Crypto Meltdown and Pension Assets
While the public remains focused on whether the republic collapses and what it means for one’s 401k, a liquidity event in the crypto space will ultimately set investors’ and pensioners’ hair on fire.
Crypto exchange FTX, reports the Wall Street Journal, “succumbed Tuesday to a sudden liquidity crunch of its own and agreed to be taken over by rival Binance.” Sam Bankman-Fried (SBF) founded FTX and has recently been the second largest donor to the Democrats after George Soros. SBF was supposedly worth $16 billion until this week, with FTT digital coins and his ownership of crypto trading company Alameda Research the bulk of his wealth.
Binance is controlled by its founder Changpeng Zhao, who is also known by his initials CZ. Binance and CZ owned $580 million of FTT and what passes for official corporate correspondence these days, CZ tweeted over the weekend that Binance would be selling its FTT because SBF continues to “lobby [Washington] against other industry players behind their backs.”
CZ’s announcement sent FTT’s price reeling. A year ago FTT traded for $59, as I write its price is $2.30.
Binance’s agreement to purchase was non-binding and CZ quickly backed out on Wednesday, leaving an $8 billion hole at FTX. “Binance’s deal withdrawal raises questions on what is next for investors who entrusted their funds to FTX. Several crypto companies have declared bankruptcy this year, leaving individual investors waiting in line to recover their funds,” reports the WSJ.
You might be thinking “who cares about crypto, I’ve never gone near the stuff,” just like in 2008 when you said “who cares about collateralized debt obligations (CDOs) I don’t have any of those, whatever they are.”
However, as MarcoMaven’s Steph Pomboy tweeted Wednesday, “For my money, the most interesting…and foreboding…aspect of the downfall of Blankman-Freed’s FTX is the «revelation» that the Ontario Teachers Pension was a major investor. The coming pension crisis is going to be massive…and the switch to QE by global cbks whiplash-inducing.”
For instance, Mr. SBF is one of the largest shareholders in the brokerage app. Robinhood. Investors fled the stock looking to beat SBF to the exit. “Robinhood shares dropped nearly 14% on Wednesday, bringing losses for the week to more than 30%,” reports WSJ.
FTX “was launched in 2019 and attracted backers including Singapore’s sovereign-wealth fund Temasek Holdings Pte. Ltd., Silicon Valley venture-capital firms and the Ontario Teachers Pension Plan.” It’s believed Tom Brady and Gisele Bündchen will lose a few million in a FTX failure. The NY Post reports, “Brady was a brand ambassador and appeared in commercials for the crypto exchange. Bündchen was named the company’s Environmental & Social Initiatives Advisor.”
In a recent discussion on Real Vision Corey Hoffstein and Roxton McNeal discussed pensions. Mr. Hoffstein made the point, “One of the things we do see in the US and have seen is that pensions have decreased or seemingly decreased the amount of liquidity they have by increasingly moving into private investments [like an investment in FTX?]. And so is that a potential area of risk when they're trying to immunize using derivatives and they get capital calls and they can't rebalance, because they have a huge amount of private illiquid assets?”
McNeal replied, “So they're increasing the allocation of these private assets. And they say, oh, by the way, I don't like rate risk either. That introduces uncompensated volatility, so let's just hedge all that out. Or wait, but we have a bunch of privates, let's just do it in derivative form. And they just, that's the recipe that you're talking about. It's disastrous. Because then if rates go up, and you have a liquidity call, and you have nothing liquid to sell to be able to create that liquidity for your derivatives management, you're screwed. And then you're forced seller this private, you, obviously, you're going to get out very bad marks. And it just creates a big mess.”
With the FTX mess, as Jim Bianco explains, there is no Federal Reserve to step in and print money.
In the fantasy libertarian monetary world of Defi crypto, transparency was supposed to fix everything. But, instead as Elaine Ly said on Real Vision Crypto, “Boys will be boys.”
