Some Bankrun Fraud

It was never a question of if.

An energetic digital autopsy of the FTX implosion is well under way. Details have emerged and more will follow. So rather than duplicate those efforts here, let’s take out our macroscopes and have a look at the bigger picture.

The echoes of deja vu ring loudly. Enron, Global Crossing, WorldCom. Subprime and Bernie Madoff. What do they have in common?

They were overlooked. Regulators, the media, all the usual checks and balances failed, despite early warnings. There are always unmistakable signs of trouble well before any rickety scheme blows up. They are ignored in bubbles. Only when the bubble bursts does the fraud get exposed.

That’s how bubbles work. They breed corruption and fraud and as long as everybody’s making money they don’t want to see it. Then the bubble deflates and the rot becomes obvious.

The Enron-Global Crossing-WorldCom wrong-doing festered amid the dotcom bubble around the turn of the century. It was exposed as the bubble deflated in 2001. Bernie Madoff with billions while the mortgage and subprime bubble inflated. His arrest came as the bubble deflated on December 11, 2008.

Warren Buffett famously formulated it this way: Only when the tide goes out do you see who’s been swimming naked.

So it now appears we have a group centering on one Sam Bankman-Fried replaying the same script in a newer higher-tech setting. But to focus on only the details risks missing the bigger cause, the warm, moist environment in which such rot festers and that in which it is exposed and cleaned up.

Bubbles are fun while they’re inflating. Massive wealth appears to be created. But wealth was not created, only transferred. What products or services were produced that feed, house, heal or educate? Nada. Real wealth improves standards of living. It was obvious from the get go that this was vacant amusement, devoid of enduring value. But a bubble-addled system doesn’t want to see it.

According to economic historian Martin Hutchinson, fourteen years of reckless monetary profligacy did this:

Bernanke Brought Us Bankman-Fried

So my angle isn’t to dissect, but to look for the larger causes, the macro policies that create the environment for fraud to flourish. And with that in mind, as the forensic investigation delves into the anatomy of this scandal, to encourage us to ask ourselves what other things we thought were true, but aren’t. Just to get us started:

Low interest rates support the economy?

Corporate buybacks return value to shareholders?

In parting, we might also ask what is the best way to deal with the aftermath of the cryptobubble? Wolf Richer of Wolf Street puts it eloquently:

I Agree: Don’t Regulate Crypto, Let it Burn. Making Good Progress on its Own

5 thoughts on “Some Bankrun Fraud

  1. jk says:

    do you think crypto is “contained”? if not, any ideas about the next dominos? bain, morgan creek, tiger global are all losers but hedge funds being hurt is not systemic. maybe it’s about what they have to sell if clients seek redemptions. or maybe it’s something else.

    1. Finster says:

      I don’t know enough about the crypto space plumbing to give you a solid answer. We do know there’s never just one cockroach. BlockFi just filed for bankruptcy today. There are more waiting in the wings. What’s less clear is how far the tentacles reach into more conventional areas of finance … what banks, hedge funds, etcetera have exposure and how much. Some, clearly not all. So the most I can offer is it goes further than we’ve seen so far, but unlikely enough to wreck the whole financial system … not enough by itself to be a 2008 type of thing. On top of everything else, though? Maybe someone else has more insight … probably you included …

  2. Finster says:

    FWIW, I think the real tragedy of the crypto phenomenon won’t come in the form of dramatic financial losses, but in the sheer amount of resources diverted into digital speculation.

    Take the energy used to “mine” mere pieces of information. This is energy that was not available to heat homes, move goods to market, or make fertilizer to grow food with. It puts no clothes in closet nor puts a roof over anyone’s head.

    Yet that pales next to the countless hours of human time that’s been expended. It’s drawn in some of the world’s best and brightest minds, whose hours were taken away from productive pursuits like curing disease, feeding the hungry or housing the homeless. What might have happened if those thousands or millions of hours of brilliant thought had gone into sustainable nuclear fusion or curing cancer or Alzheimer’s? Not to mention billions of hours expended by more ordinary crypto speculators which might otherwise have been used growing food, building homes, improving infrastructure, designing more efficient industrial processes, etc.

    These are just a few examples of the real costs of crypto. More generally there has been an excessive financialization phenomenon; the amount of resources that are expended moving wealth around as compared to creating and producing it is staggering.

  3. jk says:

    i wonder if this is like the failure of the 2 bear stearns funds some time before the gfc- an early signal. certainly the bankruptcy of some crypto firms has revealed some of the “bezzle” [jk galbraith’s term for embezzled money we don’t know about yet]. i suspect there’s plenty more bezzle in the more traditional markets. i watched an interview last night in which private equity and vc was discussed, with a major point being that because those investments aren’t in public markets, they cannot be marked to market. they are marked to make-believe until they either pan out or go belly up and are written down to zero.

    1. Bill Terrell says:

      That analogy has crossed my mind too. There are never any exact parallels, but there are elements of 2008 present. The rally in commodity prices, the rise in consumer price inflation, Fed hiking; though not to the same degree. The pace in contrast is much more like 2000-2002 … this market process is unfolding more slowly and looks apt to take a couple years. So some kind of 2000-2002 – 2007-2009 hybrid is my current speculation.