Tuesday, June 6, 2023

From Lehman Brothers to FTX: A Review of the Biggest Financial Scams in America

The bankruptcy of cryptocurrency firm FTX, along with the arrest of its founder Sam Bankman-Fried, represents the latest link in a long series of financial scandals in the US. economically According Since the eighties, with an open bar of interest rates and the wolves of Wall Street as a synonym for prosperity, to the danger of the universe collapsing cryptoA dozen cases of high-reward fraud, financial or graphical engineering – for example, Bernard Madoff’s pyramid scheme – have marked the heart of capitalism in recent decades. In almost all of them, the lack of market regulation played a fundamental role (lessons were learned immediately, although control mechanisms have not reached crypto assets). In others, the excesses had global consequences in the form of shock waves, such as the subprime mortgage collapse that dragged down Lehman Brothers and, following it, the Eurozone. Was Titanic Which caused the Great Recession of 2008.

In chronological order, these are some of the most serious scandals in the US economy since the 1980s, Wall Street’s heyday after the superinflation of the previous decade. Gary Gensler, chairman of the US Securities and Exchange Commission (SEC), this week called FTX a “house of cards created by fraud”, a definition that can be applied in many cases.

The rebound effect of Enron and Arthur Andersen

The power company, at its time one of the largest in the world, has the dubious honor of inaugurating the accounting hit list. In October 2001, Enron’s chairman announced quarterly losses of $618 million. This was due to the creation of a series of subsidiary companies to remove debt and assets from its balance sheet. Within two months, Enron filed for the largest bankruptcy in history. Shares were trading at 42 cents from $90. On the rebound, its auditor, Arthur Andersen, was dragged into ruin when it was shown that he had supported highly inflated billing figures (over $100,000 million per year). From a political perspective, this raised many questions when it was revealed that 75% of senators and half of congressmen received donations from the company for their election campaigns.

Worldcom’s ‘accounting errors’

The leading operator in the US market admitted in 2002 that it had inflated its results by $11,000 million during the previous years. The stock market plummeted following the announcement, causing a loss of $200,000 million. The crisis of confidence stemming from the collapses of WorldCom and Enron led to the worst crisis for the stock markets at the beginning of this century. Like Enron, the operator first agreed to a suspension of payments, although it eventually declared bankruptcy in order to reorganize under Chapter 11 of the bankruptcy law, a common process that floods the Wilmington (Delaware) courts that require them to file. processes together. After the firm admitted accounting errors, the SEC filed a fraud suit. The process ended with an out-of-court settlement whereby the operator agreed to pay $750 million.

Lehman Brothers and the Great Recession of 2008

On September 15, 2008, photographs of shirt-sleeved executives with their belongings in a cardboard box from Lehman Brothers’ New York headquarters spread like wildfire. It is an image of the Great Recession of 2008, an earthquake that cost the US economy $22 trillion and forced the Barack Obama administration to intervene with a rescue of $800,000 million (about 615,000 million euros, at the exchange rate). ) to cover mortgage and consumer loans, while the Fed assumed asset purchases – potentially toxic – backed by mortgages.

With a history of 158 years, Lehman lost 95% of its value on the stock market when it collapsed in 2007. their commitment to doing business with junk mortgages, the so-called subprimeThis cost them their existence. That same night, as pictures of the officers’ defeat went around the world – it had a workforce of 25,935 employees – analysts warned: “This will have significant consequences for the country’s financial system.” To what extent did some imagine. The bankruptcy of the fourth largest investment bank in the US intensified the global crisis, of which the European debt crisis is the main chapter; Shock unknown since the 1970 oil tsunami.

Lehman Brothers employees in a meeting at their London office on September 11, 2008.reuters

Banks’ exposure to subprime mortgages and toxic assets, hidden and packaged in millions of investment products and funds around the world – and backed by so-called insurance that turned out to be junk paper – had infected the entire system. subprime Problems also emerged in European banks such as Societe Generale, BNP Paribas or Deutsche Bank, particularly with exposure to Greek debt. The rest is history: three financial bailouts for the good part of the past decade and the eurozone teetering on the brink of collapse. Five years after the Lehman Brothers bankruptcy, the Fed estimated that the amount allocated to prop up the financial sector was $12.6 trillion.

the madoff plot

Financier Bernard Madoff was the great thief of Wall Street: he defrauded more than $64,000 million for the pyramid scheme he led for years. The scam came to light with the collapse of Lehman Brothers, but it had been ongoing since the early 1990s. In 2009, he was sentenced to 150 years in prison as responsible for “the biggest fraud perpetrated by a single person”, according to the sentence. He never saw the light of day again, and died in prison in April 2021. A self-made man with great prestige among the Jewish community to which he belonged, Madoff defrauded celebrities, companies, director Steven Spielberg’s foundation. Or Nobel Peace Prize winner Elie Wiesel, and even financial institutions like Banco Santander. their mode of operation It consisted in attracting money from investors, whom it promised high profitability. When they claimed interest, they were long-suffering or, in some cases, paid with money from newly arrived investors. The one who managed to retire in time won; The lower level was always exposed, and so on ad infinitum. call is Ponzi schemeA classic wholesale scam that, with minor differences, ruined Albania in the late 1990s and shocked Portugal a decade earlier.

In a story with overtones of Greek tragedy, Madoff’s crimes are exposed by his oblivious children deal, in 2008. The summary revealed the myopia of the SEC, which through incompetence or negligence botched half a dozen investigations into Madoff’s business. “Had many meetings with [funcionarios de] SEC in which I thought: they caught me, ”Madoff confessed already behind bars.

Theranos, a blow to the reputation of Silicon Valley

example of fraud in the area of start-up technical, the theranos case It’s a broken mirror of Silicon Valley. The company that promised an express blood test system in a near-monopoly sector that generates billions of dollars was a huge scandal that tore away its founder, Elizabeth Holmes. But it had the media’s blessing until 2016, when a fraud lawsuit was filed. It wasn’t for less: Theranos was one of the first unicorns (companies that made more than a billion dollars before they even went public). start up, which managed to get celebrities like former Secretary of State Henry Kissinger on its advisory board, was valued at $9,000 million. until a diary check wall street journal (later adapted into a documentary and a fictional series) thrust Holmes and her partner and partner at the time, Ramesh Balwani, into the limelight. The biotechnology company had promised to revolutionize the healthcare landscape with a machine capable of performing hundreds of diagnostic tests with a single drop of blood, thus facilitating the diagnosis of 200 diseases. Some of the equipment found was not working, the WSJ confirmed.

Theranos founder Elizabeth Holmes in 2015.
Theranos founder Elizabeth Holmes in 2015.reuters

In November Holmes, 38, was sentenced to 11 years in prison for fraud. The judge considered it proved that he defrauded investors of $385 million, although the allegation raised the amount to $800 million; Those affected include celebrities such as Bill Clinton, Carlos Slim and Rupert Murdoch. “There were clear signs from 2015 that the company was going to fail. Investors were trapped, with no way to get rid of their shares. They invested hundreds of millions of dollars and got nothing back,” prosecutors said during the trial. His former partner received a 13-year sentence in December.

FTX, the cryptocurrency monopoly

The great cryptocurrency scam is seen by some as a canary in the mine that warns of an imminent collapse of the galleries. Sam Bankman-Fried (SBF), the founder of the FTX platform, was arrested in the Bahamas this week for allegedly diverting $10 billion (9.4 billion euros) from FTX clients and investors without their knowledge and against the terms of the contract . The Poof disclosure comes from the closure of the parent company Alameda Research, an investment firm involved in the exchange of crypto assets. The attorney for the Southern District of New York called the incident “one of the largest financial frauds in American history”. Till his arrest, SBF worked side by side with the best of finance. He remotely intervened in an important forum organized by the daily new York Times in late November in the Big Apple, despite the fact that skepticism was already surrounding him. A year ago the quintessential cryptoguru claimed to have deployed “a structure” before the US Congress [financiera] Which minimizes the risk” thanks to the standards of an industry that remains unregulated. But actually he managed it in a rough way through an accounting software for SMEs. “Monopoly money,” as Congressman Richie Torres described the business’s value.

FTX founder Sam Bankman-Fried is taken to court following his arrest in Nassau, Bahamas on December 13.
FTX founder Sam Bankman-Fried is taken to court following his arrest in Nassau, Bahamas on December 13. Dante Carr (Reuters)

SBF, 30, like Holmes, was swallowed up by the spotlights he attracted to himself, like light to moths. The pretty children of finance, both the lightning rise and the spectacular fall, are emblematic of the challenge posed by companies that move much faster than the laws in charge of regulating them, that is, protecting those who invest in them. Huh. The SEC Learned A Lesson In 2008, But Looks Still Haven’t Reached Finance Virtual,

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