The Sex it Up Era Continues

Over the weekend an article in The Wall Street Journal caught my eye The 30 Year-Old Spending $1 Billion to Save Crypto

Let me start by saying that from all appearances, 30-year-old Sam Bankman-Fried is probably a lot smarter than me and he doesn’t appear to be a carnival barker like the two gents I will speak of in a moment. However, I can’t help but feeling like this whole crypto “thing” is just a sexed-up version of the financial markets we’ve all come to love. It seems like some real brilliant marketing has cloned the current financial markets, staged it in some sort of alternative universe where mankind will be saved from “The Banksters” and managed to rope in a few trillion dollars of suckers’ money for different criminals to steal.  

Maybe I feel this way because I just got done binge watching WeCrashed, the story of WeWork on Apple TV and I loved it.  If you’re not familiar, WeWork was the creation of Adam Neumann, a self-described serial entrepreneur who managed to bamboozle the supposed best and brightest out of billions.  He clobbered storied venture capital firms, he pulled the wool over “America’s Banker” Jamie Dimon’s eyes, he sucked in and then outmaneuvered the king of technology investors, Masayoshi Son of Softbank and managed to walk away from the company’s collapse with $2.3 billion. 

Neumann was able to take a dull, blocking and tackling commercial real estate business, co-working space, and sex it up into a revolution to reinvent work and save mankind!  When he had finally burnt through all of the venture capitals cash overpaying on the leases of millions of square feet of space, he “pivoted” to being a technology company to snare Softbank for billions.  At one point, before attempting a disastrous IPO, WeWork was valued at $47 billion.  In 2019 the IPO was put off indefinitely and Neumann was forced out when enough people looked under the hood and realized that the company was a gigantic money furnace.

Then there was Lex Greensill, the king of Supply Chain Finance

Supply Chain Financing (SCF) may have been around during the time of Marco Polo, and definitely was around when Ebenezer Scrooge and Jacob Marley were running their financing business in mid-19th century London. Here is how it works,

1.    A company delivers its product to a buyer and the buyer promises to pay in a few months’ time, creating an accounts receivable.

2.    The company who has the accounts receivable sends it to the supply chain financer (Scrooge and Marley, or Lex Greensill)

3.    The supply chain financer pays the company cash for the receivable minus a discount, which is another business practice called factoring, that has been around for centuries.

4.    The buyer pays the financer the full amount of the receivable.

If that seems straightforward to you, that’s because it is! This is the life’s blood of how a modern (the standard for modern here is sometime shortly after The Dark Ages) economy functions. There are hundreds—if not thousands—of banks and financing firms who do this every day. Yet somehow, Lex Greensill’s version of this fundamental business enabled him to buy four private jets, become great pals with U.K. former Prime Minister David Cameron, and to be honored as a Commander of the Order of the British Empire (CPE) by Prince Charles! The Financial Times article, “The Unravelling of Lex Greensill: A Mix of Bravado and Financial Alchemy” had a fantastic quote from another SCF player, who did not get to meet Prince Charles or buy four private jets.

How Greensill was able to afford such a luxury always baffled the company's rivals. As one supply-chain finance executive puts it: “This is a great industry, but I fly Ryanair.”

The company had frequently portrayed itself as a savior of small business, proclaiming that it was “making finance fairer” and “democratizing capital.” Sound familiar? Like WeWork, it was a house of cards that failed the minute someone took a good look at what he was doing and stopped playing. However, before complete failure, it seems that no explosion of a “boring business” disrupter made sexy is complete without $200 billion technology fund SoftBank tossing a billion or more onto the deck of the sinking ship. Lex pivoted to tech like Neumann by telling Softbank they used Artificial Intelligence or something like that. In 2019, SoftBank invested $1.5 billion into Greensill. Lex Greensill promptly took $200 million of investment for himself. SoftBank has recently stated that they consider the $1.5 billion a total loss. Total losses caused by Greensill were estimated to be over $10 billion.

Is Crypto really just a sexed-up version of the very worst of finance?  The $2 trillion blowup that we’ve just witnessed seemed to have the same greed, gullibility, hubris and stupidity as our current financial system.  I understand that cryptocurrency’s blockchain technology can be a more efficient transfer of funds and provides anonymity, but it seems to me that it has just become another asset class to speculate on. 

Look what happened.  The bedrock of crypto as an instrument of commerce was supposed to be stablecoins.  Stablecoins were supposed to be as good as a dollar.  What that means is the digital coins are backed by a currency like the U.S. Dollar or some other stable asset.  If you wanted to engage in what I guess you can call crypto commerce but were scared away because of the tremendous volatility of the main coins, Bitcoin and Ethereum, you could convert your Bitcoin to a stablecoin and buy or sell what you wanted knowing that the value of what you just transacted in goes up or down 5% a few hours later.   One of the major stablecoins Terra/Luna was backed by an algorithm that apparently misfired (blame the computer) and erased billions of dollars in a couple of days which in turn set off a panic that obliterated about $2 trillion of crypto currencies and assets. 

Meanwhile Decentralized Finance (De-Fi), the banking world sans “Banksters” proved that “De-Fi” bankers can be just as greedy and stupid as regular every-day bankers. De-Fi turned into just another idiotic banking adventure where investors were lured into depositing real money into FDIC insured banks (giving the appearance of safety) in order to remove that money from the bank, buy a stablecoin and lend it to “De-Fi” lenders like Voyager and Celsius and earn 5%-10% on their coins (when regular bank CDs were paying practically zero).  The De-Fi lenders would then lend the coins to investors and hedge funds to buy Non Fungible Tokens (NFTs) and God knows what else for lending rates as high as 15%.  The loans were “over-collateralized” with Bitcoin, which turned out not to be such a great idea when the market crashed, and Bitcoin dropped over 50% as liquidity was squeezed.  When the retail folks tried to get their money out of what they thought were FDIC accounts they realized that they had overnight become creditors in the bankruptcies of Voyager and Celsius.

Somewhat at the center of this disaster was a hedge fund called Three Arrows. From what I’ve read, Three Arrows was run by two punks (smart punks but still punks) who got frustrated trying to arb foreign currency by picking off major dealers and realized it was a lot easier to do in crypto world. The boys borrowed heavily from the De-Fi lenders like Voyager and leveraged up their bets on crypto coins and NFTs and road the rocket ship until it crashed. It turns out that roughly 60% of Voyager’s lending was done with Three Arrows.  I guess the risk management at Voyager overlooked that. As of this writing I believe the two chaps who ran Three Arrows are on the run.

Well, that is probably enough for now. I live by a few adages and one that particularly relates to finance is, “It’s never different this time, ever.” Oh, as of this writing Adam Neumann has a new start-up, Flow Carbon. It’s a crypto coin backed by carbon credits!