Sam Bankman-Fried and the corruption of the elites
The rise and fall of the ‘crypto king’ is a damning indictment of our entire financial system.
Last week, Sam Bankman-Fried, the former chief executive and founder of cryptocurrency exchange FTX, was convicted of fraud and money laundering following a month-long trial in New York. SBF – or the ‘crypto king’, as he is sometimes known – was arrested last year when FTX went bankrupt and some $8 billion in customer funds went missing. He now faces decades in jail.
It’s interesting to compare SBF’s fate with those of the architects of the 2008 financial crash. That catastrophe created the deepest and longest economic depression since the Second World War. It involved a range of institutions across the West, including investment and commercial banks, mortgage lenders, insurance companies and mutual associations. As the smoke cleared, eight banks were formally deemed by the US Federal Reserve to be ‘too big to fail’.
The financial disaster of 2008 resulted in some convictions and custodial sentences, but only for individuals much lower down the food chain – and mostly outside the US and UK, such as in Ireland and Iceland. Not one CEO went to jail.
In fact, more convictions resulted from abuse of the Troubled Asset Relief Program (TARP), the US government’s bailout scheme, than from the creation of the asset-backed securities, such as collateralised-debt obligations, that actually caused the crisis in the first place.
In the subsequent LIBOR and EURIBOR scandals in 2012, which revealed that interest rates had been manipulated by a cartel of bankers for decades, four bankers were eventually found guilty and went to prison. The seven major Wall Street companies that were too big to fail settled for fines of under $60 billion. Which sounds like a lot, until you consider they had assets in the trillions.
So are the authorities being too tough on SBF, the star of the unregulated crypto Wild West? Of course not. Even laser-eyed crypto evangelists wouldn’t suggest so. As Bankman-Fried’s prosecutors stated: while the terminology and techniques may sound new, his crime was not. ‘This kind of corruption is as old as time’, said prosecutor Damian Williams, whose office indicted Bankman-Fried. He was guilty of plain old embezzlement, the jury agreed.
But the relationship between the ‘respectable’, regulated financial sector and the new world of digital finance is a complicated and uneasy one. And, in many ways, it’s a case of ‘as above, so below’.
Like many other crypto operators, Bankman-Fried issued a digital coin, creating money out of thin air. He then used billions of dollars of customers’ money, deposited with FTX, to cover the losses at his other firm, hedge fund Alameda. Some 40 per cent of Alameda’s assets were actually held in FTX’s funny money, called FTT tokens. When the value of Bankman-Fried’s FTT tokens collapsed last year, Alameda faced margin calls it couldn’t meet, and it filed for bankruptcy.
SBF’s scheme was precisely as dodgy as it sounds. Yet creating money out of thin air is essentially what our central banks have been doing since the 2008 crash, with their strategy of quantitative easing. What began at first as an emergency measure quickly became the default policy.
In the wake of the crash, central banks also cut interest rates to zero, or close to zero, and ensured they remained abnormally low for over a decade. Our political class had freed the bankers from political oversight two decades ago, deciding that they know what’s best for us. This Brahmin caste of central-bank technocrats were expected to dispassionately steer our economies. But their policy of making money artificially cheap was anything but ‘apolitical’.
Only now are we beginning to discover the corrupting consequences of both money printing and low interest rates. These range from runaway inflation to the creation of asset bubbles. Central-bank policies have also encouraged wild and speculative manias for truly terrible ideas, products and companies. Coincidentally, WeWork – a commercial-property company posing as a ‘tech’ firm – filed for bankruptcy this week. Renewable energy and electric cars have also been sustained by central-bank funny money.
As has cryptocurrency speculation. The irony here is that if crypto has an ideology, and a moral purpose, it can be found in its opposition to ‘fiat’ money (ie, government-issued currencies), because fiat money can be printed at will by central banks. Yet crypto was itself boosted by the past decade or so of central-bank largesse.
Before the crash of FTX last year, crypto entrepreneurs had become wildly ambitious. They were giddy on the potential of creating money using software. And they looked forward to a world where the traditional financial institutions played no part. They set out to create an entire shadow financial universe, a completely decentralised alternative to the traditional capital markets, with a range of instruments that fell under the umbrella term ‘DeFi’, or decentralised finance.
DeFi became a kind of tribute act to what advocates called ‘TradFi’ (traditional finance) – mimicking the practices and functions of those markets. These financial instruments came with implausible claims, such as ‘algorithmic stablecoins’ which promised a decentralised currency but with no price volatility. Still, as long as crypto gave speculators improbably large returns, the ‘respectable’ financial sector wanted in. Hedge funds and corporate wealth managers were desperate to see FTX succeed. The rise of Bankman-Fried reflected Wall Street’s reckless enthusiasm for returns, regardless of the means.
It’s tempting to regard Sam Bankman-Fried as the emblem of a corrupt Silicon Valley, which of course he is. But there’s very little moral high ground to be found on Wall Street, either. Perhaps it’s now time to ask how we created a world where the survival of our economies is based not on making or doing things, but on wild speculation.
Picture by: Getty.
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