Fraud Guaranteed

Thoughts on the Debacles

Every morning I get the Bloomberg Open newsletter delivered to my e-mail with its pithy summaries of the biggest news in business and finance. Today, it’s virtually all debacles, from merely dodgy ones to downright fraud: Meta employees caught taking money from hackers to give them access to user accounts, Theranos founder Elizabeth Holmes’s sentencing, Musk’s ongoing Twitter debacle, SoftBank’s Masayoshi Son and his massive losses, and, of course, the unfolding FTX scandal, specifically the story that many of Sam Bankman-Fried’s congressional inquisitors will be people he gave money to. In Vox, there’s an interview with “SBF,” where he basically admits his interest in the fashionable ethical theory known as “effective altruism” was a reputation laundering ploy. The theory, which to me sounds basically just like “philanthropy + intellectual pretensions,” is popular among technocratically-inclined liberals. In fact, SBF’s ties to establishment liberalism—photos of him with Tony Blair and Bill Clinton, a planned New York Times DealBook event next week with talks by SBF and luminaries like Janet Yellen and Mark Zuckerberg—is itself becoming a scandal of its own, giving confirming evidence to the populist doctrine of total elite depravity. And one could really be forgiven for thinking just about everything was an interlocking series of scams and rackets. The vulgar Marxist contention that liberal humanitarianism is just a cover for capitalist exploitation sounds rather persuasive in the moment.

We should emphasize the total, here: Crypto is not a project of what’s called the “globalist elite;” it was always marketed as an alternative to the system, on the populist side of the spectrum, something for people who distrusted central banking, who were into conspiracy theories and suspicious vitamin supplements. Its utopian promise was the generation of a new world outside the structures of global capitalism, or, basically, starting capitalism all over again at the beginning where everyone had a chance to be a winner. What SBF was essentially trying to do was an exercise in respectability politics: he was trying to gain mainstream acceptance for crypto by integrating it both into the regulatory infrastructure of the financial system and winning it a cultural cachet beyond the seedy subcultures it has hitherto occupied. On the left, the story is, “I told you so. We knew all along this crypto stuff was a load of bullshit.” But on the far right, SBF has committed high treason: his proximity to the corridors of elite liberalism is damning in itself, and increasingly, so is his Jewishness. Who ruined the utopian promise of everyone getting rich off crypto currency? A Jew, of course.

Was SBF engaged in outright fraud? Probably. His open cynicism about his endeavors in charity seem to suggest a conscious will to deceive. But Bloomberg’s Matt Levine isn’t so sure: “I don’t want to minimize the likelihood of intentional fraud and theft. Stuff seems bad. But I want to say that the story of FTX also reads like what would happen if you and a few of your college friends set up a gigantic international financial exchange after like a year or two of working in finance.” This raises an interesting point: where does stupidity and delusion end and fraud begin? A lot of these guys just seem dumb to me. I suppose the legal system exists to determine that. But it is actually a difficult question to answer under current conditions. All entrepreneurs, especially in technology, make overconfident promises to their investors. Who is a visionary and who is a charlatan? All speculative schemes are premised on visions of fantastic wealth for little effort. When they don’t deliver, people lose money, sometimes a ton of it. When is it stealing and when were they just wrong? This is the Fyre Festival era of capitalism: outlandish promises and then a ludicrous debacle.

Of course, frauds and swindles are not a new part of capitalism. In fact, they’ve always been intrinsic to the system. Swindling was just part of doing business for the railroad barons. The Union Pacific Railroad formed a fake company called Crédit Mobilier to overcharge the company for building the transcontinental railroad. The credits were mobilier indeed: they moved right into the pockets of Union Pacific’s principal shareholders. Along the way they bribed a bunch of congressmen, too. Earlier there was the infamous Eerie Railroad scheme, where Jay Gould and his confederates simply just printed more stock to prevent Cornelius Vanderbilt from buying the company. And readers of this newsletter may remember the Panama Scandal of the Third Republic, where Ferdinand de Lesseps bribed parliament and the press and ruined half a million middle class Frenchmen in a failed attempt to build the Panama canal. It seems a little unfair that we give the name of a poor Italian immigrant to “Ponzi schemes” when fraud was just as rampant in that era among people with names like “Gould” and “Fisk.”

As outrageous and baldfaced as these scams were, there was some underlying capital project: the rail roads actually got built and eventually so did the Panama canal, under different management. But today, the investments and speculations are increasingly notional: even its proponents have trouble explaining in plain language what crypto currency or its underlying technology actually is or does. Going back to Marx, theorists of capitalism have noted how it makes thing increasingly abstract, how it makes “all that’s solid melt to air.” Keynes pointed out the irreducibly irrational nature of markets: they are driven as much by “animal sprits” as shrewd calculation of risk and benefit. Hyman Minsky even identified a Ponzi phase as part of the natural cycle of investment: institutions will create riskier and riskier investment products in search of profits until the system itself crashes, new regulations re-stabilize it, and then the whole thing starts over again. But as fictitious and fanciful as these things appear, there will be real consequences: a pension fund in Ontario has already been forced to write down $95 million due to the FTX collapse. Lots of retail investors—everyday people—trusted crypto with their life savings. There might be disturbing political consequences, too: we already live in an era of low institutional trust. Liberalism just seem to fend off the most Trumpified part of the G.O.P and things looked like they might be stabilizing a bit again. Now there’s even new spasms from an old sickness that seemed to be in remission: antisemitism. Just like in the 19th century, demagogues are already rushing to take advantage of SBF’s ethnicity to sell their own set of dubious wares. In upcoming newsletters, I’ll return to that history, looking at the Panama Scandal in particular.