--FTX Was Creating Money Out of Thin Air Like the Fed; and Trading Its Own “Stock” Like the Wall Street Mega Banks in their Dark Pools
By Pam Martens and Russ Martens: November 16, 2022
On June 10 of last year, Wall Street On Parade penned this headline: Seven Years after Michael Lewis Described on National TV How the U.S. Stock Market Is Rigged, SEC Chair Gensler Says He’s Going to Tackle Market Structure. Unfortunately for confidence in U.S. markets, that’s yet to happen. And it’s not just the fault of Gensler. The Senate Banking Committee and House Financial Services Committee that should be holding in-depth hearings on the most corrupted market structure since 1929 have opted instead to hold superficial hearings each time something blows up as a result of that corrupted market structure, but never actually get around to tackling the corrupt market structure itself.
So here we are today with another abject failure of market structure causing a week of sensational headlines around the globe that make U.S. markets look unhinged.
If one looks very closely at the structure of FTX, the collapsed crypto exchange now in bankruptcy and causing everything it touched to teeter, it was actually using a technique of the U.S. central bank – the Fed – to create money out of thin air; and a technique we’ve been writing about repeatedly since 2014, Wall Street mega banks trading their own stocks in their own Dark Pools, effectively making a market in their own stock.
Let’s start with our comparison of what FTX was doing to the Fed’s creation of money out of thin air by pushing an electronic button. You don’t have to take our word for what the Fed is doing. The Fed actually created an educational video to explain how it creates electronic money out of thin air. That video was released in 2011 and the spokesman for the Fed says this in the video: “The Fed will not keep buying large amounts of securities on an ongoing basis,” noting that “Its purchases are a temporary measure to help the economy recover.”
At the time of that video on January 14, 2011, the Fed had used its magic money button to buy up $2.2 trillion of debt securities from Wall Street, thus pushing the interest rates on debt instruments artificially lower. And despite that promise that this would be a “temporary measure” the Fed continued over the next decade to use its magic money spigot to the point that it now holds $8.256 trillion of debt securities on its balance sheet and it can’t figure out how to unwind that monster pile of debt securities without collapsing the U.S. economy.
What Sam Bankman-Fried, co-founder and CEO of FTX, did with the help of his colleagues, was to create their own magic money creation tool. It was a crypto token called FTT and was backed by nothing more than the hyped reputation of FTX and Sam Bankman-Fried. In that sense, it traded much like the “stock” of FTX.
And much like the price of debt on Wall Street was levitated by the Fed’s $8 trillion buying binge over a decade, the price of FTT soared through a buying binge by FTX and Sam Bankman-Fried’s own hedge fund, Alameda Research. FTT’s price went from less than $4 in December 2020 to more than $84 in September 2021 – a 2,000 percent gain in less than a year. (And all those sophisticated institutional investors in FTX didn’t find that suspicious?) This morning FTT is trading at $1.61 – despite the fact that some very sophisticated investors in FTX have written down their investment to zero.
CNBC explains what was going on with the FTT token as follows:
“The source explained that Alameda could post the FTT tokens it held as collateral and borrow customer funds. Even if FTX created more FTT tokens, it would not drive down the coin’s value because these coins never made it onto the open market. As a result, these tokens held their market value, allowing Alameda to borrow against them – essentially receiving free money to trade with.
“FTX had been able to sustain this pattern as long as it maintained the price of FTT and there was not a flood of customer withdrawals on the exchange. In the week leading up to the bankruptcy filing, FTX did not have enough assets to match customer withdrawals, the source said.”
Reuters reported that Bankman-Fried had moved as much as $10 billion of FTX customers’ money to his hedge fund, Alameda Research, through a “backdoor” in its software. Alameda lost much of the money on wild bets while $1 billion to $2 billion had just “disappeared,” according to Reuters. The Financial Times reported that FTX held just $900 million “in easily sellable assets” against $9 billion “of liabilities the day before it collapsed into bankruptcy.”
CoinDesk reported that a significant amount of the assets listed at Alameda were FTT tokens.
In trading FTT, the equivalent of stock in FTX, Sam Bankman-Fried was using a technique deployed by Wall Street mega banks to trade their own bank stock – right under the nose of their comatose regulators – in what are called Dark Pools. These Dark Pools are effectively unregulated stock exchanges operated internally by the trading units of the mega banks.
On August 26 of last year, we reported the following:
“Until August of 2017, JPMorgan Chase operated only one Dark Pool, known as JPM-X. But in August 2017, the bank added a second Dark Pool, which also began to trade in the shares of its own bank stock. That second Dark Pool is known as JPB-X…
“For the past seven years we have checked that FINRA data and witnessed JPMorgan Chase (as well as other banks) trading in the shares of their own bank stocks. We have repeatedly in the past asked the SEC to explain how this constitutes legal activity. We have yet to receive an answer.
“In the most recent week reported by FINRA for Dark Pool trading, JPMorgan’s two Dark Pools traded a total of 518,277 shares of JPMorgan Chase stock in a total of 3,308 separate trades. As the chart below from FINRA data indicates, JPMorgan Chase’s own Dark Pool, JPM-X, was the third largest Dark Pool trader in the shares of its own stock for the week of August 2, 2021. In the four weeks from July 12 through the week of August 2, FINRA data shows that JPMorgan’s two Dark Pools made a total of 22,070 trades in its own stock.”
For more on this Dark Pool insanity that has been allowed to continue in U.S. markets, see “Related Articles” below.
To make a long story short, those FTX wizards from MIT and Stanford seem to have adopted the corrupt market structure of Wall Street and simply tweaked it for crypto.
Editor’s Update:
Just moments after we posted this article, the House Financial Services Committee released the following statement:
“WASHINGTON, D.C. – Today, the Chairwoman of the House Financial Services Committee, Congresswoman Maxine Waters (D-CA), and the Ranking Member of the House Financial Services Committee, Congressman Patrick McHenry (R-NC), announced a bipartisan hearing into the collapse of FTX and the broader consequences for the digital asset ecosystem. In December, the Committee expects to hear from the companies and individuals involved, including Sam Bankman-Fried, Alameda Research, Binance, FTX, and related entities, among others.”
We would strongly suggest that the Big Law firm of Sullivan & Cromwell be ordered to send a law partner to testify at the House hearing on how that law firm performed such extensive legal work for FTX and Alameda Research without spotting a house of cards.
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