…where credit is undue | Value Research Fraud is endemic in global finance, but some fraud is more respectable than others
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...where credit is undue

Fraud is endemic in global finance, but some fraud is more respectable than others

…where credit is undue

According to a new disclosure by the now-bankrupt FTX crypto 'exchange,' Sam Bankman-Fried took two billion dollars from his crypto 'exchange' FTX. No pretence or stratagem was involved here, as it usually is in more sophisticated types of fraud. He just took it. There was money in the FTX bank accounts, and the man just transferred it to his own companies and personal accounts. Of course, this is crypto, so you and I expect this kind of fraud. However, it's notable that at the time when Bankman-Fried took this money, he was pretty much the toast of the US financial and business media. His photos and interviews were all over, and he was hailed as a kind of messiah of new-age finance.

The nature of the FTX collapse would have been different had it been just badly run, but the fact that the company took customers' money and the founder just took the company's money make it an out-and-out fraud. For ordinary people who lost money, the real damage was done not by SBF and FTX but by the halo that convinced them that it was all legit finance.

So what about the Credit Suisse collapse? If one goes by the official statements of the various banking authorities and reports in the western financial media, central banking authorities of Switzerland and other western countries are fighting a heroic battle to contain financial contagion. That's good, I guess. That's their job. However, a short glance at the recent history of Credit Suisse makes one wonder how well that job is being done.

In the past few years, this bank has been caught doing everything that a bank should not be doing. From drug trade money laundering to spying on people, from lending large amounts of money without due diligence, billions of dollars in the Archegos fund collapse are just one example. Large parts of the accounting statements were just made up, and the bank had no serious risk monitoring or control. Credit Suisse was a ridiculously badly (and fraudulently) run bank, and hardly anyone in the world of banking and business did not know it.

The important point is that this bank was no overnight creation like FTX and SBF. This was a banking institution founded about 150 years ago. For almost the entire period, it was a large and important part of the world's financial industry, monitored by what one assumed was the competent bank regulatory system of Switzerland. But now this has happened. I would say that these events reveal nothing new about Credit Suisse but reveal a lot more about the way financial regulation is made and financial institutions actually run. When one sees the Swiss banking authorities stuff the worthless Credit Suisse down the throat of UBS shareholders and then pat themselves on the back for saving the global financial system, the reasonable conclusion to draw is that it's these people who are the real frauds.

On the morning after the forced Credit Suisse - UBS merger, when I opened the Bloomberg website, the first headline at the top was 'Credit Suisse Tells Staff Bonuses Will Still Be Paid, Go to Work.' At that moment, I felt pity and sympathy for Sam Bankman-Fried. He just made the wrong choice of the type of fraud he should be committing. There are plenty of ways in which you can 'take' two billion dollars (a lot more, actually) and still be free to enjoy your wealth. He just chose the wrong method.

There is clear learning here for all of us as investors and savers. We can compromise with investment quality and returns, but not on the ethics of those running a business. It also helps to be in a regulatory environment where crooked top-level bankers actually go to jail, but that's a different story.

Suggested read: Bad news: The crypto racket will survive

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