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VC and private equity vultures have been buying up FTX debt at a loss since the collapse, with this being the singular reason why, to make a huge profit off the Anthropic shares. Any retail investor that sees this as a possibility of getting their money back is about to be disappointed once again.
I’m a noob.
Question 1: Why would VC and private equity have a stronger claim as compared to a retail investor in this case? My guess is that “retail investor” here means customers of FTX, who were investing in crypto. VC/private equity has a stake in the company itself now after buying shares, so I guess they come first in the chain — is that right?
Question 2: If a “retail investor” somehow obtained shares of FTX, would they have the same strength of claim as VC/private equity?
FTX declared bankruptcy in November '22. At the date they did so, any debts anyone had against them were essentially frozen and converted into dollars at the rate of that day. As FTX converts their assets into money, they will pay back all of their creditors in order of priority, with taxes coming first, then customer deposits, then normal debt, and last what remains goes to holders of the stock (leaving out a lot of nuance here).
Normally when a bank (or whatever FTX was) goes under with customer money missing, people lower in the pecking order don't really expect to see any money back, so they would be looking to offload whatever FTX owes them to anyone dumb enough to buy it, at whatever valuation it would fetch. The play is that if you are a savvy investor who knows that FTX holds an illiquid rapidly appreciating asset that might be valuable enough to pay every creditor, toxic FTX debt sold at pennies for the dollar might suddenly look very enticing.
For the private equity to make bank here, then all retail investors have to first be made whole (to the dollar valuation of whatever they held in November 22 at that time), but they are not going to see any profit. The profit goes to whoever who managed to buy debt at low valuations. If Anthropic shares appreciate enough that FTX makes every creditor whole, the rest goes to the stockholders which are mostly FTX employees and also mostly going to be in prison, which is a weird outcome.
Thanks for the detailed explanation! Just to clarify, I think the parent comment must be incorrect? It says “ Any retail investor that sees this as a possibility of getting their money back is about to be disappointed once again”, but from your explanation it sounds like they should get it back, just without profit.
Americans and non Americans alike? I’d be surprised if foreign depositors living in the EU would be made whole; Could this ever happen?
They don't have any stronger claim. I assume all customer claims are being treated equally. They bought the claims because they have access to capital, a longer time horizon, and/or a better understanding of the ultimate payout value.
Correct. Workers will never win at a game designed by capital. The only path forward is exercising labor power by withdrawing it for political ends.
This is a non sequitur. "Investors might buy senior debt in a defunct crypto marketplace" is not actually a problem facing labor as a class.
Even though this has been down voted into oblivion, I’ll bite: to what political ends would you propose the labor class exercise their power?
It’s looking more like FTX is going repay customers in full, with a cash value computed based on the value of crypto deposits when the company went bankrupt in November 2022. That was a time when the prices of crypto had fallen, and they’ve gone back up.
If FTX has billions of dollars left over after paying depositors, FTX equity holders could end up getting paid too. If that happens, the outcome arguably would be pretty unfair. You’d have a situation where an insolvent FTX effectively managed to crash the crypto market, forcibly cash out all its customers at the low prices, but hold onto the other assets that it bought with customer money.
In effect, capital gains that were earned with the capital of FTX customers are going to go FTX shareholders instead. Same happened with Mt Gox.
FTX did not crash the crypto market. The crypto market crashed FTX. Crypto running on greater fool theory ran out of fools. FTX was just caught swimming naked after the tide went down.
The prices of BTC and ETH dropped by about 15% between Nov 2 when the Coindesk story about FTX balance sheet came out and Nov 11 when FTX went bankrupt. And some others like Solana dropped more.
But you’re right that crypto already had a much bigger crash before that.
The precise sequence of events (and cause) doesn't affect the numbers.
And this is reason 26366363 why it almost never makes sense to sell your creditor claim to a hedge fund.
Unless you have 29% interest loans to pay down or you’re going to die soon without heirs, it makes sense to wait it out. The hedge funds (usually) discount the expected value by a ton when deciding how much to pay.
I wonder what Miami Dade county sold their $17m claim for after the stadium naming agreement got cancelled:
https://amp.miamiherald.com/news/local/community/miami-dade/...
(But I guess they did ok by re-selling the naming rights for more per year to Kaseya which somehow has a lot of cash after indirectly getting >1000 companies had their computers down after getting ransomware’d: https://en.m.wikipedia.org/wiki/Kaseya_VSA_ransomware_attack )
> The hedge funds (usually) discount the expected value by a ton when deciding how much to pay.
That’s called a risk premium.
> FTX equity holders could end up getting paid too
FTX is under heavy litigation. If there is extra cash, it will go to those claimants.
I thought the IRS popped a claim of $44b out of the hat [1], did this change? If they collect that, customers are bound to get pennies on the dollar.
[1] https://www.forbes.com/sites/digital-assets/2023/05/14/the-i...
No, to make it the same as Mt. Gox they'd have to sit on the money for at least a decade without paying anyone. Ever.
Wow. I never followed up on that story after I heard that the payouts would be low. Wonder how long it takes for FTX depositors to get paid out.
I'm not sure what your proposed alternative is? If you don't peg the payouts to crypto FMV at the time of the crash, then FTX is still insolvent (because their debts were also denominated in crypto), so nobody gets anything.
> nobody gets anything.
The argument is that equity should get nothing, and the crypto-holder's assets should be adjusted for current value... just like how cash-holder's recovery would be adjusted for inflation.
It’s funny that this is getting downvoted when it is true.
It is more complicated though, the bankruptcy lawyers had to come up with some system to pay people back, and if not for the huge run up in crypto prices, which happened mainly after the policy was locked in, it wouldn’t be so bad.
Still though it does seem a very generous to the other FTX creditors (I doubt the equity holders are getting anything).
> the bankruptcy lawyers had to come up with some system to pay people back
I don’t think it’s a lawyer’s decision: per law, everyone’s unsecured debts get fixed at the date of bankruptcy filing converted into dollars.
For anyone interested to follow the drama
https://twitter.com/sunil_trades/status/1758750047296962913
My lawyers Moskowitz and Boies have filed a 106 pg class lawsuit against Sullivan and Cromwell for FTX creditors
Causes of Action:
- Civil Conspiracy: S&C long relationship with FTX, entities and insiders
- Aiding and Abetting Fraud
- Aiding, Abetting Fiduciary breach FTX US
- Fiduciary breach FTX
- Federal RICO
I get what Sam did was wrong -- but uh... doesn't it look like everyone is going to get a return on their investment? Like -- uh -- weren't there far worse players through all this than Sam at the end of the game? For example the SPAC borderline scams that lost investors billions?
Something smells really strange here...
If a store employee steals $500 from the till, gambles it on what he thinks is a sure bet, doubles the money, and returns $600 back to the till, that’s still theft, wrong, and punishable, even if the store happened to win in the end.
Perhaps not an exact analogy, but seems reasonably close.
It must be driving Sam insane though to think he could have made it all fine if he had hung on a few more months.
And they put the money back in the till years later, after the owner of the store lost their house.
I feel like it must be true that there are many others out there that were able to hang on and now we merely know about them as a wealthy person, rather than as a criminal.
The question is what the ratio is: one caught for every ten not caught?
Eh, he had made exactly these sorts of bets before and he won those. Because it is gambling, eventually you lose a bet or two. While experienced gamblers learn to manage risk- mostly by diversifying and betting small chunks of your pot on different, uncorrelated bets, SBF never did. He continually bet his entire net worth- and his freedom- in one big gamble again and again. And it worked for a while. Until it didn't. But if he did get this bet to pay off, then he would have done it again, clearly. And eventually, one of the gambles would break like this one did.
Martin Shkreli pulled off a similar feat, still went to jail for the fraud even though he made investors whole.
https://www.nytimes.com/2017/07/26/business/dealbook/martin-... | https://archive.today/gH2zT
https://en.wikipedia.org/wiki/Martin_Shkreli#Criminal_convic...
What's being punished is the fraud, not the losses. We do not want to incentivize companies putting it all on red with customer funds they don't have a right to touch as long as they win the bet, we want to punish them for even trying, regardless of whether it happened to work this time.
I get that, but whats the point of NO HARM is proven.
A big part of why investors are being made whole is also that what they are owed froze into dollars at the moment of bankruptcy. If you had 1 BTC in FTX at the point of bankruptcy, and that was worth 20,000 on that day, you do not get 1 BTC back (or what 1 BTC is worth today)- you get cash for the amount it was worth on the day of bankruptcy. So as crypto prices have gone up again, the assets that FTX owned have gone up and the amount they owe has stayed constant.
This is only possible because FTX is no longer a continuing operation- if they still owed that customer 1 BTC then the assets appreciating and the debts increasing does nothing to help them.
Most people won't get anything close to what they had. That's because bankruptcy claims are locked in USD on the date on the filing, which was pretty much the bottom of the market. And they certainly won't get any returns on the investment.
Let's say you had 1 BTC at the time of bankruptcy which was worth $20k for the sake of example. Your claim is now $20k and you won't get more than that. And even if you get 100% of that, it's only 0.4 BTC at current prices.
For people who's life savings was that $20k, that's still $20k that they'd previously written off. It's not $60k or whatever, but it's still better than $0.
The way punishment and deterrence works in the U.S. is that you pick a high profile villain and make an example out of them, and then hope that the publicity generated by their punishment works to deter similar actors. Enforcement agencies like the SEC and FBI are bureaucracies just like major corporations, and often have fewer resources and lower paid employees. They don't have the resources to go after every criminal. So they pick the most high-impact, hated, and sensational cases to go after, then rely on the media to amplify the deterrence value.
Most SPACs never made headlines on the way up; therefore prosecuting them is not going to make headlines on the way down. They'd spend a lot of resources to gather evidence and prove a court case, but it would have zero deterrence value to other potential criminals, because nobody will ever hear about the successful prosecution. It is far more cost-effective to go after SBF and FTX, which was very prominent in the 2019/2020 crypto bull run and many Americans personally lost money in its collapse, and use that to send a message to the rest of the crypto sector.
> many American politicians personally lost money in its collapse
I agree, however selective exemplary punishment is specifically outlawed in the constitution. As well as precedent around selective enforcement.
Chamuth's SPAC that dumped together a ton of covid duds and sold it to investors then took a 90% loss to clear a bunch of billionaires books of their boondoggles ... that somehow feels so much more wrong than Sam.
Assets have been in limbo for over a year now. Won’t believe people are made whole until it actually happens.
If you steal a million dollars, put it all on a lucky red turning that million into two, and then put the original million back, you still stole a million dollars at the start.
https://www.investopedia.com/why-ftx-plan-to-refund-90-perce...
> FTX expects to pay all customers in full, although it will calculate their repayment based on cryptocurrency prices from November 2022, when FTX filed for bankruptcy amid a prolonged slump in the crypto market, rather than at the present, higher value of crypto assets.
November 2022 was a bottom they themselves created. Bitcoin has tripled in value since then so paying in USD is a huge loss for the affected customers.
And let’s not neglect the massive fees that the bankruptcy lawyers for FTX have raked in.
> The filings also show that FTX has paid lawyers a total of $350 million since bankruptcy proceedings began earlier this year and that from August to October, it shelled out somewhere in the region of $1.4 million per day.
That was from Dec. 2023 I’m sure it is much more now. That money comes from somewhere.
Trick is to be lucky like Bernie Madoff creditors. Then SIPC covers all the fees.
> No funds recovered in the Madoff Recovery Initiative are used to pay costs associated with the recovery. All trustee, legal, and accounting fees, as well as administrative expenses, are paid by SIPC.
https://www.sipc.org/news-and-media/news-releases/20231208
Still chugging along doing collections and distributions, oh and of course billing, to this day 16 years later.
Yeah, that's what happens when a fraud, a crook ruins a business and bankruptcy lawyers have to take over to save whatever can be saved for victims of said fraud.
Holy shit, $350 million? how the hell is that even possible?
Maybe they're harder on conmen who buy super bowl ads.
Honestly these prosecutions are really just driven by the media. They just are.
The fact that sam was young and had a poluamorous house in the Bahamas meant this was front page material. This then meant that prosecutors feel they must do something about it to show the world you can't commit fraud AND be widely known and get away with it.
People who commit fraud and aren't widely known aren't treated the same by our justice department.
You're right. People who commit fraud and aren't widely known don't get house arrest pending trial, they go straight to a federal holding facility.
They don't get to access the internet or play video games all day, they get to look at 4 walls and contemplate the meaning of life.
SBF benefited from being widely known. Most people aren't that lucky.