Matt Levine on the Collapse of FTX and Alameda

Joe Weisenthal (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

Tracy Alloway (0:16)

And I'm Tracy Alloway.

Joe Weisenthal (0:17)

So Tracy, we're continuing to talk about the implosion of FTX and Alameda, the Sam Bankman-Fried empire. Yesterday, we talked to two people who are involved in the story in different ways.

One who is a market maker who had used and got caught out on the FTX site, another one who had attempted to blow the whistle. But of course, we're still just sort of like beginning to understand the story.

Tracy Alloway (0:42)

Right, a very fast moving story. But one of the things that people are talking about right now with the benefit of hindsight, of course, is the infamous Sam Bankman-Fried episode of Odd Lots.

And in that episode, we had him on with Bloomberg Opinion columnist, Matt Levine. We were talking about how DeFi works. And of course, he described it as the sort of magical money making box.

Joe Weisenthal (1:08)

Right. And so in retrospect, and at the time, of course, people were pretty in shock by those comments. But now everyone's going back and listening to that. In retrospect, and it also helps explain perhaps certain aspects of the FTX balance sheet, particularly the tokens that it used to capitalize its balance sheet.

Anyway, so we have to have Matt Levine back on. He's been writing a lot about this story. It's been a must read, his coverage. And of course, he was there with us on that episode. So, Matt Levine, thank you so much for joining us.

Let me start kind of with a simple question, which is what is your summary or how would you describe why FTX collapsed? What's the basic model of what happened here?

Matt Levine (1:53)

So it's a little bit unclear, but basically what seems to have happened is that FTX has an affiliated crypto hedge fund called Alameda, Alameda seems to have made some bad bets somehow or other.

It ran into trouble and to prop it up at some point over the summer, probably FTX started sending a lot of FTX customer money to Alameda, which Alameda then posted to its own lenders or otherwise lost. And then last week, there were some doubts about FTX in the market and customers started withdrawing their money from FTX and FTX realized it didn't have their money and it went bankrupt in about 20 minutes.

Tracy Alloway (2:39)

That it did. So prior to recent events, what was your impression of the relationship between FTX and Alameda?

Matt Levine (2:47)

I have to say I didn't really have much of an impression one way or the other. Obviously there were a lot of conspiracy theories about what FTX and Alameda were doing because they were run basically by the same group of people, the same people who kind of were all roommates in a big apartment in the Bahamas.

They were founded by the same person. They were clearly connected and there were sort of these vague representations about them being separate, but like, you know, not a lot of necessarily enforceability to that. So I didn't really know. I assumed that Alameda was a market maker on the FTX exchange and that, you know, it may or may not have had some benefits from being the affiliated market maker.

When you hear people complaining about these things, you often think that the essential complaint is Alameda has some advantage in making markets on FTX. It makes too much money by trading against FTX customers because it knows something that everyone else on the exchange doesn't know.

You know, I never find those stories that, like that's a story in standard equity market structure, and I don't find it like that exciting. It might be true, but it's not that exciting to be like, oh, they like can see the order book a little bit faster than everyone else. That can be an advantage, but I don't know. Like those stories aren't that compelling. But it seems increasingly likely that that is not at all what was happening here because the basic problem here was very much not that Alameda was making too much money. Alameda was losing too much money. So the actual like problematic relationship here is pretty much that Alameda lost a bunch of money and FTX just bashed over its customer money to Alameda. There are other possible stories that are even worse and I don't want to talk too much about them because they're all sort of speculative. But some speculations are basically that Alameda was more or less in the business of losing money on FTX that rather than Alameda being too good at trading on FTX, Alameda was bad at trading on FTX. And so if you went to FTX as someone else, as a crypto hedge fund or even as a retail customer, and you traded on FTX, you got really good prices because Alameda was making really bad prices because they were losing money on every trade.