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Finance & economics
The Economist July 9th 2022
Buttonwood Last man standing Is Sam Bankman-Fried the John Pierpont Morgan of crypto?
T
wo years ago scarcely anyone in mainstream fi nance had heard of Sam BankmanFried, or ftx, the crypto currency exchange he launched in 2019. Both gained greater prominence, fi rst as the crypto craze reached fever pitch and then as crypto fell to Earth. Mr Bankman Fried (widely known as sbf) has lately been at the centre of attempts to rescue beleaguered crypto fi rms. To some ob servers, the role calls to mind the rescue missions organised by John Pierpont Morgan and America’s other banking scions in the early 20th century. The comparison is surprisingly instructive. The recent slump has left destruction in its wake. Some cryptolending fi rms, notably Celsius, have collapsed; some stablecoins, like terra, have been obliter ated. At least one crypto hedge fund, Three Arrows Capital, has gone bust. Estimates of sbf’s personal wealth have tumbled, too, from $26bn just over three months ago to nearer $8bn now. None theless, his companies (ftx and Alame da, a trading fi rm) seem to be the great survivors of the recent chaos. ftx had kept employee numbers relatively low; sbf has said the exchange is still profi t able. Welltimed funding rounds early this year saw its global and American arms raising $400m each. That has en abled sbf to help others in need. In June Voyager Digital, a broker, secured loans worth $485m from Alameda. BlockFi, another trader, has received a revolving line of credit from ftx’s American arm. To some this harks back to America’s banking panic of 1907. The economy was in recession; towards the end of that year the thinly capitalised Knickerbocker Trust Company, one of America’s largest fi nancial fi rms at the time, collapsed. Morgan went on to orchestrate a series of private rescues with other fi nanciers,
off ering deposits in the tens of millions of dollars to various banks in order to pre vent runs. Those actions are usually cred ited with preventing a deeper, more da maging crisis. No other trusts went under. At fi rst glance, then, the comparison is a fl attering one for sbf. But 1907 was not the Morgan family’s only attempt at a big bailout. When the Wall Street crash struck in 1929, J.P. Morgan junior, like his father, sought to bring together a gang of plutocrats to stem the tide. Several bank ers and brokers pledged to buy $125m in stocks, equivalent to around 0.1% of America’s gdp at the time (which would be about $27bn today). The plan failed miser ably. The purchases perhaps pushed out the stockmarket’s collapse by a few days, but did not prevent it from imploding. The Dow Jones Industrial Average index of stocks fell by around 35% between early September 1929 and the end of the year. By its nadir in 1932, it was almost 90% lower. Historians are divided over why one intervention worked but not the other. Perhaps the panic in 1929 was too far gone for private purchases to make a diff erence,
for instance. Other research suggests that the success of 1907 may have been over played, and that it was action by the Bank of France to calm domestic markets that spilled over to America and halted the mayhem. The debate suggests that iden tifying sbf’s role in quelling chaos today may be just as hard. The trouble could simply continue, for a start. Indeed, on July 5th Voyager fi led for bankruptcy. A cynic might point out that sbf might be striking deals with other fi rms not because he wants to rescue the in dustry, but because he has spotted an opportunity to snap up some of his competitors’ operations for pennies on the dollar. Some of these attempts may not succeed—Voyager owed Alameda $75m when it went under—but others could. On July 1st Zac Prince, BlockFi’s chief executive, said that its credit line from ftx had been increased to $400m, and included an option to acquire Block Fi for up to $240m. That looks like a bargain compared with the valuation of $5bn that BlockFi was reportedly seeking during a fundraising round last year. Even if sbf is not attempting to save crypto, though, history remains relevant. The panic of 1907 was a proximate reason for the creation of the Federal Reserve and the beginnings of the progressive taxation of income in America, as well as an expansion of antitrust law. Instead of being hailed as a hero, Morgan senior became the focal point for concerns that power was too concentrated in the hands of a small number of fi nanciers. Now, too, there is a possibility that a crash leads to more stringent oversight, particularly if the volatility in digital assets spills over to other markets, galva nising regulators. Boosters may see a J.P. Morgan in Sam BankmanFried and ftx. They might come to regret needing one.
row Group, once controlled a vast array of assets from mining and property to bank ing and insurance. Over the years his net work built up huge debts, which quickly turned into fi nancial losses after he was abducted. The Chinese state was forced to take over his bank, Baoshang Bank, in 2019 in order to prevent spillovers to the wider system. Several other institutions were also eventually bailed out or seized in what posed one of the biggest threats to China’s fi nancial system in years. Oncehidden risks such as these are now popping up in other corners. Poor
oversight of smaller lenders has led to an accumulation of bad debt. In many cases tycoons such as Mr Xiao have been allowed to control banks and use them to lend to their own ventures, or to friends. Central auditors recently discovered that a handful of small banks had under stated their bad debts by a total of more than 170bn yuan ($25bn). The central bank has said there are more than 300 highrisk institutions in the country. All this is start ing to test public trust in the thousands of small lenders. Bank runs are occurring more frequently. In May depositors at sev
eral rural banks in Henan province disco vered they could no longer withdraw bil lions of dollars in funds, leading to prot ests in the provincial capital of Zhengzhou. The banks are linked to a property tycoon. Covid19 is making the problems worse. Lockdowns are expected to create a new wave of troubled loans worth 1.1trn yuan this year alone. Adam Liu of the National University of Singapore recently noted that a “systematic central bailout is increas ingly foreseeable”. Political intrigue can be contained in a closed court. But the fi nan cial spillovers are harder to keep secret. n
