never actually purchased the cryptocurrencies for the clients, the ones doing the Alameda transfers?

THAT is the $8 billion question. And that’s not something that happened suddenly in the last month. What happened in November was that the run on FTX exposed the asset shortfall on behalf of clients.

How the client deposited through Alameda worked: WSJ

SBF confirmed to WSJ that customers could see those dollars they remitted allocated on their screens. Obviously, otherwise, they would have been yelling blue murder for years.

As in other interviews, SBF stated that it did not run Alameda. However, he was the CEO of Alameda in the early days when much of this money was transferred to FTX through Alameda. Or not transferred, as it turns out.

And specifically, he was CEO when this deposit methodology was created through Alameda. In fact, there was such a small team at that stage that he was probably the architect or he was intimately involved in the plan to use Alameda’s bank account.

Despite running Alameda and thus being familiar with how it works, SBF ‘guessed’ how it worked when talking to WSJ.

“Dollars are fungible with each other. So it’s not like there’s a dollar bill that can be traced from start to finish,” SBF said.

Let’s stop right there. That is unadulterated garbage. Yes, dollars are interchangeable with each other, but accounting systems allow you to track things. In addition to account and transaction records, every accounting system has an audit trail. Precisely so that you CAN track transactions from start to finish. Unless you intentionally clear the audit log.

“It’s more just a bus… pots of assets in various forms,” SBF added. Just to clarify, omnibus accounts are pooled accounts. Most cryptocurrency exchanges have Bitcoin omnibus wallets: all of their clients’ funds are held in a single wallet. But the accounting system accurately records how much belongs to each individual.

When a customer uses $100 of their cash to buy $100 of Bitcoin, the total amount of Bitcoin held in the customer’s Bitcoin omnibus wallet should increase by $100.

Let’s go back to Alameda’s account on FTX. From FTX’s perspective, when a customer transferred $100 to FTX through Alameda’s bank account, the customer would have received a positive “cash” balance in FTX, and the equivalent amount was deducted from Alameda’s account. So Alameda had a negative balance. But somehow, that side of the Alameda was lost. Or ignored. And the amount grew, you know, to a negative $5 billion. Or maybe $8 billion.

One way this $5 billion could be ignored is if the system in which customer assets and liabilities are recorded did not try to balance itself. That seems inconceivable. If that were the case, there is a high risk that customers will find out. Or there was some deliberate tampering with the system that made it appear balanced through the use of a “stub account”.

Customer deposits through Alameda: The Block edition

Yesterday, The Block published a long interview with SBF. Frank Chaparro asked how the auditors missed this. Here is SBF’s answer:

“This (Alameda’s negative $5 billion) was effectively a negative client position (because Alameda was a client). And you know that many, many clients had open negative positions on FTX. It was a margin trade.”

It seems a bit doubtful that there are any other customer accounts with a negative balance of $5 or $10 billion. You’d think it would stand out unless deliberately hidden. SBF has often referred to this balance as a safe account, implying that it was not displayed in the trading system.

SBF continued: “This is how it worked. Those were not part of FTX’s assets or liabilities. So they were active and passive customers. So FTX’s finances were not directly affected by this.”

So SBF is saying that the auditors were only interested in FTX’s own balance sheet. Because client assets are in custody, they did not appear on FTX’s balance sheet. And therefore the auditors were not interested?

Wow! Here are some fundamental reasons why an auditor would be very interested.

First of all, it is widely known that FTX offered a high level of margin, which is risky. Auditors must be sure that the company can continue to be a going concern. So an auditor would look at the level of leverage on the platform. A single $5 billion overdrawn account should set off an alarm bell or two. Or if the trading platform accounts aren’t balanced due to $5 billion missing, that’s more than a small problem.

Second, a balance sheet doesn’t just record assets and liabilities. You also have to account for contingent liabilities. For example, if FTX was negligent and misplaced a few billion customers’ money.

Third, transactions with related parties, such as those with FTX and Alameda, must be reported in the accounts. even if there are no intercompany balances. Related party notes indicate activity between related parties, not just balances. And because Alameda is a customer, it makes it all the more important that this disclosure be made. Any auditor would have a specific checklist of questions and tasks around the Alameda relationship.

Bankman-Fried hinting that the auditors weren’t interested because client assets weren’t on FTX’s balance sheet is just the latest incredibly dubious statement.