FTX: Wall Street could cover the liquidity problem, but not its bankruptcy

It appears that Sam Bankman-Fried has not heard of the blockchain's record-keeping capabilities. In a lengthy Twitter thread on Thursday, the fallen cryptocurrency tycoon blamed a clerical error for the collapse of his FTX exchange. This looks strange.

SBF tweeted that it incorrectly believed that FTX customers had plenty of liquidity to facilitate withdrawals earlier this week. He was unaware of the leverage within the FTX system. He couldn't have done it more wrongly. Panicked FTX account holders were prevented from withdrawing their assets this week.

SBF insists that FTX is currently illiquid but not insolvent. That is, its assets exceed that of its liabilities. He is seeking a cash injection of several billion dollars to close any liquidity gaps. To some, giving FTX a lifeline right now may seem absurd. Not to mention the highly opaque processes, serious regulatory and legal risks are increasing.

But there may be a template for taking such a risk. Shares of Coinbase, the listed crypto exchange, have fallen 80 percent in price this year as crypto trading volumes have plummeted. But it clearly lists its customer assets and liabilities and cash. Additionally, it does not lend out customer funds, either expressly or implicitly, which FTX appears to have done.

Remember the financial crisis. JPMorgan bought Bear Stearns. Barclays took on Lehman Brothers. Mistakes were made. Private equity firm TPG invested $1 billion in Washington Mutual just months before it went belly up in 2008. Wall Street has many specialized funds and strategic buyers that make bold bets in panic situations.

This week, venture capital powerhouse Sequoia wrote down its $214 million investment in FTX to zero. However, the Silicon Valley titan also noted that FTX had generated $250 million in operating profits in 2021. How much of this comes from fees and commissions versus volatile trading profits is not clear. However, the former could be the basis of a restructured FTX.

During the financial crisis, distressed takeovers occurred under strict legal and regulatory regimes that monitored the process. Nothing that substantial exists in cryptocurrency.

The immediate task is to uncover the relationships between FTX customer accounts and the apparent lending to Alameda Research, SBF's trading operation. His stupidity probably caused this week's run on FTX. SBF had better gather all the records he can find.