The global equities market has taken a historic beating this year. Halfway through June, the S&P 500 had lost about a quarter of its value. Even Tesla’s famously overvalued stock was down about 45 percent over the same time period.[*] Somehow, cryptocurrencies have had it even worse. After several years of comically large growth since the last major “correction,” Bitcoin and Ethereum—the two foundational and most widely traded cryptocurrencies—have, at the time of this writing, more than halved in value since January 2022. For an asset that was supposed to offer a hedge against volatility—like that induced by a land war in Europe—the sector’s failure has been especially galling.
Among the many scandals now coming to light as crypto’s tide goes out, the most troubling is the complete collapse in price of the cryptocurrency Luna and its associated “stablecoin,” TerraUSD, also called UST. While Luna’s value was free-floating, the purpose of UST, like that of other algorithmic stablecoins, was to use sophisticated, proprietary computer code to maintain a fixed exchange value of 1 UST = $1. One UST could be worth five Luna or fifty-thousand Luna, but it would always equal $1.
Stablecoins serve two purposes in the cryptocurrency world: they allow for easier convertibility in and out of more volatile currencies; and possessing stablecoins can even be a remunerative hedge against volatility in other crypto assets. All that’s needed is an incentive to hold the stablecoin in the first place. If UST is worth $1, why not just hold $1, secured by the U.S. government rather than some string of code? Well, Luna’s and UST’s parent company, Terraform Labs, sold these securities using a service (or “protocol”) offering a 20 percent annualized percentage yield (APY) for holders of UST: significantly more than what its competitors offered.
In early May, when Terra inevitably lost control of UST’s “peg” to $1, it prompted a “death spiral” that pushed the value of Luna toward zero. Post-mortem, UST’s staggering yield—its payouts—were widely described as classic “Ponzinomics” and clearly “too good to be true.” Terraform Labs cofounder Do Kwan’s covert involvement with another failed stablecoin project has since been revealed. After previously dismissing his critics as “the poor” and explicitly disavowing even the possibility of the “death spiral” scenario that killed UST and Luna, Kwan’s tone has softened somewhat.
Enter the comparatively shameless Sam Bankman-Fried, cofounder and CEO of the cryptocurrency exchange FTX, whose net worth is popularly estimated in the media as being in the tens of billions of dollars. In a recent interview with Bloomberg News, Bankman-Fried was asked to describe how yield “farming,” the process by which asset holders loan or “farm” out crypto securities (such as the now defunct UST) to earn more yield, works. He told listeners to start by imagining a box.
Crypto is economically volatile, technically dense, politically polarizing, and obtusely categorized.
“Maybe for now actually ignore what it does or pretend it does literally nothing,” Bankman-Fried said. “It’s just a box.” What Bankman-Fried said over the next minute or two was pure crypto word salad. He explained that deposits into the box could be made with a cryptocurrency like, say, Ethereum. Depositors would then receive a “token” allowing them to “vote” using “on-chain governance” protocols. In plain language, depositors (or investors, or traders—you get the idea) would be given something resembling equity, which would come with something resembling shareholder rights and voting powers. The token, which resembles a share of stock, assumes the place of a company’s share price. And these tokens, because of the demand stimulated for them by how the box is presented, would subsequently be able to pay dividends to their holders. Per Bankman-Fried: “They probably dress it up to look like a life-changing, you know, world-altering protocol that’s gonna replace all the big banks in thirty-eight days or whatever.”
“I think of myself as a fairly cynical person,” responded one of the FTX founder’s interviewers, Bloomberg columnist Matt Levine. “And that was so much more cynical than how I would’ve described [yield] farming. You’re just like, well, I’m in the Ponzi business, and it’s pretty good.” Joe Weisenthal, Levine’s co-interviewer, added: “At no point did any of this require any sort of economic case.” To which Bankman-Fried generously conceded: “So, on the one hand, I think that’s a pretty reasonable response. But let me play around with this a little bit.”
The past two years have been a financial and spiritual rollercoaster. The onset of the pandemic in spring 2020—managed with historically significant government intervention with cash transfers to individuals and businesses—and the ongoing Russian invasion of Ukraine have provided twin exogenous shocks to the economic system that have brought memories of the Arab oil embargo and the 1970s back in full force. The recurrence of inflation, the Federal Reserve’s tepid interest rate hikes, indicators of a likely economic recession, and slipping consumer confidence all indicate that, at a minimum, many are having a bad, uncertain time.
How then, to explain the dizzying trade in cryptocurrencies? Crypto is economically volatile, technically dense, politically polarizing, and obtusely categorized, and yet, as the Wall Street Journal reported this past February, “institutional clients traded $1.14 trillion worth of cryptocurrencies” on the exchange Coinbase in 2021, “up from just $120 billion the year before.” By the beginning of May 2022, the Journal reported, Wall Street now had “a message for its many clients that have been eager to invest in cryptocurrencies: OK, OK, we hear you.”
Wall Street initially appeared reluctant to get its feet wet with crypto, but that wasn’t the full picture. Yes, JPMorgan Chase’s Jamie Dimon made a show of castigating Bitcoin, the original, most heavily traded cryptocurrency, as a “fraud” and “worthless.” But two months before his latter comment, CNBC reported that “with little fanfare, JPMorgan Chase has started giving its wealth management clients access to six crypto funds in the past month,” following the lead of Goldman Sachs and Morgan Stanley. Now, as many outlets have reported, it’s mostly been the ordinary retail investors who got wiped out in the crypto crash. You will perhaps be shocked to hear that the big banks and their clients do not, in fact, have much exposure to crypto. So reported the New York Times on July 5, chalking this up not to investor discipline but to regulatory chastity: “Wall Street banks sought ways to participate, but regulators wouldn’t allow it.”
As it turned out, Sam Bankman-Fried and Do Kwan were no outliers when it came to flirting with Ponzinomics. From the Bored Ape non-fungible tokens, to “play-to-earn” crypto video games, to Beeple’s $69 million auction of NFT art, you name it: all businesses, deals, and sectors within the crypto universe can reduce their needs to the same one, which is for new marks to provide fresh capital that can be used as an exit for earlier investors. The promise of investing in this brave new asset class has nothing to do with the asset. It has only to do with the returns.
Buying Friends and Influencing People
In January, FTX reportedly raised $400 million in new funding that valued the company at $32 billion, prompting CNBC to observe that Bankman-Fried’s crypto derivatives exchange “has built up a war chest of funds at a time when crypto prices have sunk considerably.”
Bankman-Fried said at the time the money would likely go toward mergers and acquisitions, which it has. But FTX has also ponied up for other things, such as a four-page spread in The New Yorker, live events, and a remarkably irritating “viral” Super Bowl ad, even by this year’s standards (it was the Larry David one). Not counting the Super Bowl spot, FTX has spent hundreds of millions on other big-ticket marketing items, including the naming rights to the Miami Heat’s arena, the naming rights to the global e-sports organization TSM, and the naming rights to UC Berkeley’s California Memorial Stadium.
The marketing spend has paid off handsomely, rewarding Bankman-Fried’s penchant for gimmicks. He has been characterized by Bloomberg News as a “strange sort of capitalist monk.” Like Elizabeth Holmes, he reportedly eschews a dating life. Like Jack Dorsey, he questions whether sleep is a good use of time. Like a child, he has felt the same way about showering.
In spite of Bankman-Fried’s potential odoriferousness, a combination of FTX’s money and attendant clout has put him at dinner in Beverly Hills with the likes of Jeff Bezos, Sia, Leonardo DiCaprio, Kate Hudson, and Katy Perry, as well as in a Super Bowl box seat just in front of FTX pitch-man Steph Curry. In late April, he appeared onstage at a conference in the Bahamas in his signature T-shirt, sneakers, tube socks, and shorts alongside Bill Clinton and Tony Blair. The two former heads of state, who presided over the first derivatives boom of the 1990s, were introduced by Anthony Scaramucci, the short-lived Trump White House communications director. After the off-the-record event, a Politico headline described the vibe shift thusly: “Crypto’s strange new respectability.”
“You want to do right by it in the regulatory space,” Clinton told the crowd, according to Politico, discussing “his experience regulating e-commerce with a light touch in the 1990s.” Not to pick on an old man, but “e-commerce” is quite the euphemism. Cryptocurrencies should be understood to be securities like stocks or bonds. And as a derivative exchange, not merely a crypto trading platform, FTX allows traders to make more lucrative, risky, and complicated bets using special contracts, with the catch being that the derivee of the underlying products at play is “crypto,” broadly speaking. Narrowly speaking, the underlying crypto is a swirl of loans: the so-called “decentralized finance,” or “DeFi,” shadow banking business that is the crypto world’s only consumer-facing apparatus at the moment.
Derivatives have been around since the nineteenth century, a way for nascent imperial powers and their corporate allies to manage financial risk. But the classic, contemporary example of a derivative exchange is the Chicago Mercantile Exchange (CME). Commodity derivatives, introduced by CME in the 1960s, were pioneered as an instrument that allowed investors in commodity markets to hedge their bets. If, for example, you were to buy physical wheat from Kansas to sell in New York, and the price of wheat went down by the time the grains arrived on the East Coast, you could offset your loss if you purchased a “future” contract meant to accommodate such a movement. Companies like beer giant Anheuser-Busch use derivatives in exactly this fashion, as the economist Bruce Tuckman observed in a 2015 paper. It’s a surefire strategy to keep the kegs full and effective at minimizing potential losses.
But that’s not all derivatives can do, as Tuckman knows well. From 2002 to 2008, he was the managing director at Lehman Brothers, whose collapse was sparked by a very bad bet on the value of synthetic “collateralized debt obligations” (CDOs)—a type of derivative constructed from bets on the housing market. Housing and food: these are two essential, but risky, things in which to invest. Energy, the other major global derivatives market, fits into the same category. Everyone in the economy needs a place to sleep, food to eat, and a way to get to work. Building homes, growing crops, and transporting oil are all projects that require differently skilled labor, distinct raw materials, land, and so on. And there are infinite reasons why such endeavors can in the end be successful—that is, result in a house, a hamburger, a pipeline—but still be unprofitable.
The safety of a derivatives market can be directly correlated with the persistence of demand for the underlying security. Oil, soybeans, and rare earth metals are necessary reagents of modern life. Cryptocurrencies, on the other hand, waste energy; they do not produce it. You can’t eat an NFT. If a Bitcoin wallet is drained, the FDIC does not cover the loss. What needs, then, does a cryptocurrency derivative—a speculative bet on the volatility of a Hall of Fame volatile asset—satisfy? What about cryptocurrency, period?
Web3, a cliche invoked to refer to the growing mélange of blockchain protocols, “fintech,” and virtual reality, is often heralded as a technological paradigm shift on par with the internet itself. What web3 evangelists by and large have proposed, however, is a theoretical new digital commons defined not by dank memes, but by the potential to draw rents from dank memes. Ostensible objets d’art, however, require something like a cultural consensus to acquire pecuniary value. The same goes for financial systems. So how to go about winning the masses?
The thing that really piqued my interest in crypto, I confess, was the flurry of naming rights deals: the football stadium at my alma mater and, most ominously to me, the rechristening of the Staples Center, home of the NBA’s Lakers and Clippers, as the Crypto.com Arena. At $700 million over twenty years, this latter deal is the largest naming rights transaction in sports history.
The first major sports naming rights deal took place in 1988 and involved a different kind of scandalous financial institution: a savings-and-loan bank. That year, the home court of the Lakers in Inglewood, California, the Forum, was renamed the Great Western Forum. The Great Western Bank, formerly Great Western Savings and Loan, was one of the biggest savings-and-loan banks in the country, and was eventually acquired by the largest remaining savings bank, Washington Mutual. One of the worst so-called shadow bankers of the 2000s, Washington Mutual failed during the financial crash in 2008. But just a year before it expired, it purchased the naming rights to a theater at Madison Square Garden. When I imagine how the cryptocurrency story ends, I see something like WaMu: its corpse carried on a stretcher out of the arena bearing its name.
Between the end of World War II and the 2007 global market crash, the greatest American financial disaster was the savings-and-loan crisis. It was a speculative frenzy that sought to shore up America’s real estate market and satisfy investor needs for better returns, turning a $16 billion problem into a $160 billion calamity over the course of the 1980s—one ultimately paid for by the U.S. government. Like all modern American financial crises, it was synthetic; it was also entirely evitable on policy terms, as the contradictions that gave rise to the savings-and-loan bust were identified well before the cancer became truly malignant. There are intriguing parallels between the financial malfeasance we saw then and what we’ve just witnessed in crypto, as well as instructive distinctions. The savings-and-loan crisis is part of a straight line of American mortgage lending policy disaster from the 1980s to the 2000s. But it is through crypto and web3—interlocking, politically engaged pools of money relying heavily on both “Wall Street” and “Main Street” investors—that I believe the mechanics of disasters like the savings-and-loan crisis can be more readily produced today. Unlike with the S&Ls, however, there will be no bailout of crypto—so said the head of the SEC in late June. There will only be, to use the parlance of the industry, rug-pullers and bag-holders.
Crypto began as a story of delivering outrageous gains during the so-called “zero-interest rate policy” that has been enforced by the Federal Reserve since the late 2000s. The S&Ls disguised their adventurism in more traditional clothes. Savings-and-loan banks, also called building-and-loan societies, or “thrifts,” were once upon a time the cornerstone of the American mortgage market. Although originating in the nineteenth century, the modern thrift was created in the 1930s as a New Deal reform meant to restore trust in the financial system. A companion to the Federal Deposit Insurance Corporation, the Federal Savings and Loan Insurance Corporation, or FSLIC, was created in 1934, federally guaranteeing depositors’ money. The boards of S&Ls were generally composed of local business leaders and gentry, and the banks focused primarily on residential loans and development, often lending to subprime customers otherwise unable to get loans from more respectable commercial banks. FSLIC’s insurance capital was funded by the S&Ls themselves, who were in turn regulated by the Federal Home Loan Bank Board (FHLBB) and its regional branch banks, which examined the books of thrifts under their purview.
That great sucking noise you hear is billions of dollars being deployed to support crypto in its hour of need.
S&Ls proliferated and prospered where commercial banks were sparser, particularly in rural America and in the so-called Sunbelt. The writer Gary Indiana has referred to his native New Hampshire as being stocked with “savings and loan Democrats”; in City of Quartz, Mike Davis wrote that the formula behind the rise of Los Angeles to West Coast economic preeminence in the 1940s was “federally guaranteed mortgages, veterans benefits, and a protected savings-and-loan sector”; the late “humorist” P.J. O’Rourke, commenting on the savings-and-loan bailout for Rolling Stone in 1989, told readers to “look for Kevin Costner to star as a likable scamp of a Texas S&L swindler in a major-studio Christmas release.”
The largest thrifts were in Texas and in California, and although lovable George Bailey is probably how most Americans today remember the institution, corporate leadership tended toward the political right. For example, Southern California’s Joseph Crail, son of a California judge, served in the 1950s and 1960s as the president of Coast Federal Savings & Loan, one of the largest thrift banks in California. An early donor to Richard Nixon’s first 1950s congressional slush fund, in the following decade Crail printed and distributed anti-communist pamphlets with his bank’s name on them and set up a thirty-five-member “Free Enterprise Speaker’s Bureau” ensconced within Coast Federal. A typical Joe Crail quote: “It’s good business. Anticommunism builds sales . . . You will make money at it—profits in your pocket.”
By the mid-1970s, however, after a spectacular wave of savings-and-loan consolidation, the thrifts were in deep trouble and looking for Uncle Sam to help. For a thrift, inflation was the worst of all enemies. If the dollar’s purchasing power was diminished, customers had a strong incentive to move their accounts out of a thrift and into, say, a money market mutual fund—one of the many new, widely touted financial products created through deregulation, non-regulation, and market reform.
The S&Ls did not have a lot of tools available to compete. They were only allowed to issue fixed-rate mortgages whose interest rates couldn’t keep up with inflation, and as home loan banks, they were largely forbidden from making riskier but potentially higher-yield investments. Even after the cap on interest that thrifts paid out to depositors was raised in the late 1970s, the S&Ls remained deep in the hole and without strong prospects for growth. In 1972, American thrifts had collectively held something like $16.7 billion in assets. By 1980, they were worth negative $17.5 billion, and 85 percent of all S&Ls were losing money.
One sane response to the S&Ls’ insolvency would have been to completely restructure the thrift industry, reconfiguring the home loan market so that these banks were protected against increases in interest and inflation. Saner yet, but politically implausible, was closing all the money-losing thrifts and agreeing to backstop those that were still in the black. Rather than provide government stimulus that might “crowd out” private investment, the shackles on private pools of capitals were instead loosened. In the spring of 1980, President Carter signed into law a bill that attempted to stabilize the situation by permitting S&Ls to invest higher portions of their capital in instruments other than mortgages, and to operate nationally.
Cryptocurrency’s capacity to encode both hard-money crank politics and climbing profits places it on a continuum with previous American financial scandals. In this unfortunate dialectic, the material gains of the latter obscure the economic incoherence of the former. This was true of the savings-and-loan industry failure: its transfiguration from “problem” to “quietly epoch-shifting” was the product of a nationwide bipartisan collaboration that stemmed from a culture of graft cartoonishly endemic to the political economic system: a team effort from within, in other words, not an ideological takeover from without.
By the middle of 1982, the savings-and-loan insolvency had ballooned to $150 billion on a market-value basis—an inconvenient figure for Reaganites high on supply-side theory, balanced budgets, and tax cuts. Because savings-and-loan depositors were insured by the federal government via FSLIC, this would put FSLIC on the hook for those billions. The White House’s solution was a cover-up. “The administration knew that if the public realized that the budget deficit was really $150 billion larger than reported,” writes William K. Black, a former savings-and-loan regulator, in his hybrid memoir-history of the crisis, The Best Way to Rob a Bank is to Own One, “the resulting outcry could have prevented passage of the large tax cuts that the Economic Recovery Tax Act of 1981 . . . provided for.”
The Reagan White House was also naturally inclined to support the S&Ls: since the days of Joe Crail and Richard Nixon, the thrifts’ political influence had grown in spite of their declining business. The thrift industry was further rewarded in October 1982, when Reagan signed the Garn–St. Germain Depository Institutions Act into law. Though Reagan himself never publicly mentioned the savings-and-loan crisis during his presidency, at Garn–St. Germain’s signing, he called the bill “the most important legislation for financial institutions in fifty years.” True, but perhaps not in the way that he meant. “Some unrestrained lenders” newly freed up by the law, notes an official Federal Reserve history of Garn–St. Germain, “offered infamous 2/28 adjustable-rate mortgages to entice subprime borrowers to initiate loans at low rates, only to find that they could not afford the payments when the mortgage quickly reset at a much higher rate. Millions of foreclosures ensued.”
“Interest rate risk rendered every S&L insolvent (in market value) in 1979–1982, making it far cheaper and easier for opportunists to get control,” the ex-regulator Black writes. “Owners and regulators were desperate to sell S&Ls; opportunists were eager to buy.” If that sounds familiar, it’s because a basic law of societal physics comes into play: while honey draws bees, shit draws flies. Look no further than the 2000s mortgage fraudsters memorialized in The Big Short. Or more au courant, the transformation of former child actor Brock Pierce to latter-day crypto colonizer of Puerto Rico. In fact, near the top of a Miami Herald story in June about how the wealthy (including Ghislaine Maxwell’s family) use the British island of Jersey as a tax-haven, the authors noted that Jersey had previously laundered dirty savings-and-loan money from the 1980s. It was a dirty time.
Cash for Trash
On December 16, 1980, an offensively stereotypical Texan named Erwin “Erv” Hansen was voted in as the new president of Centennial Savings and Loan in Sonoma County, California. Bolstered by deregulation, Hansen took Centennial on a fraudulent ride that would become emblematic of the decade’s thrift bank crisis. Centennial was one of the many institutions taking advantage of a “competition in laxity,” in which the federal and various state governments raced to the bottom in thinning down their rule books to let the thrifts do whatever it took to make money. By the beginning of 1983, California S&Ls were allowed to invest 100 percent of their assets in speculative ventures like commercial real estate and service corporations.
Cryptocurrency’s capacity to encode both hard-money crank politics and climbing profits places it on a continuum with previous American financial scandals.
Centennial started 1983 with $49 million in assets and finished its life in August 1985, seized by regulators, with assets of $404.6 million. During Hansen’s tenure at the bank, he engaged in nearly every type of trick that dirty S&Ls would pull in the 1980s: “loan participations” with other crooked thrifts that hid increasingly large and smelly piles of bad loans; “land flips,” in which property was traded back and forth between parties, inflating the value each time; “cash for trash” transactions; and more. Deregulation and the freedom newly allowed to thrifts was supposed to give them the latitude to make more “creative,” higher-yield investments. These higher yields, in turn, would allow banks like Centennial to manage the high cost of the brokered deposits they were accepting. In practice, as economists George Akerlof and Paul Romer demonstrated in a famous paper, “Looting: The Economic Underworld of Bankruptcy for Profit,” the system created an incentive for executives like Hansen to “loot” their own companies.
Hansen’s expensive tastes included a belt buckle that held an operational .22 caliber pistol, and a 1983 Christmas party that cost $148,000 (theme: “Elegant Renaissance Faire”). That same year, Centennial relocated to an office building in downtown Santa Rosa that reportedly cost around $7 million, and to put a point on it, in one afternoon of car-buying, Hansen purchased five vehicles for $90,000 (not counting his $137,000 Rolls-Royce), then called to have a Centennial executive deliver the check to pay for them. The FBI later said, of course, that the bank was never reimbursed. Hansen died of a cerebral aneurysm before he could be prosecuted, and the assistant U.S. attorney who was working the case subsequently went private, setting up his criminal defense practice in Centennial’s former multi-million abode.
“In less than five years, from December 1980 to August 1985, when federal regulators took over the thrift,” Stephen Pizzo, Mary Fricker, and Paul Muolo write in Inside Job: The Looting of America’s Savings and Loans, “over $165 million vanished, and no one ever served more than a year in prison for the theft.” Although the savings-and-loan crisis is popularly remembered for having been the last major white-collar scandal in which a whole industry got taken down and people thrown in jail—if, that is, it is remembered at all—there were many thieves who got away. At one point, the authors write, U.S. attorneys’ offices in California and Texas “simply established an arbitrary $100,000 cutoff point. If a case under $100,000 was reported to them, it generally went unprosecuted.” It’s a legacy of impunity that stretches into the present.
One Pays, the Other Doesn’t
When I visited Stephen Pizzo, coauthor of Inside Job, last summer, I was still vexed by the question of how so many influential people had been caught up in the thrift crisis. It seemed that everywhere you looked, you found extensive political connections. Neil Bush (brother of W. and Jeb) was on the board of Silverado Savings in Denver, which at the time it went tits-up in 1988 was worth more than $1 billion; a younger Andrew Cuomo tried unsuccessfully to acquire a Florida thrift; a former governor of Illinois did manage to get one in his home state.
Between the end of World War II and the 2007 global market crash, the greatest American financial disaster was the savings-and-loan crisis.
Even at Centennial, which the Encyclopedia of White-Collar and Corporate Crime describes as “a classic example of fraud and all that went wrong during the savings-and-loan crisis of the 1980s,” there had been ample regulatory and political capture. A congressman, a Bank Board official, and a county sheriff had all fallen into Erv Hansen’s pocket at one point. Clearly the problem was national. Had there been some sort of conspiracy?
Not quite, Steve said: The whole savings-and-loan mess “was a spontaneous ecosystem of criminality.” Not spontaneous in that it came from nothing, but spontaneous in that it was itself a new development—a legally constructed environment in which fraud and capitalist misbehavior of the worst order could take place. Jim Chanos, an investor famous for his bet against Enron, used similar language to describe crypto in a recent Bloomberg News interview, calling it “a vast ecosystem that sprung up overnight around it to basically extract fees from unsuspecting primarily retail investors.”
Although the nature of the political capture is different this time around—namely in that it is fortunately not as advanced—crypto checks many of the same boxes. While the SEC has begun announcing cases against cryptocurrency figures like the Winklevoss twins of The Social Network fame, these are fairly small fry. Sam Bankman-Fried, by contrast, has already secured himself a measure of political safety as a Democratic Party megadonor. He’s floated the idea of spending from $100 million to a “soft ceiling” of $1 billion in support of Democrats in 2024. This kind of ingratiation is smart thinking. After all, thrifts, with their Reagan Democrat customers and D.C. swamp operators, were not a set of institutions that the ruling political coalition could dispense with. In fact, they were senior partners in the coalition, allies of home-builders, run by influential nodes of regional power elites across the country. The highest-level public official to fall because of the savings-and-loan crisis was no less than speaker of the house Jim Wright, a Texas Democrat whose 1989 resignation from Congress came a few months after the House Ethics Committee determined he had strong-armed regulators on behalf of the thrifts.
Home-building and finance remain basic barometers of how America as a whole is doing; for decades, the number of housing “starts,” or new homes under construction, has been the metric Wall Street looks to most for gauging American economic health. In The Asset Economy, a slim book by University of Sydney professors Lisa Adkins, Melinda Cooper, and Martijn Konings, the coauthors argue that “as an asset, housing works in a distinctive way,” one that gives it a specific role in the creation of inequality. “[Switching] from renting to buying is not nearly as easy as switching savings from a bank account to a mutual fund,” the trio write. “Instead, it requires a down payment and then leveraging that by taking on debt. It is increasingly difficult for all but the highest income earners to save up a deposit through wages alone.”
LeBron James infamously suggested on behalf of Crypto.com that crypto assets are a way for people to build intergenerational wealth—the kind of investing that can turn home renters into home buyers. Data are scarce about how effective this pitch has been, particularly after the May-June meltdown, but there is evidence that this is the strategy of at least some new mortgage borrowers. At the end of 2020, the real estate brokerage Redfin found that “one in nine first-time homebuyers (11.6 percent) surveyed in the fourth quarter said selling cryptocurrency had helped them save for a down payment.” And Bloomberg News reports that as of late April at least one Miami-area lender was offering a fixed-rate thirty-year mortgage that could be entirely secured with cryptocurrencies, one day before Bloomberg News further reported that Goldman Sachs had offered “its first ever lending facility backed by Bitcoin.”
That great sucking noise you hear is billions of dollars being deployed to support crypto in its hour of need. Much in the same way that a previous generation of capitalists embraced patching up the savings-and-loan industry until it finally fell apart in 1989, the crypto “industry” and its supporters have continued to throw their full weight behind the enterprise since the crash. The result is a kind of zombie Ponzi environment. On the one hand, the SEC appears to have increased its scrutiny of all things crypto. But on the other hand?
The pop singer The Weeknd kicked off his world tour by tweeting on June 2, “Excited to partner with @Binance and @BinanceUS for my After Hours Til Dawn tour !!! We’ll use innovative Web3 tech to connect with you in NEW creative ways and collaborate on charitable efforts to provide food to those in need.” The following day, the Federal Trade Commission’s Twitter account noted that roughly 25 percent of fraud losses reported to the agency “paid in cryptocurrency.” I’m reminded of the crooked police officers who, in order to protect their own criminal dealings, demand that their coworkers participate. Turning and turning in the widening gyre, running out of assets to financialize, you can picture the inevitable excuses for how celebrities, so-called “technologists,” and—most important—politicians and regulators all signed up for the crypto take. More realistically, no one will want to remember any of it at all.
One theory for why FTX’s Sam Bankman-Fried avoids making a case for the use-value of cryptocurrencies is that he actually doesn’t believe there is one. But why would a paper billionaire even publicly flirt with the idea of calling his business a Ponzi, even if he secretly believes it to be true? Part of Bankman-Fried’s brand is that he is an “effective altruist,” a branch of utilitarian philosophy in which categorical moral claims are applied to everything except for systems of political economy. In short, it’s an easy way to rationalize making a lot of money in a scammy fashion and then giving it all away to charity, as Bankman-Fried has said he plans to do.
Even if this is the case, it would be a ludicrously cynical bet, and an ethically misguided one, too. Had an entrepreneur taken a similar approach during the thrift crisis, they would have been lining their pockets with dollars that, deployed honestly, could have built homes in which families could live. In the case of crypto, it’s waste all the way down: as Bankman-Fried surely knows, crypto mining is a filthy business, generating millions of tons of CO2 emissions in the United States alone every year.
Wall Street initially appeared reluctant to get its feet wet with crypto, but that wasn’t the full picture.
He is admittedly an easy scapegoat. Faced with slowing growth for the first time in decades, asset managers and banks have been plowing money into crypto, surely hoping to imitate Andreessen Horowitz’s Chris Dixon, the Silicon Valley venture capitalist dubbed by Fortune this past April “the world’s top crypto investor.” It’s a title the firm appears intent on keeping, announcing during the spring 2022 crash that it was raising a further $4.5 billion to invest in crypto companies they believe will survive the bear market. To a slow but steady drumbeat, crypto investors and their allies are building a lobbying machine to ensure that “blockchain” and “web3” technologies remain, as they currently are, largely unregulated. It’s already bearing fruit: New York Senator Kirsten Gillibrand and her Wyoming colleague Cynthia Lummis, a Democrat and Republican respectively, have introduced a bill to reclassify crypto as a commodity rather than a security. According to SEC chairman Gary Gensler, the measure would “undermine the protections we have in a $100 trillion capital market.”
Between 2018 and 2021, the advocacy group Public Citizen reported this past March, the number of crypto lobbyists rose from 115 to 320; lobbying spending, meanwhile, quadrupled from $2.2 million to $9 million. This money is what put schlubby Bankman-Fried, with his ratty sneakers and cut-rate Zuckerberg impression, onstage with Tony Blair, Bill Clinton, and “the Mooch,” where he laid his claim to the future, dethroning “the social network” and the “Third Way” in one fell swoop. Savings-and-loan executives positioned themselves as similarly ingenious in the 1980s. While many Americans remember those years for their pain—for the progressive hollowing out of industrial and manufacturing bases—the savings-and-loan executives were held up as icons of the economic creativity that would supposedly lead America out of its moral malaise and materialistic morass.
Take Columbia Savings and Loan, a thrift bank located in the Mid-Wilshire section of Los Angeles that was described on the front page of the business section of the Los Angeles Times in October 1985 as “one of the most aggressive, controversial, and profitable savings and loans in the nation.” “Quarter after quarter we’re making money,” the bank’s chief executive, Thomas Spiegel, told the Times. “I think we’re finally starting to stand the test of time.” Less than five years later, Spiegel was out of a job, and Columbia was bust; along with Charlie Keating’s Lincoln Savings, the two banks had been key “straw buyers” of the junk bonds peddled by convicted fraudster Michael Milken.
“Even by the standards of S&L excesses, there is nothing quite like what they’ve discovered at Columbia,” reported the Washington Post on the cleanup investigation. Spiegel had used Columbia to buy a Range Rover, BMW, Mercedes-Benz, Bentley, as well as three corporate jets and “a corporate headquarters on fashionable Wilshire Boulevard so decorated with stonework, leather walls, stainless-steel ceilings and a private gym that it cost $54.7 million to build.”
John Reed Stark joined the SEC in 1991 as an attorney, rising to become the first head of its Office of Internet Enforcement, a position he held from 1998 to 2009, bringing some of the SEC’s first actions against financial crimes on the internet. Today, he is a private consultant and a lecturer at Duke Law School. When I asked Stark why his former colleagues have not aggressively chased crypto cases over the past few years, he told me, “In two words? Beach houses.” “The political capture is unbelievable,” Stark continued. “It’s unprecedented, the scale of the capture. I think, you know, it started to obviously become more and more lucrative to be an SEC enforcement defense lawyer, and firms started paying large amounts of money. . . . You’re not defending someone, you’re orchestrating transactions that can have terrible harm imposed upon investors.”
In his recent Bloomberg News interview, investor Jim Chanos told journalist Tracy Alloway that he believes there is, as he put it, “hidden leverage” in the crypto ecosystem. Meaning that if firms and coins like Terra continue to fall, it will come out that the system is more interconnected than it looks, having been stitched together with debt. It increasingly appears that this is the case. The beginning of summer 2022 saw major, interconnected failures and fire sales: Three Arrows Capital, then BlockFi, and then Voyager.
It is only the degree of the contagion—the accumulation of harm facing investors, institutional and otherwise—now left up for discussion. The savings-and-loan crisis showed how shrewd lobbyists and ambitious politicians were able to prolong the implosion without drawing much scrutiny even as it eventually cost the government billions. Crypto will test what happens when people seem to be paying close attention. Will it make a difference?
[*] Correction: An earlier version of this essay incorrectly described Elon Musk’s Tesla as a blue-chip firm, implying it is consistently profitable, stable, and generally recognized as a safe investment. Tesla is none of these things. We regret the undeserved compliment.