from Patrick McKenzie | by Patrick McKenzie

FTX is now a special purpose vehicle containing, prominently along with a list of other assets, a long list of legal claims. One of the duties of the bankruptcy administrator is maximizing the value of those assets.

Note that this duty is extremely incentive compatible, because while it is not formally the subsidiary of a legal firm that has almost unlimited ability to staff and bill hours at white shoe rates, it looks a lot like that if one squints a bit.

I will note that this is not particularly unique to FTX. The number and dollar amounts of claims will be higher than in typical corporate bankruptcies, but claims are an asset every time if you’ve got them.

Many FTX claims will be pressed against people who thought, in the moment, that they enjoyed the trust of FTX management. Now FTX management is a different group of people entirely, but for legal purposes, FTX is the same jurijudicial person and has the same rights it always had.

Doubtless some of the agreements which will be sued over are underpaperworked, either without contracts or with contracts which are extremely less defensive than they would normally be. Parties were relying on mutual trust.

And thus this will go in the expansive list of We Told You So by the legal profession, which will generally tell you to get a contract and tighten it appropriately even in an environment of mutual trust, because the people enforcing the contract in the future may not be at table.

This has been memorably phrased to me as “You may trust X but do you know their future wife’s divorce attorney? No? Then get a contract that you’d be happy with him holding you to the letter of.”

This is, of course, not dispositive. Lawyers gonna lawyer just like security teams gonna security team. You have to make decisions with the totality of the factors considered, including (frequently!) making handshake deals, including in finance.