WEBVTT - Edward Harrison on FTX (Audio)

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<v Speaker 1>Let's talk about f t X, which has brought the

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<v Speaker 1>specter of fraud into this business cycle, and the question

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<v Speaker 1>now whether f t x it's downfall was due to incompetence,

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<v Speaker 1>too much risk, well flat out fraud. To talk about

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<v Speaker 1>this some more, we've got Edward Harrison, he's at Bloomberg

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<v Speaker 1>senior markets editor who's been writing a column about this topic.

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<v Speaker 1>And and I know you make an observation that stuff

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<v Speaker 1>like this typically happens towards the end of cycles. Can

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<v Speaker 1>you tell us more, Yes, Paul, thanks for having me. Uh.

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<v Speaker 1>It is interesting that when you look back at most

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<v Speaker 1>of the major business cycles, including the Great Depression, that

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<v Speaker 1>the large frauds happened very near the end. That is,

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<v Speaker 1>that the large institutions that had the veneer of respectability,

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<v Speaker 1>but underneath uh, fraudulent activity was occurring. They didn't go bust.

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<v Speaker 1>The fraud wasn't uncovered until all of the red hikes

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<v Speaker 1>had been through. Uh, the economy potentially had gone through

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<v Speaker 1>the ringer. It was right at the end that the

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<v Speaker 1>fraud was uncovered. I'm wondering if there is an analog

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<v Speaker 1>here that would help us understand the magnitude of this.

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<v Speaker 1>I mean, is the Birdie made Off scandal in any

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<v Speaker 1>way um analogous to what we're seeing play out in

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<v Speaker 1>the ft X story. Yeah, I mean it's it's it's

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<v Speaker 1>to be determined whether it was in competence, fraud or

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<v Speaker 1>or or what have you. People talking about Lehman Brothers

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<v Speaker 1>uh and made Off as the two parallels that they're

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<v Speaker 1>most likely thinking about. I actually looked back at Ivra

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<v Speaker 1>Krueger from nine to thirty two. He was I thought,

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<v Speaker 1>I think of him as more of an analog in

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<v Speaker 1>terms of here was a business that was a very

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<v Speaker 1>real business. It was doing well, but when the whole

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<v Speaker 1>economy hit the skids, Uh, the the manager Ivra Kruger,

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<v Speaker 1>the owner of the company, turned to fraud, and eventually

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<v Speaker 1>it was uncovered and he took his own life in two.

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<v Speaker 1>So the parallel here is is that f t X

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<v Speaker 1>was a real company. It was If they had stuck

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<v Speaker 1>to their knitting and engaged in exchange activity rather than

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<v Speaker 1>loaning money or acting in a u a untoward way

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<v Speaker 1>with an affiliated company, they would still be around. Is

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<v Speaker 1>this perhaps a different case though, because the crypto world

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<v Speaker 1>is somewhat opaque, there's very little regulation, and there's another

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<v Speaker 1>old saying there's never just one cockroache, right. I would

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<v Speaker 1>agree with that. Another place where um, the Swedish match

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<v Speaker 1>king was very similar to what's going on today, is

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<v Speaker 1>the lack of regulation. Price Waterhouse back in the day

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<v Speaker 1>looked at the books when they had a chance to

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<v Speaker 1>do so, and they said, anyone with any sort of

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<v Speaker 1>rudimentary accounting no, that these books are completely fabricated, fraudulent.

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<v Speaker 1>The poor record keeping, the lack of of a regulatory

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<v Speaker 1>structure to make sure that this company had good accounts

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<v Speaker 1>is very much something that would not have happened in

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<v Speaker 1>it more highly regulated banking industry, or even within the

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<v Speaker 1>United States outside of the banking industry. I remember in

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<v Speaker 1>the kind of the late nineties when the guys and

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<v Speaker 1>traders over at Enron were held in such high regard,

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<v Speaker 1>nobody could figure out what was going on at Enron

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<v Speaker 1>to the degree that the company was able to um

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<v Speaker 1>create those enormous returns, and then the bloom came off

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<v Speaker 1>the rows, so to speak. It was a spectacular unwind there.

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<v Speaker 1>I mean, do we think that it's going to arc

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<v Speaker 1>in the same way in terms of prosecution? Is there

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<v Speaker 1>going to be I know you're talking about the lack

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<v Speaker 1>of regulation, but there has there been the kind of

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<v Speaker 1>violation of law where we would see kind of aggressive

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<v Speaker 1>prosecution of this case. Yeah, I think that we're at

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<v Speaker 1>the point, the discovery point. Uh. The new CEO of

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<v Speaker 1>f t X has said that the accounts are very terrible.

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<v Speaker 1>He was also the man who was responsible for cleaning

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<v Speaker 1>up in Ron. Uh. What we know now is is

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<v Speaker 1>that there was sixty billion dollars of collateral according to

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<v Speaker 1>Sam Bankman Freed that went down to nine billions. We

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<v Speaker 1>know that they engaged in a non armed length relationship

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<v Speaker 1>with the affiliated Alameter Research, which Sam Bankman Freed also started.

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<v Speaker 1>So there are a lot of things that have happened

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<v Speaker 1>that would suggest that, at a minimum, we're going to

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<v Speaker 1>see some prosecution. If you think back to the two

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<v Speaker 1>thousand and eight scenario, we had Lehman Brothers with Countrywide Financial,

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<v Speaker 1>with Angelo, Mozilla, both of those companies, there was an

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<v Speaker 1>attempt to find out whether there was malfeasans but ultimately, uh,

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<v Speaker 1>no one went to prison in those cases. So we

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<v Speaker 1>can't really say at this point other than it's very

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<v Speaker 1>likely that we're going to see prosecutions. Yeah, there are

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<v Speaker 1>according to the US bankruptcy called fifty unsecure creditors owed

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<v Speaker 1>more than three billion and SOGG there's an awful lot

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<v Speaker 1>more unsecured creditors out there. How long is it going

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<v Speaker 1>to untangle this mess? And how bad does it does

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<v Speaker 1>it look? It is a good question because today in

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<v Speaker 1>the bankruptcy proceedings, the creditors were not named. They did

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<v Speaker 1>not want to be named. I would imagine part of

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<v Speaker 1>that is because they're involved in the same business. And

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<v Speaker 1>once it's learned who they are, and there were the

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<v Speaker 1>top ten creditors had nine figure credits with with f

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<v Speaker 1>t X, people will then start to wonder whether these individuals,

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<v Speaker 1>these UH organizations have problems themselves. And what do you

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<v Speaker 1>think the reputational damage HIG is to the entire crypto

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<v Speaker 1>space as a result of this. I think that the

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<v Speaker 1>reputational damage is tremendous. It means that it can no

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<v Speaker 1>longer be seen as an adjunct to the regulated banking system,

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<v Speaker 1>that it's not something to get involved in unless you're

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<v Speaker 1>a true believer. No one who is mainstream and certainly

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<v Speaker 1>not institutions will want to touch this with a ten

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<v Speaker 1>foot barge pole. Yeah. Crypto, once known as Digital Golden

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<v Speaker 1>New payment system, a replacement for cash having underlying blockchain technology?

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<v Speaker 1>Is this technology and an answer in steach of a question,

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<v Speaker 1>just quickly, I think it is. It is. Uh. We

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<v Speaker 1>have yet to see the killer app, so to speak.

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<v Speaker 1>There's no applicable usage of blockchain technology thus far that

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<v Speaker 1>would bring it into the mainstream. And that's the biggest

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<v Speaker 1>problem alright. Edward Harrison, Bloomberg Senior my gets editor, writing

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<v Speaker 1>a very fascinating column about the downfall of f t X.

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<v Speaker 1>Recommend you read that on the Bloomberg terminal