Under questioning by his own legal counsel on October 27, Bankman-Fried tried to offer plausible alternative explanations for various potentially incriminating aspects of the relationship between FTX and Alameda Research, the sibling company at the heart of the alleged fraud.
The sharing of bank accounts: FTX customer deposits were wired to Alameda-operated bank accounts as an “interim” measure, said Bankman-Fried, while FTX applied for accounts of its own. These deposits were logged as a liability to FTX and factored into the exchange’s risk management calculations accordingly.
Alameda’s special privileges: As a customer of FTX, Alameda was exempt from the auto-liquidation feature that would typically prevent the value of accounts falling below zero. That’s because, in its role as a liquidity provider on the exchange—a party that keeps trades flowing—an “erroneous liquidation,” said Bankman-Fried, would be “catastrophic” for the FTX platform and lead to any losses being shared across the customer base.
The $65 billion line of credit: To help improve the efficiency of the service they provided on the exchange, parties like Alameda could borrow money from FTX. As trading activity on FTX grew, said Bankman-Fried, Alameda began to run out of credit, which could have made it difficult for customers to place trades and caused other problems too. To stop that happening, FTX increased the line of credit to $65 billion, a theoretical maximum never likely to be reached.
