How Sam Bankman-Fried’s FTX Compared to 2008

  • Experts have drawn comparisons between the collapse of the FTX crypto exchange and the fall of Lehman Brothers in 2008.
  • FTX on Friday filed for bankruptcy after failing to secure a rescue.
  • Here’s how the two events compare and what the fall of FTX means for the broader financial system.

FTX filed for bankruptcy on Friday, failing to secure a rescue from rival crypto exchanges and deepening fears that the cryptocurrency market is teetering on the edge of Lehman Brothers’ own moment.

In the years leading up to the Great Financial Crisis, Lehman filled its balance sheet with huge amounts of subprime mortgage debt. The value of these securities plummeted with the collapse of the housing market, kicking off a domino effect that rippled through the global economy and culminated in the worst financial crisis since the Great Depression.

It could be a FTX situation thingumajig bad? Maybe not. But annoying.

When US housing imploded and some of the largest financial institutions began to wobble, the Federal Reserve stepped in with a rescue for Bear Stearns, but famously let Lehman go under. At the time of its collapse in September 2008, the bank was the fourth-largest in the US and had about $650 billion in assets.

The collapse of a company as large as Lehman Brothers, with its massive exposure to failing markets and extreme counterparty risk arising from complex derivatives and credit default swaps, would have been expected to lead to massive losses – and it did.

The 2008 crisis led to widespread wealth destruction, and a deep recession that wiped trillions from the value of the global economy.

Lehman Crypto’s moment

Now consider FTX, which on Friday filed for Chapter 11. In its bankruptcy petition it lists assets of $10 billion to $50 billion and says it has more than 100,000 creditors.

While much smaller than Lehman, Bankman-Fried’s exchange faces similar problems. In the future balance sheet, it is weighed down by an asset with rapidly depleting value in the form of its original FTT token. Since a report from Coindesk revealed that Bankman-Fried’s trading firm, Alameda Research, counted billions of FTT as an asset on its balance sheet, questions swirled about the solvency of both companies and led to the sale.

“It ends up being very similar to Lehman because of how over-leveraged it is,” Brent Xu, founder of blockchain firm Umee, told Insider.

What’s more, FTX puts client funds as collateral for its own business to reduce losses while simultaneously bringing in more investors. When the “bank run” began this week, FTX did not have the funds to meet withdrawal requests.

On the news, bitcoin fell to $16,000, the lowest price in two years. Other tokens like Solana and ether plunged, and stablecoin Tether lost his peg to the dollar.

“The crypto ecosystem has been made fragile by leverage and interconnectedness, just as the traditional financial system was fragile because of leverage and interconnectedness in 2008,” Hilary Allen, financial regulatory expert and law professor at American University, told Insider.

Lehman brothers

Oli Scarff/Getty Images

All this is bad, and there is a big risk for those who have money locked in FTX accounts or anyone who trades with Alameda. But compared to 14 years ago, it’s unlikely that FTX’s losses triggered the broader financial crisis, Allen said.

The economy still relies on traditional finance rather than crypto for credit provision and payment processing, so whatever that is is likely to remain in that sector, he said.

“The primary use of crypto is speculation, and so its failure is unlikely to have wide repercussions as long as the traditional financial system does not have significant exposure to crypto,” said Allen.

Even with the events of the past week rocking the crypto world, it is not guaranteed to have systemic consequences, and the drop in crypto prices could be a temporary market reaction.

“This is a shock to the system, but it remains to be seen if the contagion will impact crypto in the same way as Lehman in 2008,” David Siemer, CEO of Wave Financial, told Insider. “It is very clear that companies and platforms can no longer run away and hide their reserves and keep not only investors but also consumers in the dark.”

What’s next for crypto

It is possible that FTX’s implosion is just the beginning of a broader reckoning in crypto, because more dominoes can still fall.

“It seems likely that a new cascade of margin calls, deleveraging and failed crypto companies/platforms has begun,” JPMorgan analysts wrote on Wednesday.

The big difference between 2008 and this week could be the saving grace. Crypto is not connected to the real economy in the way that mortgages were in 2008, which means that the plunge is not a concern for governments. But it means that one of the biggest players, once seen as a potential backstop for the entire market, is out of the game.

“What makes this new phase of crypto deleveraging induced by the apparent collapse of Alameda Research and FTX more problematic is that the number of entities with strong balance sheets can save those with low capital and high leverage is shrinking in the crypto ecosystem,” JPMorgan. write

Moving forward, companies may be forced to change their behavior, or regulators may change it for them by tightening the screws. 2008 ushered in a massive overhaul of financial regulation, creating a completely new agency to police the worst excesses that caused the accident.

“What we’re going to see similar to Lehman is an acceleration of regulation to protect market participants, namely retail investors who bear the brunt of the damage,” Siemer said. He predicts the most regulated and compliant firms will emerge as the biggest players.

Confidence in the sector will remain shaky for some time, though, as the ripple effects of FTX’s implosion continue. Illustrating this crypto lender BlockFi, which this week announced it will stop client withdrawals and limit activity on the platform as a result of FTX chaos.

“Due to the lack of clarity regarding the status of, FTX USA and Alameda, we are unable to conduct business as usual,” BlockFi said, saying its priority is to protect its customers and their interests.

“The industry needs to mature before it can recover, whether this comes from improved government policies on how to interact with crypto, or more sophisticated asset managers handling the movement of large amounts of assets,” Siemer said.

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