FTX: The Dominoes of Financial Fraud Have Yet to Fall, by Charles Hugh Smith

FTX has probably set a record for the most of amount of money vanished in the shortest span of time. From Charles Hugh Smith at oftwominds.com;

Once assets are revealed as worth far less than claimed, insolvency is the inevitable result.

If you haven’t plowed through dozens of post-collapse commentaries on FTX, I’m saving you the trouble: here’s a distillation of what matters going forward. If you’re seeking a forensic accounting of FTX, others have done this work already. If you’re seeking an ideological diatribe, you won’t find that here, either.

What you will find is insight into the real innovation of FTX: FTX compressed the entire playbook and history of financial fraud into one brief cycle of the credulous bamboozled, Charles Ponzi bested and creative accounting being revealed for what it really is, fraud.

All financial frauds share the same set of tools. The toolbox of financial fraud, whether it is traditional or crypto-based, contains variations of these basic mechanisms:

1. Using clients’ capital (without full disclosure) to increase the private gain of the Owners of the Con (OOTC).

2. Using the clients’ capital to arbitrage yield differentials in duration, risk and other asymmetries to the benefit not of the clients but to the Owners of the Con (OOTC)..

3. Overstate assets by listing illiquid, insider-controlled, non-marked-to-market assets at valuations completely disconnected from reality, i.e. what they would fetch on the open market in size. Rely on assets issued by the firm or its subsidiaries for the bulk of the firm’s assets, i.e. its claim of solvency.

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2 responses to “FTX: The Dominoes of Financial Fraud Have Yet to Fall, by Charles Hugh Smith

  1. “Since John Law and his Mississippi Bubble, individuals have been continually appearing with the same scheme in new disguise. The principle is very simple. You have only to multiply your creditors by the cube and pay them by the square out of their own money. Then for a while you are [the Biblical] Nabob.

    The fatal weakness in the scheme is that you cannot stop. When new creditors fail to present themselves faster than the old creditors demand to be paid off, the bubble bursts. Then you go to jail like Ponzi or commit suicide like Ivar Krueger.”

    – “A Bubble that Broke the World,” Garet Garrett, published in 1932.

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    • Alasdair Macleod refers frequently to John Law in his writings, essentially saying the world’s monetary authorities are engaged in the same sort of shenanigans.

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