On January 14, 2022, former crypto mogul Sam Bankman-Fried tweeted: “First, we’re launching a $2 billion enterprise fund, FTX Ventures. As a founder, it’s necessary to assist different founders creating nice corporations. Hopefully it will permit us to try this much more.”
A noble objective, to make certain. However fairly than elevate capital for the fund from exterior buyers, Bankman-Fried used cash from third celebration lenders like Genesis International Capital that had gone to Alameda Analysis, Bankman-Fried’s cryptocurrency buying and selling agency, in accordance with testimony from Caroline Ellison, former CEO of Alameda Analysis.
Ellison testified Tuesday because the fifth witness for the prosecution in Sam Bankman-Fried’s six-week trial. She claimed that the previous FTX CEO directed her to commit fraud and cash laundering crimes.
By the point Bankman-Fried posted that tweet, Alameda had already made sure enterprise investments, however the govt wished to up the ante considerably. Within the “summer season or fall of 2021,” Bankman-Fried despatched Ellison a possible dangerous state of affairs scenario for FTX and Alameda, detailing a world during which the crypto market was down, Alameda’s investments plunged and the corporate turns into nugatory. Bankman-Fried had put that actuality into the tenth percentile, in accordance with Ellison, which continues to be pretty dangerous within the buying and selling world.
“tenth percentile eventualities occur on a regular basis,” mentioned Ellison.
Bankman-Fried was pondering of investing one other $3 billion into early stage corporations and wished to know the way that will have an effect on Alameda’s funds if the shit hit the fan. Not surprisingly, Ellison discovered that it could put Alameda in a riskier place than it was already in — on the time Alameda’s web asset worth was unfavourable $2.7 billion — and make it unlikely or not possible to repay its loans in the event that they have been known as abruptly.
And since Alameda was working underneath the belief that it could take FTX buyer funds to repay any loans, that will imply FTX would lose a major sum of money on this state of affairs, as effectively.
Ellison testified that she shared these issues with Bankman-Fried and performed out various eventualities to taking out extra loans for investments, akin to elevating extra fairness, investing much less in ventures and promoting extra FTT (FTX’s crypto token). Bankman-Fried requested her to run the numbers once more assuming that each one of Alameda’s loans from Genesis have been fastened, fairly than open-term. Most of Alameda’s loans on the time have been open-term, which is extra dangerous as a result of it means the mortgage might be known as at any time.
“…after which you would need to repay it even in case you don’t essentially have the funds obtainable,” mentioned Ellison.
In a state of affairs the place all of Alameda’s loans may very well be modified to fixed-term, Ellison estimated that the corporate was right down to a 30% probability of being unable to repay its loans in a foul market state of affairs.
Bankman-Fried urged her to attempt to change Alameda’s loans to fixed-term. Ellison was in a position to change some, however the majority remained open-term. She had run a state of affairs for that actuality, as effectively.
If there have been to be a market downturn with Alameda’s largely open-term mortgage construction, and if Alameda made $3 billion in investments, Ellison discovered the likelihood of Genesis recalling its loans could be 25%. The likelihood that the corporate could be unable to make these mortgage funds would go from 30% to 100%.
“Meaning if we made this $3 billion of investments and there was dangerous market information resulting in a major market downturn and our loans obtained known as, that there was no approach we might be capable of make the funds,” mentioned Ellison, noting that Alameda could be unable to repay its loans even accounting for the limitless line of credit score and entry to FTX buyer funds.
Ultimately, Bankman-Fried seems to have settled on investing $2 billion into enterprise investments, backed by FTX fairly than LPs, however the end result was the identical.
Ellison’s testimony and cross examination will proceed on Wednesday.
