ftx: FTX has upended the risk mania of Jane Street. Disaster followed for Bankman-Fried

Before Jane Street’s cadre of alumni spectacularly burned the cryptocurrency scene from their spot at FTX this month, the Wall Street firm was enjoying its status as the behemoth almost nobody knew about.

The 2,000-plus employee powerhouse headquartered in lower Manhattan is known among its peers for its obsession with risk and its preference for disguise. It delves into the health of business partners, models potential disasters, autopsies losses and restricts employees from commenting publicly, because even that is a risk.

The easiest way to describe the culture that Sam Bankman-Fried has created at FTX: the opposite.

As the story of the epic collapse of FTX, the $32 billion cryptocurrency exchange now in bankruptcy, one of the biggest revelations is that founder and former leader Bankman-Fried has recruited an inner circle of some of the most serious employers around Wall Street, Silicon and Brown Valley. Such a random process. Jane Street’s defectors include his romantic partner Caroline Ellison, who ran the investment arm of Alameda Research, and Brett Harrison, who oversaw FTX US. Sam Trabuco, who co-drived Alameda for a period with Ellison before announcing his departure in August, was a dealer with Susquehanna International Group. Chief Technology Officer Gary Wang and Chief Engineering Officer Nishad Singh of Google and Facebook, respectively, paid tribute. FTX Chief Operating Officer Constance Wang previously worked at Credit Suisse Group AG.

Jin Street should have been a perfect training ground. On Wall Street, his proprietary trading shop is a major employer of quants and technologists, and prides itself on spotting large, complex risks that the rest of the market misses. I have been trading cryptocurrencies for half a decade.

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Despite these proportions, a growing pile of evidence – now laid out in bankruptcy court – shows that key parts of FTX lack adequate risk and bookkeeping controls. Alameda’s secret financial connections and privileges worry investors and employees alike. FTX is now the subject of a criminal investigation. A company attorney told bankruptcy court Tuesday that the tally of its assets showed that a “significant amount” was either missing or stolen. This case involves more than a million creditors.

“When billions of dollars are circulating, it’s not a monopoly game for kids,” said Ty Gelach, CEO of the Health Markets Association, an advocacy group. “You have to keep records that look better than a high school kid’s lemonade stand.”

An FTX representative did not respond to a message seeking comment, and a Jane Street spokesperson declined to comment.

When Vox sent Bankman-Fried a message last week to ask where the problem began, he blamed “messy accounting” and said he “didn’t realize its full magnitude until a few weeks ago.”

“I didn’t mean for any of this to happen,” he wrote in a letter to employees on Tuesday. “And I would give anything to be able to go back and do things again.”

Doomsday trade

Bankman Fried has spent three years on Jane Street, and there is no black mark – or what is known in the industry as a “disclosure event” – in employment records littered with brokerage regulators.

The company starts indoctrinating new traders into its risk-obsessed the moment they arrive, according to people familiar with its practices. Its leaders allocate an unusually thick slice of capital to hedge and even preserve a doomsday deal in the event the US stock market drills.

Merchants on Jane Street have been known to stay up late, socialize over chess, and go on strolls to escape rooms. But above all, its leaders expect they will maintain a level of loyalty that was more common in the era of partnerships on Wall Street, when company interests always came first and discretion mattered most, according to people close to the company. Managers will not feel comfortable with employees forming a clique or defending a competing invitation.

At FTX, Bankman-Fried took a different approach, advocating effective altruism, a dedication to earning as much money as possible and then giving it all away. Eventually, he ran into an apartment in the Bahamas with fellow employees, who in a number of cases dated co-workers.

While Jane Street featured a code-breaking puzzle machine, FTX had video games during business hours. Bankman-Fried himself has been known to play League of Legends in key meetings.

And then there was his embrace of the limelight.

Bankman-Fried’s Alameda made waves in 2019 after listing itself on the board of directors of the BitMex exchange. It was an obvious move even by cryptocurrency standards, as traders generally prefer column names in rankings to avoid attracting hackers or home burglaries.

Bankman-Fried, who was contacted by a Bloomberg reporter at the time, said the shedding of anonymity was strategic — a way to infuse his team’s influence into the market as he prepares to launch FTX. Two of Alameda’s accounts have been among the 10 most successful board accounts by lifetime earnings.

Indeed, the rise of FTX has been rapid.

Late that year, venture capitalist Edith Young stopped by the luxurious Peninsula Hotel in Hong Kong to introduce a government official to Bankman-Fried, then 27-year-old managing her latest investment. Waiting for another funding round, he and his colleagues rent a penthouse suite with a great view of the city.

I recalled in an interview with Bloomberg before the FTX collapse that it was the middle of a party when Young arrived. “I remember having this guy in a suit and tie and when we walked in, they were playing beer pong,” said Yeung, general partner at Race Capital. The official turned to her and asked, “Have you invested in these children?”

As FTX’s market share has gone up, so has Bankman-Fried’s public persona. Soon he was everywhere, addressing regulators and legislators directly, while FTX bought advertising and naming rights to the stadium.

In Bankman-Fried, the authorities saw someone who could help bridge cryptocurrency and Wall Street. He began his congressional testimony at a hearing last December by mentioning his time as a quantitative trader. He soon boasted that his company offered robust risk monitoring around the clock, which he said anyone could verify by monitoring its data.

“Unlike a traditional financial system where risks accumulate overnight, where separate risk models are required for weekends, nighttime activity and holidays, where hours can pass without the ability to mitigate risks on the system, we have a transparent system,” he said.

Feeling wronged

The truth was that FTX ignored some of the routine conventions on Wall Street. Messages and documents shared in FTX Slack channels are automatically deleted at regular intervals, according to people familiar with the matter. Strangers sometimes roam the workplace. People at the companies FTX has deals with, and the developers building on the Solana blockchain projects it supports, can come to work and hang out in its offices.

Current and former employees said FTX’s organizational structure sometimes obscured the private status of Bankman-Fried’s inner circle. They were the ones with access to vital information, while other senior executives grumbled that they were left in the dark — including about Alameda’s relationship with FTX.

Ellison, who knew Bankman-Fried from his time at Jane Street, was promoted to co-CEO of Alameda in 2021 when he stepped back from day-to-day management of that business to focus on FTX. For a while, they were romantically involved while driving about their business, according to people familiar with the situation, who asked not to be named while discussing private information.

One person said that given her lack of leadership experience, her appointment was surprising. Compared to him, she sent out fewer tweets and rarely spoke to the press.

Meanwhile, people working on some of FTX’s many side projects struggled to get access to Bankman-Fried to make key decisions, according to another former executive. For the past few months, he has been particularly unable to communicate. Senior lieutenants felt particularly ghosted and worried about finances. In one case, part of the company almost missed payroll. In another case, rewards are delayed.

different fates

Cryptocurrency traders could have used the doomsday trade to rout this year. At FTX, a mountain of $60 billion in collateral has dwindled to $9 billion, Bankman-Fried wrote in his letter Tuesday. He cited a combination of credit pressures, virtual currency selling and a “bank run”.

As part of the bankruptcy, the company is headed by John J. Ray III, who oversaw the liquidation of Enron Corp. In last week’s filing, he decried FTX’s controls and “total absence of trustworthy financial information.”

Ray writes that FTX lacks a system for predicting how much cash will be available when revenue will arrive and bills will be paid. Not all of its major business silos have been audited, and one was done by “a company I’m not familiar with,” he said, noting that it recently announced the Metaverse headquarters in Descentraland.

In the end, results differed at Jane Street and FTX: When the Covid-19 pandemic hit the US in early 2020, Jane Street’s revenues were up 54% to $10.6 billion in the ensuing 12 months. When cryptocurrency prices tumbled this year, and the depth of its entanglements with Alameda came to light, FTX collapsed.

But the Bankman-Fried break-up still had an unwelcome effect on Jane Street, raising its profile. Google Trends, a tool that tracks audience interests, shows that searches for her name started to skyrocket early this month.

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