FTX’s Collapse Mirrors an Infamous 18th Century British Financial Scandal

Yves here. The more time you spend in finance, the more you realize that perilous little is actually new or “innovative” but instead is an exercise in putting old wine in new bottles. This article explains how an early 1700s scheme has strong parallels to the FTX fiasco.

And in keeping with their newfound appreciation of SBF’s character, or perhaps more accurately, lack thereof, the media has become fond of showing SBF in the Kubrick stare:

By Amy Froide, Professor of History, University of Maryland, Baltimore County. Originally published at The Conversation

Enron. Bernie Madoff. FTX.

In modern capitalism, it seems as if stories of companies and managers who engage in fraud and swindle their investors occur like the changing of the seasons.

In fact, these scandals can be traced back to the origins of publicly traded companies, when the first stockbrokers bought and sold company shares and government securities in the coffee houses of London’s Exchange Alley during the 1700s.

As a historian of 18th century finance, I am struck by the similarities between what’s known as the Charitable Corporation Scandal and the recent collapse of FTX.

A Noble Cause

The Charitable Corporation was established in London in 1707 with the noble mission of providing “relief of the industrious poor by assisting them with small sums at legal interest.”

Essentially, it sought to provide low-interest loans to poor tradesmen, shielding them from predatory pawnbrokers who charged as much as 30% interest. The corporation made loans available at the rate of 5% in return for a pledge of property for security.

The Charitable Corporation was modeled on Monti di Pietà, a charitable institution of credit established in Catholic countries during the Renaissance era to combat usury, or high rates of interest.

Unlike the Monti di Pietà, however, the British version – despite its name – wasn’t a nonprofit. Instead, it was a business venture. The enterprise was funded by offering shares to investors who, in return, would make money while doing good. Under its original mission, it was like an 18th century version of today’s socially responsible investing, or “sustainable investment funds.”

Raiding the Fund

In 1725, the Charitable Corporation diverted from its original mission when a new board of directors took over.

These men turned the corporation into their own piggy bank, taking money from it to buy shares and prop up their other companies. At the same time, the company’s employees began to engage in fraud: Safety checks ceased, books were kept irregularly and pledges went unrecorded.

Investigators would ultimately find that £400,000 or more in capital was missing – roughly $108 million in today’s U.S. dollars.

In the autumn of 1731, rumors began to circulate about the solvency of the Charitable Corporation. The warehouse keeper at the time, John Thomson, who was in charge of all loans and pledges but also in league with the five fraudulent directors, hid the company’s books and fled the country.

‘Let ’em be ruined so we are made,’ a man says in a 1734 satirical print criticizing the Charitable Corporation and its ties to government. © The Trustees of the British Museum

At the shareholders’ quarterly meeting, they found that money, pledges and accounts had all gone missing. At this point, the proprietors of the Charitable Corporation stock appealed to the British Parliament for redress. One-third of those who petitioned were women, a proportion that equaled the percentage of women who held shares in the Charitable Corporation.

Many women were drawn to the corporation because of its public mission in providing small loans to working people. It’s also possible that they had been intentionally targeted for fraud.

The parliamentary investigation led to various charges being leveled against both managers and employees of the Charitable Corporation. Many of them were forced to appear before Parliament and were arrested if they did not. The managers and employees deemed most responsible for the 1732 fraud, such as William Burroughs, had their assets seized and inventoried in order to help pay back the shareholder losses.

Bankruptcy proceedings were started against the banker and broker, George Robinson, and the warehouse keeper, Thomson. Both Sir Robert Sutton and Sir Archibald Grant were expelled as members of the House of Commons, with Grant being prevented from leaving the country and Sutton ultimately prosecuted in several courts.

In the end, the shareholders received a partial government bailout – Parliament authorized a lottery that reimbursed only 40% of what the corporation’s creditors had lost.

The Risks of Concentrated Power

There are several key characteristics that stand out in the collapses of both the Charitable Corporation and FTX. Both companies were offering something new or venturing into a new sector. In the former’s case, it was microloans. In FTX’s case, it was cryptocurrency.

Meanwhile, the management of both ventures was centralized in the hands of just a few people. The Charitable Corporation got into trouble when it reduced its directors from 12 to five and when it consolidated most of its loan business in the hands of one employee – namely, Thomson. FTX’s example is even more extreme, with founder Sam Bankman-Fried calling all the shots.

In both cases, the key fraud was using the assets of one company to prop up another company managed by the same people. For example, in 1732, the corporation’s directors bought stock in the York Buildings Company, in which many of them were also involved. They hoped to juice stock prices. When that didn’t happen, they realized they couldn’t cover what they had taken out of the Charitable Corporation’s funds.

Fast forward nearly 300 years, and a similar story seems to have played out. Bankman-Fried allegedly took money out his customer accounts in FTX to cover his cryptocurrency trading firm, Alameda Research.

News of both frauds also came as a surprise, with little advance warning. Part of this is due to the ways in which managers were well respected and well connected to both politicians and the financial world. Few public figures mistrusted them, and this proved to be a useful screen for deceit.

I would also argue that in both cases the company’s connection to philanthropy lent it another level of cover. The Charitable Corporation’s very name announced its altruism. And even after the scandal subsided, commentators pointed out that the original business of microlending was useful. FTX’s founder Bankman-Fried is an advocate of effective altruism and has argued that it was useful for him and his companies to make lots of money so he could give it away to what he deemed effective causes.

After the Charitable Corporation’s collapse in 1732, Parliament didn’t institute any regulation that would prevent such a fraud from happening again.

A tradition of loose oversight and regulations has been the hallmark of Anglo-American capitalism. If the response to the 2008 financial crash is any indication of what will come in the wake of FTX’s collapse, it’s possible that some bad actors, like Bankman-Fried, will be punished. But any regulation will be undone at the first opportunity – or never put in place to begin with.

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  1. Joe Well

    The mainstream media will turn a fraud or monstrosity like Elizabeth Holmes, Elon Musk, or SBF into an idol, then with the same mob intensity totally dehumanize them, and rarely if ever investigate why the media were such accomplices in the first place, and never interrogate this idol/villain framework which should exist only in Disney or Marvel movies.

    1. Ep3

      Guys, the key is to lay all the blame at SBF’s feet. Make him the bad guy, fall guy, the patsi. He was the lone gunman. Everything was his fault, everyone else was just an innocent victim. He made all the decisions, had the final say, etc. This prevents blame & consequences from spreading. It prevents us from asking “why is our first amendment free press a mouth piece for elites & scammers? Why do our politicians & police so complacent?”. We dump all over SBF & let Jim Cramer keep running his mouth. This keeps our fraudulent system in place, continuing to benefit those currently in power who run the thing. And it keeps them from providing any bailout to poor ppl. “Customers will be made whole”. Right, the 1% richest of customers who had invested large sums, had made large sums through the original con. Heck, these same ppl will make money out of being made “whole”. But not the average joe who has no power, no political influence, no insider information. The father who invested his life savings, trying to get ahead just a little, he will never see a penny.

      1. skk

        As per Marc Cohodes, famed stock trader who looks for fraudulent companies to short, a key character missing from the arrested rogues list is Dan Friedberg, Chief Regulatory Officer of FTX. His past includes a deep role in the 2000s online poker scandal at UltimateBet. Then there’s the C-list at the financial on-ramp bank Silvergate.

        Then there’s the members of the US Congress, members of the regulatory institutions too, IMO, this story has some deep roots of corruption.

  2. Joe Well

    This wonderful article could be turned into a book, Erik-Larson-style, interleaving chapters dedicated to each scandal. I certainly would buy the audiobook at least.

    What would really make it shine would be comparative press clippings from each.

  3. Phichibe

    The simplest recitation of facts for all of the crypto bubble is this: in 2008 an individual using a pseudonym wrote a 9 page paper on implementing a so-called peer-to-peer banking system which would rely on the good will of volunteers making their computers available to run the peer-to-peer software (much like the TOR system does, and by the way at some point in 2022 the operators of TOR -almost an oxymoron- put out an appeal for more people to volunteer running the TOR routing software on their computers otherwise TOR might become erratic and even fail to operate). As an almost afterthought, the pseudonymous Satoshi Nakamoto proposed in his paper that computers running the peer-to-peer software – around maintaining a distributed ‘ledger’ called a blockchain – could be rewarded with ‘coins’ or ‘tokens’ that would potentially reward them for selflessly volunteering their computing power.

    Thus was born the Bitcoin. To say its initial value was nugatory is to overstate the issue greatly. An early ‘miner’ of Bitcoin famously bought a $34 pizza and paid for it with several hundred thousand Bitcoins, and thought he’d gotten the better deal. Another Bitcoin miner discarded a PC with hundreds of thousands of mined Bitcoins on its harddrive that he didn’t retrieve because he thought they were worthless. Google it, you’ll find the garbage dump in the UK where desperate Bitcoin junkies still show up to rummage through the hundreds of acres in hopes of finding a harddrive that at the peak of Bitcoin was worth $300,000,000.

    This brings us to the next thing to know about Bitcoin. In less than ten years a hitherto unknown asset class, one which produces zero income or revenue, hit a market capitilzation of over $3,000,000,000. For the zero-challenged, that’s over $3,trillion I submit to the good men and women of NC that there is no way this could have happened without persistent, pervasive, and openly known wash trading. As I’ve delved into the crypto charade since FTX was hit with a story on November 2 that detailed its balance sheet consisted mostly of the FTX token FTT, it is obvious that this whole thing was an insider game that ultimately took real money from financially illiterate speculators who were not privy to the rules of the game. The more I’ve thought about the Sequoia/VC episodes, the more I’m convinced the VCs were in on the game and were doing their own form of wash trading with the ever-increasing valuations of crypto startups round after round serving to advance what ultimately turned into a classic pump-and-dump scheme. Look at how Benchmark Capital bailed out first from Uber, for a noncrypto example.

    The worst part is that both parties in this country are bought and sold to Wall Street (thanks, Bill Clinton and his neo-liberal bootlickers). No real financier could have looked at crypto and spotted anything other than another South Seas Company. $3 trillion in assets conjured out of nothing in less than a decade? No wonder Warren Buffet said at the last Berkshire shindig that he wouldn’t buy a Bitcoin for $25, that among other things he would have no idea how to value an investment that didn’t produce income. I used to like Gensler, he was one of the less corrupt Mandarins in the Obama administration (although with competition like Tim Geithner and Larry Summers, that was a pretty low bar to clear) but after learning that he’d had 10 meetings with SBF or his minions in less that 2 years just reveals the naked corruption of Washington. As I wrote on a NC thread this year, I thought crypto would be at the heart of the next financial meltdown but even I have been shocked at what has been revealed since that article on Alameda came out in November.

    Oh, and at last tally the ‘market cap’ of crypto coins and tokens is just under a trillion dollars. If the ultimately fate of many dot-com startups is any clue, I’d guess it’s going to go down to $100,000,000 or less. The big institutional crypto miners (with IT investments in the tens of millions of dollars) are already going bankrupt at BC = $17,000. Imagine what’s going to happen when it hits $300. All the electricity wasted doing mathematically mindless ‘proof of work’ computations (upwards 2% of global electricity used in 2021). Charles Kindleberger would have loved the utter vacuity of it all.

    Happy New Year!


    PS Loved the Kubic framing of SBF.

    1. Hickory

      I very much enjoyed your comment… though my favorite part is that you seem to be the zero challenged one. 3,000,000,000 is 3 Billion. Great history though.

      1. Phichibe

        I know. I caught that myself after proofing and thought, well, maybe I’m zero challenged as well ;-)

        Notice that I didn’t say anything invidious about the zero challenged!

    2. Paula

      Love your comments. Bought in low, got out with all I put in. Best scenario. I hear from Whitney Webb there’s a bit more to the story. Can’t wait for more in-depth investigation but since it may involve high players like Epstein dealt with, may take time to reveal.

  4. Mikel

    It’s been reported that SBF is going to plead not guilty.
    Maybe now, after centuries, the attempt is being made to set a precedent to make such blatant scams legal.
    Freedom to rip off people easier is the freedom being exalted.

  5. fjallstrom

    While I appreciate learning about the Charitable Corporation, I think Charles Ponzi comes closer. In both cases it starts with spotting a leverage that can be used, then there is getting other peoples money to use it at scale. Oops, it didn’t work at scale, well as long as more money flows in than out, nobody will notice.

    Sure Ponzi didn’t – as far as I know – build an exchange to try to create new opportunities for leverage, but hey that’s innovation!

    An advantage of calling it a Ponzi scheme is that it was actually obvious that it was a scam, and media that praised SBF and politicians who accepted his contributions should have seen it.

    But who could have known? Well anyone that understands that crypto is scam haven, anyone that understands how unsustainable FTX promises was, anyone who listened to SBF describe his business model (you put the money in the box…), and anyone who listened to anyone in those groups could have known and did know!

    Make them answer to why they didn’t understand that the obvious Ponzi scheme was a Ponzi scheme, and it will at least be obvious that they see their job as cheerleaders for anything as long as the line goes up

  6. Willow

    Surprising the large number of young people who got burnt by FTX. There’s a lot of very angry people out there who are going to be really pissed if SBF gets off lightly. A rerun of the GFC anger against banks & Obama that fed the Trump machine?

  7. Paula

    See Whitney Webb’s site about his connection to the Deep State, she prefers to call the national security state. Very interesting interview on Redacted. Very talented young woman who spoke without notes because she just spent a great deal of time on a 1000 page book: One Nation Under Blackmail – Vol. 1: The Sordid Union Between Intelligence and Crime that Gave Rise to Jeffrey Epstein. Some of the debunked conspiracy theories are not very far off. I think most Americans would be disgusted if they knew all the sordid facts in the underbelly of our country and its leaders.

    1. Phichibe

      Yes, I’ve been following Whitney since the Epstein stuff broke. She has a very strong voice and take on these things and I look forward to watching/reading her latest on SBF. If she’s correct in even half the stuff she’s reported then the upper reaches of practically every pillar of Western societies – finance, universities, governments, etc are almost irredeemably corrupt.

      I worked in Silicon Valley for two decades and saw enough shenanigans by high corporate officers of companies like Cisco Systems, 3 Com Networks, Sun Micro, etc to know it’s much more common than we realize. I was also once a doctoral student at Stanford and saw how the rules could be bent for the ‘in-crowd’ of favorites. Nonetheless Webb’s reporting has at times left my jaw firmly in my lap. I hope she stays safe and keeps investigating; but the murders of Epstein in the MCC in Manhattan and his partner in crime Jean Luc Brunel in France’s pre-trial prison a year later tells me that the powerful people pulling the strings really don’t care if the evidence is overwhelming of their corruption, as long as it keeps working for them. I think even Trump was worried that he could be taken out by the cabal that got Epstein and Brunel.

  8. Thomas Wallace

    “Meanwhile, the management of both ventures was centralized in the hands of just a few people. The Charitable Corporation got into trouble when it reduced its directors from 12 to five and when it consolidated most of its loan business in the hands of one employee – namely, Thomson. FTX’s example is even more extreme, with founder Sam Bankman-Fried calling all the shots.”
    They are both instances of firms with no, that is zero, internal controls. FTX was an offshore venture and used a small accounting firm for audits. They were using Quick Books.

    “Ray explained that FTX was “unusual” in that it had “no record keeping whatsoever.” He said that employees would exchange invoices and expenses on Slack, the ubiquitous workplace chatroom.

    “They use QuickBooks,” he added, referring to the accounting software.

    “QuickBooks?” Congresswoman Wagner asked for clarification.

    “QuickBooks, very nice tool, not for a multibillion dollar company,” Ray confirmed.”

    A basic principal of internal control is segregation of duties. It is very basic and ubiquitous in US public companies. So much so that no one thought to ask. FTX wasn’t a failure of accounting, but rather a failure to use use it.

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