Thanks! It really should have occurred to me to just look this up and read the statute, it definitely makes things a lot clearer.
I'll be interested to see what value gets ascribed to the various cryptocurrency assets.
Let's say I'm running some business and it's maybe going under. On behalf of the business, I create 101 finger paintings, sell one to my friend's uncle's golf buddy for $10,000, and book the rest as $1m in fine art assets. With my balance sheet shored up, I go on trading, but eventually things don't work out and I file for Chapter 11.
Does the court have to accept the value I put on the paintings at the time, and regard me as solvent for that period? After all, sure, eventually it turned out I couldn't sell the paintings. But that could just be because by then my name was in the news and that tanked the market for my art.
Thanks, this is a really great summary of the principles.
I definitely agree that it will depend on further factual development. But I think the facts that are out imply that the insolvency period could go back a very long way. It sounds like the user deposits was intermingled with FTX and Alameda operating capital from the very beginning, and the accounting practices were such that they wouldn't necessarily have known their overall position.
Do you happen to know whether the bankruptcy court just looks at when the executives knew (or negligently failed to find out) that the company was insolvent? It seems kind of weird to expect the court to decide the true value of all the assets at each point in time.
I think he was referring to the idea of getting in touch with the bankruptcy proceeding to let them know about the funds you've set aside.
I really wasn't trying to advocate this as an immediate action, but when I went back and read the relevant paragraph, it does say that. I don't think there's actually so much danger of people taking my post as a recipe to follow --- I hope it's clear that I'm focussing more conceptually on what the right thing to do is, and that there's still a significant gap between that and the exact way to carry anything out.
Another thing I'm saying is that the public discussion and leadership on this topic has been greatly lacking. On that much I have some agreement with what you've said. However I really think you should reconsider the way you've worded your sentiments. It's fine to register an anonymous account to say something that you wouldn't readily put your name to. But using that as an opportunity to insult is definitely not something that can make anything better.
Regarding the secondary debt holders, my position is that FTX didn't have the right to disperse the funds, and so the grantees who might have custody of the money currently don't have any right to try to intervene in the outcome. Now, I use the term "rights" here, but really that's just a shorthand for the rule utilitarianism I mentioned in the original post. I don't believe in natural rights or something. I just think that society needs to coordinate around clear principles for things like property, and actions which go against those principles are almost always net bad.
So, the people with the title to the debt via the secondary market have the right and proper claim to the property. The people who are holding the property shouldn't try to do anything but get out of the way.
When it comes to Anthropic, I've just seen from your profile that you work there. I understand that you might know much more about the situation, and also that you might not be able to comment on it.
Based on the information that's available (which might paint a misleading picture), I'd say that SBF also didn't have the right to make the investment into Anthropic. So it seems to me that the right thing for Anthropic to do would be to offer to buy back their shares. I think they should not prefer to have $500m in stolen money as investment capital. They should prefer to get their equity back and find another investor.
Again, I accept that there could be a lot of specifics about the situation that aren't public, or where the information that's available is wrong or misleading. But I do strongly believe that Anthropic needs to come forward and explain its position. So far the company hasn't said anything at all in response to this.
While none of know exactly what went on or what the state was at any time, my mental model is basically that there was never a time where FTX genuinely had "honest profits" it was free to disperse as it wanted.
It sounds like they intermixed user deposits with operating capital from day 1, and never accounted for anything well enough to have a responsible estimate of whether they had money to donate.
It could be that if you went back to some particular snapshot in time, you could find various points where yes their actual assets exceeded their liabilities (which doesn't count having as "assets" a bunch of shitcoins marked to market). But even at that point, I think if you go back a further they'll have passed through points where they weren't solvent --- where they traded on user funds. This is basically what Shkreli went to jail for: he dipped into one fund to rescue another. The trades happened to work so everyone was in the black, but this still isn't legit.
However, let's grant the premise of your hypothetical, and imagine a world where FTX circa 2020 had always been in the black, and it granted out some of its rightly gained profits. The recipient of that grant shouldn't need to give anything back. In that transaction FTX did have the right to give the grant, so there's no issue.
But I really don't think this hypothetical has much relation to the actual situation. I think it's better for recipients of money from FTX to assume it wasn't legit, and set anything aside that hasn't been spent.
I hear what you're saying about this being uncertain and scary to deal with as an individual, and if someone really doesn't have any sense of the laws that might apply to their situation or what actions might be committal, that puts them in a really tough spot.
For donations that have been made to a literal individual who doesn't have any practice operating a business, I really hope there can be some sort of organisation on top who can take care of this. They at least need to get together and work collectively, it's prohibitive for someone who got like $15k or something to try to sort this out themselves.
But for organisations that are a bit larger (let's say, something like over $1m per year operating budget), I'd expect them to be able to get some basic legal advice about where things stand, and then be able to reach out in a way that starts a conversation without committing them to some sort of disastrous position if things go wrong.
By the way, the creditor the bankruptcy trustee represents is not an original FTX retail or institutional investor at all, but is instead a Wall Street firm that has bought up FTX customers' bankruptcy rights for pennies on the dollar, looking to turn a profit: https://www.nytimes.com/2022/11/18/business/ftx-assets-wall-street.html
It's a good thing that there's a secondary market for distressed debt. That market gives the creditors valuable options. They can get money out sooner if they need it, and trade from a position of low risk appetite with someone who has the funds and means to take on a larger risk.
The institutions who purchase the debt should be viewed as having the same ethical claim on the funds as the people who sold it to them. They're the rightful creditors at that point.
By the way this also means a statement from the EA community could be relevant to some creditors, because it might affect their pricing. The FTX future fund is obviously not that big a pool of money, overall. But the investment in Anthropic could be 10% or more of the shortfall. If they announce that they'd prefer to unwind the investment if possible, that would be pretty relevant to the price of the debt.
I think the right thing to do is to follow the official, legally authorized bankruptcy procedure (whichever that is --- I do hope it's the Delaware proceeding, but I guess we'll see).
I don't think it would be right for people who happen to be in possession of the funds to be making decisions that second guess things like the amount of legal fees. That's a pretty involved judgment call, and trying to set up some sort of alternative, direct solution will be difficult to implement and execute. You haven't been entrusted with any of that responsibility by the people who actually own the money, so I don't think it would be right for you to intervene in that way, even trying to do the right thing.
I can also say for sure that I don't think it would be right to invest the money in any way. It should just be kept in a deposit account. Investments come with risk of losing some of the principal, and nobody entrusted you with the authority to make that risk calculation.
I also think it's a time a lot of people are paying attention to us, so I don't think it's a terrible time to make commitments to somehow do things right here, but I do have enough uncertainty about how to actually do that that I don't currently feel comfortable making any super precise and strong commitments besides a general "I will really try pretty hard to make things right somehow, even though I don't know how yet".
This is just my outsiders guess, and in the end who knows, but...I predict that if the EA community did try to be sort of heroic, and tried to do some direct-for-depositors complicated thing that worked around the bankruptcy procedure, that would end up with a lot of people mad at EA, and some takes along the lines that this all confirms some of the initial criticisms.
Instead, I think the approach that's actually better, and I think also has much better optics, is to just work with the official process. There's a legal process for returning money to creditors and you're expected to just go along with it, rather than trying to invent your own alternative to try to get what in your view would be a better outcome.
And while I'm not a lawyer, I think you might be pleasantly surprised about how bankruptcy works. (This is all assuming it goes through the Delaware process -- maybe the Bahamas is odd or shady or outright corrupt.)
The basic idea is that the administrator lists out all the people who lent money to the company, which includes the depositors, but can also be other companies. Then they pool up the assets of the company, selling whatever they can for the best price they can manage, and try to pay it out to the creditors. If all the creditors can be paid back, congrats, the company is solvent! Now it can be returned to the shareholders, who might have something left that's worth more than $0. If creditors can't be made whole, they receive some fraction of what they're owed, and the company is wound down.
In practice there's almost always a seniority ordering of creditors, where you have some loan that was secured against some asset. So it's not necessarily the case that all the creditors will get the same fraction back out. Like, in the basic case, maybe a "creditor" is a bank who gave a mortgage for some property. They get to liquidate that property, so maybe that creditor gets all its money back out, while the others don't.
It's definitely weird and unideal that the depositors are just unsecured creditors. If it were a bank or a brokerage or something, it would be handled differently. Nobody knows what sort of deals FTX might have had, with what sort of creditors, secured against what.
On the other hand, definitely no loans would have been secured against user deposits! An no loans would be secured against like, money to grants. So it's not like you're returning assets that some institutional loan will be secured against. I think this does just mean whatever funds are returned will go into the pool for unsecured creditors. I'd definitely be happy to be corrected on this though.
The other thing to note is, a lot of the other unsecured creditors can be other crypto firms or other sorts of counter-parties. And maybe their holdings with FTX mean that they went broke and their own depositors are out of money. Who knows.
I don't think it's right or good to second guess any of this. There's a law and process for how assets are parcelled out to creditors in bankruptcy. You can trust that if more money is kicked back into that pot, creditors will get a slightly higher amount back.
I'll put it this way. Let's say there was some money that FTX didn't pay out in a grant, and it instead sat in its bank account like it was supposed to. That money will be swept up into the bankruptcy proceeding to be allocated to creditors. Now, consider your situation: instead of sitting in FTX's bank account, that money finds itself in your account. It shouldn't have been transferred to you; FTX wasn't solvent when it made that transaction, it needed to keep all of its money to try to pay back its creditors. So the right place for the money to go to is into the bankruptcy proceeding. That's where it would have be if FTX had never transferred it to you.
As for legal fees, yes they'll definitely make the pie smaller. On the other hand they don't scale linearly with the amount of money, and this is a lot of money -- so hopefully they don't take up that big a percent.
Assisting the process where possible will hopefully help reduce the fees too.
The difficulty with this position is that it assumes the funds were stolen. We're still waiting for a court to decide that.
I disagree that we have to wait for a court ruling before making reasonable inferences. We can judge the situation on a balance of probabilities, and it seems overwhelmingly likely that yes he took user deposits and used them directly, including getting out a $1b personal loan.
What if 20% of FTX's losses are due to fraud, but 80% are due to some non-criminal combination of negligence and risk seeking?
It's not like he only lost his investment capital, or only lost money loaned to FTX for business purposes. You can chalk those up to bad business, even negligence.
He lost the deposits! That's not just bad business. Even his own excuse, in the Twitter DM with Piper, is that the money was deposited in an Alameda account and they just never sent that $8b to FTX. I don't think this story at all adds up, but even just that version of events is enough to say that there was no attempt to separate the user deposits from FTX's working capital.
This is not an acceptable attitude to the clawbacks.
Grantees who are in possession of stolen funds need to commit to return the funds as soon as the appropriate recovery mechanism is in place. They should view the possibility of spending the funds as 0%, because they should endeavour sincerely to return them.
Let's say you're a grantee who's currently in possession of some funds from FTX that have not been spent yet. Presumably you'll readily agree with the statement, "I wish these funds had not been stolen". This is something I'd expect anybody to say. But this should also come with a consistent preference for the funds to be in the not-stolen state, rather than their current, stolen, state.
If you're happy with the funds to be in their current, stolen, state, and view the possibility of clawbacks as an unfortunate problem that might happen to you, then it's very difficult to take seriously the claim that you wish the funds had not been stolen.
Amy cannot spend any of the $20,000 in her bank account because it doesn't belong to her. There's nowhere currently for her to send it, so she just has to keep it safe. She should hope for an outcome where it can be returned to its owners.
If Amy instead took active steps to try to prevent the money from being returned to its owners, or even simply failed to assist in the recovery, her actions should be condemned. This would make her complicit in the theft.
In contrast, clawbacks against money that have already been spent are much less clear. I think there are lots of situations where you can view that as the law being discordant with fairness, and it's not inconsistent to hope that you don't have to go through that. But if the money hasn't been spent, it absolutely does need to be returned.
Thanks! It really should have occurred to me to just look this up and read the statute, it definitely makes things a lot clearer.
I'll be interested to see what value gets ascribed to the various cryptocurrency assets.
Let's say I'm running some business and it's maybe going under. On behalf of the business, I create 101 finger paintings, sell one to my friend's uncle's golf buddy for $10,000, and book the rest as $1m in fine art assets. With my balance sheet shored up, I go on trading, but eventually things don't work out and I file for Chapter 11.
Does the court have to accept the value I put on the paintings at the time, and regard me as solvent for that period? After all, sure, eventually it turned out I couldn't sell the paintings. But that could just be because by then my name was in the news and that tanked the market for my art.
Thanks, this is a really great summary of the principles.
I definitely agree that it will depend on further factual development. But I think the facts that are out imply that the insolvency period could go back a very long way. It sounds like the user deposits was intermingled with FTX and Alameda operating capital from the very beginning, and the accounting practices were such that they wouldn't necessarily have known their overall position.
Do you happen to know whether the bankruptcy court just looks at when the executives knew (or negligently failed to find out) that the company was insolvent? It seems kind of weird to expect the court to decide the true value of all the assets at each point in time.
I think he was referring to the idea of getting in touch with the bankruptcy proceeding to let them know about the funds you've set aside.
I really wasn't trying to advocate this as an immediate action, but when I went back and read the relevant paragraph, it does say that. I don't think there's actually so much danger of people taking my post as a recipe to follow --- I hope it's clear that I'm focussing more conceptually on what the right thing to do is, and that there's still a significant gap between that and the exact way to carry anything out.
Another thing I'm saying is that the public discussion and leadership on this topic has been greatly lacking. On that much I have some agreement with what you've said. However I really think you should reconsider the way you've worded your sentiments. It's fine to register an anonymous account to say something that you wouldn't readily put your name to. But using that as an opportunity to insult is definitely not something that can make anything better.
I'm happy to edit the post to prepend this notice.
Edit: Done.
Regarding the secondary debt holders, my position is that FTX didn't have the right to disperse the funds, and so the grantees who might have custody of the money currently don't have any right to try to intervene in the outcome. Now, I use the term "rights" here, but really that's just a shorthand for the rule utilitarianism I mentioned in the original post. I don't believe in natural rights or something. I just think that society needs to coordinate around clear principles for things like property, and actions which go against those principles are almost always net bad.
So, the people with the title to the debt via the secondary market have the right and proper claim to the property. The people who are holding the property shouldn't try to do anything but get out of the way.
When it comes to Anthropic, I've just seen from your profile that you work there. I understand that you might know much more about the situation, and also that you might not be able to comment on it.
Based on the information that's available (which might paint a misleading picture), I'd say that SBF also didn't have the right to make the investment into Anthropic. So it seems to me that the right thing for Anthropic to do would be to offer to buy back their shares. I think they should not prefer to have $500m in stolen money as investment capital. They should prefer to get their equity back and find another investor.
Again, I accept that there could be a lot of specifics about the situation that aren't public, or where the information that's available is wrong or misleading. But I do strongly believe that Anthropic needs to come forward and explain its position. So far the company hasn't said anything at all in response to this.
While none of know exactly what went on or what the state was at any time, my mental model is basically that there was never a time where FTX genuinely had "honest profits" it was free to disperse as it wanted.
It sounds like they intermixed user deposits with operating capital from day 1, and never accounted for anything well enough to have a responsible estimate of whether they had money to donate.
It could be that if you went back to some particular snapshot in time, you could find various points where yes their actual assets exceeded their liabilities (which doesn't count having as "assets" a bunch of shitcoins marked to market). But even at that point, I think if you go back a further they'll have passed through points where they weren't solvent --- where they traded on user funds. This is basically what Shkreli went to jail for: he dipped into one fund to rescue another. The trades happened to work so everyone was in the black, but this still isn't legit.
However, let's grant the premise of your hypothetical, and imagine a world where FTX circa 2020 had always been in the black, and it granted out some of its rightly gained profits. The recipient of that grant shouldn't need to give anything back. In that transaction FTX did have the right to give the grant, so there's no issue.
But I really don't think this hypothetical has much relation to the actual situation. I think it's better for recipients of money from FTX to assume it wasn't legit, and set anything aside that hasn't been spent.
I hear what you're saying about this being uncertain and scary to deal with as an individual, and if someone really doesn't have any sense of the laws that might apply to their situation or what actions might be committal, that puts them in a really tough spot.
For donations that have been made to a literal individual who doesn't have any practice operating a business, I really hope there can be some sort of organisation on top who can take care of this. They at least need to get together and work collectively, it's prohibitive for someone who got like $15k or something to try to sort this out themselves.
But for organisations that are a bit larger (let's say, something like over $1m per year operating budget), I'd expect them to be able to get some basic legal advice about where things stand, and then be able to reach out in a way that starts a conversation without committing them to some sort of disastrous position if things go wrong.
It's a good thing that there's a secondary market for distressed debt. That market gives the creditors valuable options. They can get money out sooner if they need it, and trade from a position of low risk appetite with someone who has the funds and means to take on a larger risk.
The institutions who purchase the debt should be viewed as having the same ethical claim on the funds as the people who sold it to them. They're the rightful creditors at that point.
By the way this also means a statement from the EA community could be relevant to some creditors, because it might affect their pricing. The FTX future fund is obviously not that big a pool of money, overall. But the investment in Anthropic could be 10% or more of the shortfall. If they announce that they'd prefer to unwind the investment if possible, that would be pretty relevant to the price of the debt.
Thanks for such a thoughtful reply.
I think the right thing to do is to follow the official, legally authorized bankruptcy procedure (whichever that is --- I do hope it's the Delaware proceeding, but I guess we'll see).
I don't think it would be right for people who happen to be in possession of the funds to be making decisions that second guess things like the amount of legal fees. That's a pretty involved judgment call, and trying to set up some sort of alternative, direct solution will be difficult to implement and execute. You haven't been entrusted with any of that responsibility by the people who actually own the money, so I don't think it would be right for you to intervene in that way, even trying to do the right thing.
I can also say for sure that I don't think it would be right to invest the money in any way. It should just be kept in a deposit account. Investments come with risk of losing some of the principal, and nobody entrusted you with the authority to make that risk calculation.
This is just my outsiders guess, and in the end who knows, but...I predict that if the EA community did try to be sort of heroic, and tried to do some direct-for-depositors complicated thing that worked around the bankruptcy procedure, that would end up with a lot of people mad at EA, and some takes along the lines that this all confirms some of the initial criticisms.
Instead, I think the approach that's actually better, and I think also has much better optics, is to just work with the official process. There's a legal process for returning money to creditors and you're expected to just go along with it, rather than trying to invent your own alternative to try to get what in your view would be a better outcome.
And while I'm not a lawyer, I think you might be pleasantly surprised about how bankruptcy works. (This is all assuming it goes through the Delaware process -- maybe the Bahamas is odd or shady or outright corrupt.)
The basic idea is that the administrator lists out all the people who lent money to the company, which includes the depositors, but can also be other companies. Then they pool up the assets of the company, selling whatever they can for the best price they can manage, and try to pay it out to the creditors. If all the creditors can be paid back, congrats, the company is solvent! Now it can be returned to the shareholders, who might have something left that's worth more than $0. If creditors can't be made whole, they receive some fraction of what they're owed, and the company is wound down.
In practice there's almost always a seniority ordering of creditors, where you have some loan that was secured against some asset. So it's not necessarily the case that all the creditors will get the same fraction back out. Like, in the basic case, maybe a "creditor" is a bank who gave a mortgage for some property. They get to liquidate that property, so maybe that creditor gets all its money back out, while the others don't.
It's definitely weird and unideal that the depositors are just unsecured creditors. If it were a bank or a brokerage or something, it would be handled differently. Nobody knows what sort of deals FTX might have had, with what sort of creditors, secured against what.
On the other hand, definitely no loans would have been secured against user deposits! An no loans would be secured against like, money to grants. So it's not like you're returning assets that some institutional loan will be secured against. I think this does just mean whatever funds are returned will go into the pool for unsecured creditors. I'd definitely be happy to be corrected on this though.
The other thing to note is, a lot of the other unsecured creditors can be other crypto firms or other sorts of counter-parties. And maybe their holdings with FTX mean that they went broke and their own depositors are out of money. Who knows.
I don't think it's right or good to second guess any of this. There's a law and process for how assets are parcelled out to creditors in bankruptcy. You can trust that if more money is kicked back into that pot, creditors will get a slightly higher amount back.
I'll put it this way. Let's say there was some money that FTX didn't pay out in a grant, and it instead sat in its bank account like it was supposed to. That money will be swept up into the bankruptcy proceeding to be allocated to creditors. Now, consider your situation: instead of sitting in FTX's bank account, that money finds itself in your account. It shouldn't have been transferred to you; FTX wasn't solvent when it made that transaction, it needed to keep all of its money to try to pay back its creditors. So the right place for the money to go to is into the bankruptcy proceeding. That's where it would have be if FTX had never transferred it to you.
As for legal fees, yes they'll definitely make the pie smaller. On the other hand they don't scale linearly with the amount of money, and this is a lot of money -- so hopefully they don't take up that big a percent.
Assisting the process where possible will hopefully help reduce the fees too.
I disagree that we have to wait for a court ruling before making reasonable inferences. We can judge the situation on a balance of probabilities, and it seems overwhelmingly likely that yes he took user deposits and used them directly, including getting out a $1b personal loan.
It's not like he only lost his investment capital, or only lost money loaned to FTX for business purposes. You can chalk those up to bad business, even negligence.
He lost the deposits! That's not just bad business. Even his own excuse, in the Twitter DM with Piper, is that the money was deposited in an Alameda account and they just never sent that $8b to FTX. I don't think this story at all adds up, but even just that version of events is enough to say that there was no attempt to separate the user deposits from FTX's working capital.
This is not an acceptable attitude to the clawbacks.
Grantees who are in possession of stolen funds need to commit to return the funds as soon as the appropriate recovery mechanism is in place. They should view the possibility of spending the funds as 0%, because they should endeavour sincerely to return them.
Let's say you're a grantee who's currently in possession of some funds from FTX that have not been spent yet. Presumably you'll readily agree with the statement, "I wish these funds had not been stolen". This is something I'd expect anybody to say. But this should also come with a consistent preference for the funds to be in the not-stolen state, rather than their current, stolen, state.
If you're happy with the funds to be in their current, stolen, state, and view the possibility of clawbacks as an unfortunate problem that might happen to you, then it's very difficult to take seriously the claim that you wish the funds had not been stolen.
Amy cannot spend any of the $20,000 in her bank account because it doesn't belong to her. There's nowhere currently for her to send it, so she just has to keep it safe. She should hope for an outcome where it can be returned to its owners.
If Amy instead took active steps to try to prevent the money from being returned to its owners, or even simply failed to assist in the recovery, her actions should be condemned. This would make her complicit in the theft.
In contrast, clawbacks against money that have already been spent are much less clear. I think there are lots of situations where you can view that as the law being discordant with fairness, and it's not inconsistent to hope that you don't have to go through that. But if the money hasn't been spent, it absolutely does need to be returned.