FTX's 'allow_negative' bankman-Fried helped avoid liquidation

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FTX's 'allow_negative' bankman-Fried helped avoid liquidation

The alleged motivation for this - as Wang had to explain to a jury at painful length - was avoiding liquidation. FTX uses liquidation to manage risk when people were engaging in risky bets on its platform. The cartoon version of futures trading is that a futures exchange is a intermediary that allows people to bet with each other. It works between the two ends of the bet, paying the winner and collecting from the loser. If the loser doesn't pay up, the exchange still has to pay the winner, which is why exchanges require collateral.

It's not Bankman-Fried's name attached to the change. It was written in Python by Nishad Singh from July 31st, 2019. The upshot was that it added two columns to the account database; the relevant one for our purposes was 'allow_negative'. This was a toggle that let the account go negative when it was on. The feature was added to a second set of code that also had Singh's username on it. He added that he was supervised by the guards.

Alameda's levels began to creep up as he was allowed to go negative. On April 2019 or 2020, Wang found Alameda negative by about $200 million, which was more than the $150 million FTX made in revenue. It had to mean Alameda was taking money from customers. It surprised him and he says he discussed it with Bankman-Fried, who told him that he just needed to take into account the value of FTT. Wang said he trusting Bankman-Fried's judgment and didn't pursue the issue further. Later, Alameda's balance was more negative than FTT and trading revenue, and Wang had more conversations with Bankman-Fried about it. At the time, Wang said, Alameda was using FTX's customers' money and that he knew it was wrong.

We heard yesterday about Alameda's credit line on FTX, a staggering $65 billion. Today we saw it in the database. The credit line didn't start that big, Wang testified that Bankman-Fried had asked him to increase it a few times because Alameda kept running into its limits. First it was a few hundred million, then a billion, then even that wasn't enough. It wasn't clear how Wang came to $65 billion, but he said he'd discussed the number with Bankman-Fried. Other customers didn't have the same privileges.