The Global Financial Crisis’s Biggest Collapse Is Compared To Sam Bankman-Fried’s FTX

On Friday, FTX filed for bankruptcy after competing crypto exchanges failed to save it, raising concerns that the cryptocurrency economy is nearing its own Lehman Brothers moment.

Lehman piled up subprime mortgage debt before the Great Financial Crisis.

Is FTX that bad? Unlikely. But it’s troubling. The Federal Reserve saved Bear Stearns but let Lehman fail once the US home market collapsed. The fourth-largest US bank with $650 billion in assets collapsed in September 2008. The 2008 crisis destroyed trillions of dollars of wealth and caused a global recession. FTX filed Chapter 11 on Friday. Its bankruptcy petition lists $10 billion to $50 billion in assets and over 100,000 creditors.

Bankman-exchange, Fried’s though smaller than Lehman, has similar issues. Its FTT token, a fast depreciating asset, dragged down its balance sheet. Since a report from Coindesk revealed that Bankman-trading Fried’s firm, Alameda Research, classified billions worth of FTT as assets on its balance sheet, suspicions swirled over the health of both companies and caused a sell-off.
“It ended up being quite comparable to Lehman because of how over-leveraged it was,” said Umee founder Brent Xu.

To reduce losses and attract investors, FTX pledged clients’ funds as collateral. This week’s “bank run” left FTX without funds to process withdrawals. Solana and Ether fell, and Tether lost its dollar peg. In a recent interview, American University law professor and financial regulatory expert Hilary Allen said, “The crypto ecosystem has been made vulnerable by leverage and interconnection, much as the old banking system was fragile in 2008. FTX account holders and Alameda traders face serious risks. Allen claimed FTX’s collapse won’t cause a financial crisis like 14 years ago. She noted that the economy still uses traditional finance rather than crypto for credit and payment processing, so any repercussions is likely to stay in the industry.

“The major purpose of crypto is speculation, and hence its collapse is unlikely to have larger ramifications so long as the regular financial system has no significant exposure to crypto,” Allen said.

Even with the events of the previous week unsettling the crypto industry, it isn’t sure to have systemic ramifications, and dropping crypto prices could be a momentary, knee-jerk market reaction. “Companies and platforms can no longer hide their reserves and keep investors and customers in the dark.”

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What happens next for crypto

More dominoes could fall after FTX’s collapse, starting a crypto reckoning. Who saves this week may be the biggest change from 2008. Crypto’s fall doesn’t concern the government like mortgages did in 2008. in “What makes this new wave of crypto deleveraging driven by the apparent collapse of Alameda Research and FTX more troubling is that the number of businesses with better balance sheets able to rescue those with low capital and high leverage is diminishing,” JPMorgan stated.

Regulators may tighten the screws to force corporations to adjust their conduct, when “Like Lehman, we will see an escalation of laws to protect market players, notably individual investors who yet again face the brunt of the damage,” Siemer said. He expects the most regulated and compliant corporations to dominate.

FTX’s implosion will continue to shake sector confidence. FTX instability forced crypto lender BlockFi to restrict client withdrawals and curtail platform activity this week.
“Given the lack of information on the status of FTX.com, FTX US and Alameda, we are not able to do business as usual,” BlockFi said, stressing its goal is to safeguard its clients and their interests.

“The market needs to develop before it can rebound, whether this comes through strengthened government laws on crypto or more skilled asset managers handling big sums of assets,” Siemer added.