At the outset let me make this statement, whenever there has been a scandal or major fraud in the financial markets it is never that the regulators found it out but it is the market forces and the power of social media that has exposed them to the surface. We will develop that more as we progress.
The more you understand the FTX story it looks like all the financial scandals of the past 50 years rolled into one. You can see traces of what happened with the Savings & Loan debacle in the 80s, Enron, Bernie Madoff, and Elizabeth Holmes.
It is unbelievable that a few thirty-year-old kids high on amphetamines created a vehicle and convinced others to part with billions of dollars and they played around with it like Monopoly money and lost it all.
What has the Fed policies to do with it? The zero interest rate policies and the pumping of trillions of money into the financial system forced the market participants to look for the craziest and wackiest ideas for investing. Loose money was looking for any source of return that they could make. To top it up ideas started to surface that the purpose of doing business is not really to make a profit but to fund a social revolution. Climate issues have to be at the center of all businesses. ESG became the buzzword. Fossil fuel has to be eliminated by force even though alternate solutions have not become mainstream. Cultural theories started to float that there is no biological distinction between men and women. The country really has gone bonkers. The corruption of government, regulatory agencies, banks, media agencies, and financial markets have reached new and unthinkable lows, and it is not even happening in secret.
The good thing FTX has done is expose all this to a large extent. Though a colossal amount of money has been lost the rot did not last that long. It started in 2019 and was over just after the mid-term elections. The rapid rise of Fed interest rates probably exposed the bluff much earlier. How much of the story will be suppressed and how much will be exposed has to be seen.
Is this all the work of the deep state and SBF will become the fall guy? Was this all a ploy to launder big money? A company head too stupid to understand the importance of risk management making billions of dollars through arbitrage though no experienced traders have done it before. A person who cannot define what is right or wrong but can send you on a goose chase with circular talks. The more I think about it many things don’t add up. One thing is sure as the story unfolds it should become clearer how it all started and who was behind him. As the saying goes “there is never just one cockroach”.
The company gave away millions or probably even billions to nonprofits mostly loyal to Democrats, all in the name of pandemic planning. They also funded media companies. It was all a deception.
How does FTX stack up with Bernie Madoff? Madoff’s method was very simple. He used the money of new investors to pay a return to old investors. A very vanilla Ponzi scheme. Madoff realized that he had better success in business by doing this than by relying on market forces themselves. By offering a predictable 9% return, he could always attract new money in up markets and down markets. He could run it for 20 years but he made sure he had all the infrastructure to hide the lie that long. After all one time, he was the Chairman of the Nasdaq stock exchange.
Finally, the GFC did him. When the housing market crashed and the money dried up he could no longer pay the old clients with new money. He surrendered, pleaded guilty, was sentenced to 150 years, and unfortunately, died before serving his full sentence. One son killed himself and the other died. His widow now lives a modest life, reeling from the horribleness of it all. Was it really worth it after all?
Again it was the market forces that exposed the lie. Harry Markopolos the whistleblower approached the SEC many times saying that Madoff is a Ponzi scheme but the SEC ignored him until Madoff was exposed by the GFC.
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Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and multi-billion dollar portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office, and a hedge fund.