The Lehman Brothers of Crypto: Here's how the fall of Sam Bankman-Fried's FTX compares to the collapse that sparked the Great Financial Crisis
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Phil Rosen
Nov 14, 2022, 17:53 IST
AP Images
Welcome back to Opening Bell, team. I'm Phil Rosen. In light of all the crypto hubbub last week, today we're skipping the econ lesson and pivoting instead to history.
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You've seen the movie "The Big Short," right? It gives maybe the clearest, most entertaining breakdown of how many, many very bad bets on subprime mortgages kickstarted the 2008 Financial Crisis.
The most serious domino to fall 14 years ago was Lehman Brothers, the classic too-big-to-fail behemoth that did in fact go under.
All this is a roundabout way of saying the collapse of Sam Bankman-Fried's crypto exchange, FTX, is severe and dramatic enough to warrant its own movie in a few years.
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1. In the last few days, I've had many conversations with Wall Street and blockchain execs who have drawn comparisons between FTX's demise and that of Lehman Brothers in 2008.
Meanwhile, the FTX empire similarly collapsed last week because its balance sheet was weighed down by an asset — its native FTT token — that saw its value virtually hit zero overnight. It raised serious concerns about the solvency of its companies and sparked a domino effect that led to Friday's bankruptcy filing.
But Jan Szilagyi, chief executive of financial services firm Toggle AI, told me that the size of Lehman, for starters, made for a much more tumultuous fallout than anything a crypto firm could bring.
"An organization like Lehman would be at the heart of a relatively complex financial system, fixed and extended into mortgages, extended to consumer loans, extended into obviously trading and so on," Szilagyi said.
Because people don't borrow in crypto to pay for mortgages or credit cards, he added, there's less risk of a contagion hitting mainstream markets.
"The crypto ecosystem has been made fragile by leverage and interconnectedness, just as the traditional financial system was fragile because of leverage and interconnectedness in 2008," Hilary Allen, a financial regulation expert at American University, told me a couple days ago.
"The primary use of crypto is speculation, and so its failure is unlikely to have broader repercussions so long as the traditional financial system has no significant exposure to crypto," she noted.
Lehman or not, risks remain for players big and small in the digital asset space.
There's no lender of last resort for a crypto firm today, unlike in 2008 with Wall Street, but David Siemer, CEO of Wave Financial, told me a new renaissance of regulation could emerge from FTX's ashes. In his words:
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"The industry needs to mature before it can recover, whether this comes from enhanced government policies on how to interact with crypto, or more sophisticated asset managers handling the movement of large sums of assets."
What do you think is the more likely result of the fall of FTX?
A) Significantly tighter regulation of crypto in the US and globally
B) The market recovers and it's eventually back to business as usual
2. US stock futures fall early Monday, after voting member Christopher Waller said the Fed's not "softening" on inflation and the endpoint of rate hikes is likely "a ways off". Here are the latest market moves.
3. Earnings on deck: SMC Corp., Tyson Foods Inc., and more, all reporting.
4. America's biggest wealth manager explained why he's telling clients that going all-in on stocks is the right move now. Acclaimed expert Peter Mallouk shared how he's recommended people invest in stocks and bonds amid uncertainty — and why real estate investing is still a no go.
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5. Stocks could see a bull run in 2023 but that doesn't mean inflation won't stay sticky. Bank of America analysts forecasted that prices will remain high heading into next year and the Fed will keep hiking rates — unless a recession hits.
6. The former chief economist of PIMCO said the Fed has smashed the housing market and killed rampant speculation. He pointed to the doubling of mortgage rates and trouble in crypto as signs that the Fed has sufficiently tightened its monetary policy. "I think we're almost there."
8. Goldman Sachs shared an options trading strategy with an 18-year track record of adding income to investors' portfolios. As forecasts over consumer price data and recession fears loom, the firm laid out which bets can withstand a choppy macro environment. See how analysts explained the strategy here.
Keep up with the latest markets news throughout your day by checking out The Refresh from Insider, a dynamic audio news brief from the Insider newsroom. Listen here.
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