At least one person might be relieved, if not exactly happy, that the banking system is melting.
All of a sudden, Sam Bankman-Fried’s alleged misdeeds look like small potatoes. Relatively speaking.
But we note that the issues at hand are a difference of degree and not of kind.
Some of the same factors that led to FTX’s collapse are echoed in the spate of bank runs and failures that have grabbed the world’s attention in recent days.
In the latest wrinkle, and as reported here, amid the continued exploration of what went wrong at now-defunct FTX, it’s been revealed that $3.2 billion was transferred to the company’s founders and that $2.2 billion went to SBF. Those funds came from FTX’s sister company, the hedge fund Alameda Research, and the transactions were billed as “payments and loans.” The recent announcement of those transfers by the new management team that has been following the money is, we contend, the latest example of risk concentrated within a firm. In short, it appears that appropriate oversight of accounts was not in place.
Amid the great crypto unraveling that sank exchanges last year — FTX among them — the key issues were tied to a general lack of liquidity and the fact that many customers lost confidence in the business model and tried to withdraw their funds.
It was, and is, the purely digital equivalent of a bank run. Silvergate’s liquidation and Signature and Silicon Valley Banks’ respective collapses will do little, at least at the moment, to bolster confidence in crypto (or the firms that have been banking, literally, on the long-term health of crypto).
In the case of Signature and SVB, there’s the fact that the government has stepped in to backstop even uninsured deposits — which itself is cause for debate, as discussed here. And there’s a stark difference between FTX and the bank failures, inherent in the fact that FTX’s demise seems to be rooted in fraud and greed.
But drilling down, the fact remains that the individuals and the enterprises tasked with signing off on the state of affairs at all of these firms missed the risks.
As we reported earlier in the week, SVB and Signature broke down just a few days after KPMG LLP completed and signed off its audit of those banks. But SVB had its own, arguable opacity, as it had $15 billion of unrealized off-book losses, outstripping equity. The runs on the banks and on FTX were the final votes, by investors and by customers, that the business models were not resilient or transparent enough to allay fears or quell the contagion of panic.
At this writing, the ripple effects continue to spread. First Republic Bank is reportedly mulling a sale. Moody’s has downgraded its rating on the banking sector in its entirety.
SBF’s reckoning is by no means over, even if the headlines dueling over the soundness of the banking system have pushed his sage to the wings, a bit.
But the crisis of confidence and contagion in the crypto sector he helped spark will have ramifications that have yet to be fully realized.
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