Tag Archives: Ponzi Scheme

FTX: The Dominoes of Financial Fraud Have Yet to Fall

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By Charles Hugh Smith

Source: Of Two Minds

If you haven’t plowed through dozens of post-collapse commentaries on FTX, I’m saving you the trouble: here’s a distillation of what matters going forward. If you’re seeking a forensic accounting of FTX, others have done this work already. If you’re seeking an ideological diatribe, you won’t find that here, either.

What you will find is insight into the real innovation of FTX: FTX compressed the entire playbook and history of financial fraud into one brief cycle of the credulous bamboozled, Charles Ponzi bested and creative accounting being revealed for what it really is, fraud.

All financial frauds share the same set of tools. The toolbox of financial fraud, whether it is traditional or crypto-based, contains variations of these basic mechanisms:

1. Using clients’ capital (without full disclosure) to increase the private gain of the Owners of the Con (OOTC).

2. Using the clients’ capital to arbitrage yield differentials in duration, risk and other asymmetries to the benefit not of the clients but to the Owners of the Con (OOTC)..

3. Overstate assets by listing illiquid, insider-controlled, non-marked-to-market assets at valuations completely disconnected from reality, i.e. what they would fetch on the open market in size. Rely on assets issued by the firm or its subsidiaries for the bulk of the firm’s assets, i.e. its claim of solvency.

4. Attracting new capital investments and client funds with “too good to be true” (but borderline plausible, given the fantastic growth and track record of high returns) returns, goals and promises to cover the normal churn of redemptions, so the fraud goes undetected. (Ponzi Scheme)

5. Play fast and loose with leverage, the full extent of which isn’t disclosed to clients or regulators.

6. Issue securities (i.e. “money”–tokens, bonds, shares of stock, etc.) whose value is based on the firm’s fraudulently listed assets and mouth-watering growth.

7. Persuade investors and clients that you’re doing them a favor by letting them get a piece of the action. In other words, exploit their near-infinite greed.

8. Present a facade of prudent, audited, transparent, regulated stability which cloaks the interlocking network of fraud, bogus accounting, illiquid assets, etc. and insider looting.

I have often recommended Herman Melville’s novel The Confidence-Man for its masterful depiction of how The Confidence-Man persuades the skeptic that not only is The Confidence-Man trustworthy, but he is doing the mark a favor in taking his money.

Note that there are quasi-legal versions of some of these tools. The full exposure to the risks inherent in extreme leverage and illiquidity can be cloaked, buried in off-balance sheet assets and liabilities, etc., while pages of mind-numbing disclosures were duly signed by blinded-by-greed marks.

These quasi-legal versions are just as prone to unraveling and collapse as the blatantly fraudulent varieties. Properly disclosed leverage and illiquidity are just as prone to unraveling as undisclosed leverage and illiquidity.

Mismatches of duration, liquidity and risk are just as toxic to full-disclosure firms as they are to fraudulent firms.

This is why we can predict the dominoes of FTX’s financial fraud have yet to fall. When there are mismatches in counterparty asset durations and liquidity, assets that theoretically cover loans that are called can’t be sold or can only be sold at ruinous discounts.

Leverage works both ways, and so the 100-to-1 leverage that’s so glorious when the $1 yields $100 in gains also triggers the mass liquidation of illiquid assets when small losses unwind all that leverage.

Everyone caught short by losses, redemptions and counterparty claims will be desperate to hide their exposure to insolvency. But humans are herd animals, and once the herd gets spooked, trust in assurances quickly plummets and all eyes are on counterparty risks and the actual market for lightly traded assets.

Once assets are revealed as worth far less than claimed, insolvency is the inevitable result. How far will the lines of toppling dominoes extend? Quite possibly much farther than the credulous believe possible.

Boobs on Credit

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From BreastImplantFailure.net

By Jim Quinn

Source: The Burning Platform

Do you ever hear something so startlingly mind numbingly ridiculous you realize it must be a sign things have gotten so fucked up something has got to give? As I was driving to work yesterday morning on the Schuylkill Expressway a commercial comes on the radio from a plastic surgeon advertising for anyone looking for a better set of boobs. I had never heard a plastic surgeon commercial before, so I thought that was unusual. But, that wasn’t the best part. This plastic surgeon was offering no money down 18 month interest free financing on your new boobs.

I wonder if they are moving boobs with subprime debt the same way the auto companies have used subprime debt to move cars. Of course, when a deadbeat defaults on an auto loan the car is easily repossessed. What happens when a bimbo defaults on her boob loan? How narrow minded of me. What happens when some dude who wants to be a bimbo defaults on his/her loan? I guess it was just a matter of time before breast enhancement met debt enhancement in this warped world of materialism, narcissism, financialization, and delusions.

Now that revolving credit has reached a new all-time high of $1 trillion and total consumer debt outstanding has exceeded it’s 2008 peak at $12.8 trillion, the Fed has completed its job of helping the average American again in-debt themselves up to their eyeballs. This is considered a success story in this twisted, perverted, bizarro world we call America today. The solution to an epic debt induced global financial catastrophe caused by Federal Reserve easy money, Wall Street fraud, and Washington DC corruption has been to increase global debt by 50% since 2007, with virtually all of it created by central bankers and the governments they control.

In what demented Ivy League educated academic mind would piling $68 trillion more debt on the backs of taxpayers as a cure for a disease caused by the initial $149 trillion of debt be considered rational and sustainable? It’s like having pancreatic cancer and trying to cure it with a self inflicted gunshot. And no one seems to care about or even notice the coming reset when this mass debt induced hysteria of delusion turns into the biggest financial collapse in the history of mankind.

This entire ponzi scheme edifice of debt is nothing but a confidence game. When people begin to realize they can’t repay their own debts, start to understand their governments will never honor their debt based promises, and realize central bankers are nothing more than pretend wizards behind a curtain, the confidence will evaporate in an instant and a collapse which will make 2008/2009 look like a walk in the park will ensue. That’s when civil and global war will engulf the world and teach people real lessons about the real world.

The boobs on credit commercial I heard this week is just another example of Wall Street and their Deep State crony co-conspirators completing their scheme to financialize every aspect of our lives and entrap us in chains of debt, beholden to these modern day Wall Street slave owners. When you see the record number of retail bankruptcies and store closings happening when GDP is supposedly rising by 3% and witness with your own two eyes the number of vacant storefronts and restaurants across our great land of materialism, you might wonder why revolving credit card debt is at a new all-time high.

The answer is Wall Street has successfully financialized virtually every aspect of our day to day lives. Consumer and taxpayer transactions which required cash or check ten years ago can now be paid with a credit card. You can pay your IRS bill with a credit card. You can pay your real estate taxes with a credit card. You can pay your utilities with a credit card. You can pay your school tuition with a credit card. You can pay your rent with a credit card. You can “buy” furniture and appliances without paying for seven years. And guess what? That’s what millions of average Americans are doing. In addition, they are driving “rented” $35,000 automobiles on seven year nothing down payment plans.

This massive debt induced fraud of a recovery gives the appearance of normalcy and stability. The stock market is at all-time highs is used as the narrative of central banker success. We’ve experienced extremely low volatility as the central bankers around the world have coordinated their money printing/debt creating schemes to purposely elevate financial markets to give the masses confidence that all is well. Anyone with critical thinking skills knows all is not well. The longer this fake stability is maintained the greater the collapse. Success breeds disregard for the possibility of catastrophe.

So you can call me the boy who cried wolf, but our Minsky Moment is approaching. Sometimes they do ring a bell at the top. In this case they are shaking fake boobs at the top.

“Stability leads to instability. The more stable things become and the longer things are stable, the more unstable they will be when the crisis hits.” – Hyman Minsky