FTX Collapse is an Old Story

Bubble blowing is nothing new, says Tom Hodgkinson

In Thomas Love Peacock’s novel Crotchet Castle, published in February 1831, the younger son of the household, Crotchet Junior, is a City swindler, or what was known in those days as a “blower of bubbles”. In other words, he talks up investment funds, takes clients’ money, and runs away when the fund turns out to be worthless. (The equivalent term today is “pump and dump”.)

Peacock writes that Crotchet Junior was very plausible, very well educated. We hear that he had “borne off from Oxford the highest academical honours” and then “had, by means of a portion of the old gentleman’s surplus capital, made himself a junior partner at Catchflat and Company.

“Here, in the days of paper prosperity, he applied his science-illuminated genius to the blowing of bubbles, the bursting of which sent many a poor devil to the jail, the workhouse, or the bottom of the river, but left young Crotchet rolling in riches.”

Then as now observers were acutely aware of the danger of bubble schemes. As we know from Edward Chancellor’s superb study Devil Take the Hindmost, unscrupulous bandits have long been in the habit of persuading greed-blinded, gullible investors to part with their cash in the hope of enormous returns. The tulip bubble of 1637 is one famous example.

And one character in Peacock’s novel is right on the button when he asks of Crotchet’s schemes:

“But sir, is all this solid? Is there no danger of reaction? No day of reckoning, to cut down in an hour prosperity that has grown up like a mushroom?”

I was reminded of young Crotchet by the story of Sam Bankman-Fried, the 30-year-old founder of a crypto currency exchange called FTX which, over the last week or so, has seen its day of reckoning: its value plummeted from £32 billion to zero, leaving over a million investors waving worthless pieces of paper (or digital documents).

Bankman-Fried’s scheme too grew up like a mushroom. It was only launched in 2019. Like Crotchet Junior, SBF, as he is known, was well-educated, being the son of two Stanford law professors who specialise in tax law. Just two weeks ago he was being praised as some sort of other-worldly visionary; now people are saying he was a fraudster all along.

You wouldn’t perhaps shed too many tears for some of the credulous investors who were seduced by Bankman-Fried’s bubble-blowing. They included big banks and investment funds like Soft Bank and Sequoia Capital.

But you might feel a little angry when you read that one of the suckers was the Ontario Teachers’ Pension Plan. This means that Bankman-Fried took cash from retired teachers and placed it into one of his many Bahamian bank accounts. So far, so immoral.

However the amazing thing about Bankman-Fried is that he convinced himself and others that he was behaving in altruistic manner. He proclaimed allegiance to a crude utilitarian philosophical movement called “Effective Altruism” which simply tells tycoons to give money to worthy causes. This has the convenient result that you can be rich and saintly at the same time, despite Christianity’s frequent warnings to the contrary. (Of course the first thing that any swindler does is to proclaim themselves to be charitable.)

Like Bankman-Fried, Crotchet Junior, in Peacock’s novel, professes allegiance to the same utilitarian creed. Money can solve all the world’s problems, he says. One evening at dinner he proposes a party game along the following lines:

“Money being all that is wanted to regenerate society, I will put into the hands of this company a large sum for the purpose. Now let us see how to dispose of it.”

In like fashion, Bankman-Fried played around with ideas for alleviating human misery through enormous sums of money. In fact Bankman-Fried’s actions and everyday life have more of the Great Gatsby about them than Francis of Assisi. With the money that poured in from clients, he bought himself a $40 million mansion in Albany, an oceanside resort on the island of New Providence in the Bahamas, today’s equivalent of West Egg, and populated it with glittering young people all in love with their own intelligence (and with each other, if the Sun is to be believed). (Though they were not as well-dressed as the denizens on West Egg, to be sure.)

Perhaps the most awful and dumb thing about him, however, was (or is) his philistinism. Following their $214 million investment in SFX, Sequoia Capital commissioned a financial journalist to produce a hagiographic profile of him for their website (since deleted). In the piece Bankman-Fried makes the following statement:

“I’m very sceptical of books. I don’t want to say that no book is ever worth reading, but I actually do believe something pretty close that. I think, if you wrote a book, you fucked up, and it should have been a six-paragraph blog post.”

Hear that Peacock, Dickens, Charlotte Bronte, Joyce and Woolf? You fucked up.

Click here to read Edward Chancellor’s Reuters piece on the FTC collapse.

SELECTED COMMENTS

These comments were mailed to us after an earlier version of this piece was sent out as a newsletter. We like to publish a selection and reserve the right to edit them for clarity. Feel free to drop us a line with your thoughts.

Sir: As an ex-bookshop owner, editor of a magazine, and author of numerous books you must have really fucked up. You’ve probably never lost billions or been on the run either, loser. I hope you continue your downward spiral by editing these newsletters into a book some day. They are hilarious, even if they exceed six paragraphs. In the words of the poet Glenn Greenwald “actual LOL”.
Dom Aversano

Sir: Beware the man bearing gifts. Nothing new under the sun, is there?
John Truslove

Sir: Hopefully, when he is in prison, SBF will have time to read the 900-page novel, The Way We Live Now by Anthony Trollope, which features similar speculative finance and hobnobbing with powerful people.
Neil Scott

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