By Matt Stoller
This article is republished with permission from BIG, a newsletter on the history and politics of monopoly power. Subscribe here.
“I’m sorry. That’s the biggest thing. I fucked up, and should have done better.”—Sam Bankman-Fried, 2022
“Recklessness and deceit do not automatically excuse themselves by notice of repentance.”—Louis Brandeis, 1936
Just before he became president, and as the world slid into the worst part of the Great Depression, New York Governor Franklin Delano Roosevelt gave a speech attacking Herbert Hoover for failing to tame the Wall Street traders who had fostered the crisis through corrupt and fraudulent activities. “The public has burned its fingers in the flame of wild speculation and has learned to fear the fire,” he said. “While it still fears the fire is the time for us to act.”
One of Roosevelt’s first acts was to regulate stock trading through the Securities Act, which forced public companies to disclose relevant material information to investors, and thus prevent the market manipulation so common on Wall Street. These disclosures are now what investors rely on today when analyzing stocks. Originally, the Securities Act was enforced by the Federal Trade Commission (FTC). And New Dealers hated the FTC, as it was slothful and corrupt, having been run by monopoly-friendly cronies for a decade. But it was all that existed.
By 1935, the New Dealers had set up a new agency, the Securities and Exchange Commission (SEC), and cleaned out the FTC. Yet, there was still immense concern that Roosevelt had not been able to tame Wall Street. The Supreme Court didn’t really ratify the SEC as a constitutional body until 1938 and nearly struck it down in 1935 when a conservative Supreme Court made it harder for the SEC to investigate cases.
It took a few years, but New Dealers finally implemented a workable set of securities rules, with the courts agreeing on basic definitions of what was a security. By the 1950s, SEC investigators could raise an eyebrow and change market behavior, and the amount of cheating in finance had dropped dramatically.
Institutional change, in other words, takes time.
It’s a lesson to remember as we watch the crypto space melt down, with ex-billionaire Sam Bankman-Fried—who was one of the single largest political donors in 2022—turning out to be nothing more than a standard Ponzi schemer. I summarized the scam he was running a few days ago:
Over the last 48 hours, SBF’s $15 billion net worth evaporated in a fraud-induced bank run common to the crypto space. SBF’s situation is a lot like that of Enron. One of his companies, FTX, claimed to have substantial assets valued at billions, but it didn’t disclose that the market price of those assets—called FTT tokens—was set by trading back and forth to another one of his company’s, Alameda Research. All the value was based on sham prices in sham transactions. When a rival decided to engineer a bank run on FTX, his network of firms simply didn’t have enough cash to honor the withdrawal requests. Bloomberg has written SBF lost 94% of his net worth (December 05, 2022), and he’s now under Federal investigation.
It’s not like perfidy in crypto was some hidden secret. At the top of the market, back in December 2021, I wrote a piece very explicitly saying that crypto was a set of Ponzi schemes. It went viral, and I got a huge amount of hate mail from crypto types. (SBF actually reached out to meet with me in between his lobbying meetings, but I decided out of either laziness or integrity that I didn’t feel like taking a short cab ride to Capitol Hill to do so. Instead I invited him to my office, and so we never connected.) I’m not some sort of genius, I just hate group-think around obvious fraud. I mean, in April, SBF literally said on Bloomberg’s Odd Lots that much of what he was doing was facilitating Ponzi schemes. But it didn’t seem to matter because, back then, he seemed to have a lot of money.
Today, a lot of people are mad at SBF for stealing. But one of the more bizarre aspects of the crypto meltdown is the deep anger not just at those who perpetrated it, but at those who were trying to stop the scam from going on. For instance, here’s crypto exchange Coinbase CEO Brian Armstrong, who just a year ago was fighting regulators vehemently, blaming the cops for allowing gambling in the casino he helps run.
And here’s soon-to-be-retiring Senator Pat Toomey of Pennsylvania, who not only seeks to protect the crypto industry from intrusive rules but owns crypto personally, blaming regulators for the fiasco that he himself had helped foster.
The target of most of the invective is Securities and Exchange Commission Chair Gary Gensler, who took office in April of 2021 with a deep background in Wall Street, regulatory policy, and crypto, which he had taught at MIT years before joining the SEC. Gensler came in with the goal of implementing the rule of law in the crypto space, which he knew was full of scams and based on unproven technology. (December 05, 2022), on CNBC, he was again confronted with Andrew Ross Sorkin essentially asking, “Why were you going after minor players when this Ponzi scheme was so flagrant?”
It’s an important question, and to answer it, we need some context as to what Gensler was dealing with. Cryptocurrencies are securities, and should fit under securities law, which would have imposed rules that would foster a de facto ban of the entire space. But since regulators had not actually treated them as securities for the last 10 years, a whole new gray area of fake law had emerged.
Almost as soon as he took office, Gensler sought to fix this situation, and treat them as securities. He began investigating important players in crypto, like Do Kwon, later revealed as a Ponzi schemer behind the $45 billion Terra/Luna scheme. But the legal wrangling to just get the courts to treat crypto as a set of speculative instruments regulated under securities law made the law moot. First, Gensler asked for Kwon’s voluntary cooperation in an investigation. Kwon said no. So the SEC served Kwon with a subpoena, which Kwon refused to honor. Then the Ponzi schemer actually turned around and his powerful legal team at Dentsons sued the SEC for attempting to investigate him.
In May of 2022, a year after Gensler began trying to do something about Terra/Luna, Kwon’s scheme blew up. In a comically-too-late-to-matter gesture, an appeals court then said that the SEC had the right to compel information from Kwon’s now-bankrupt scheme. It is absolute lunacy that well-settled law, like the ability for the SEC to investigate those in the securities business, is now being relitigated.
And the people who are now saying “where were the regulators?!?” Well, they were absolutely cheering for Kwon; organizers at one crypto conference showed Gary Gensler’s face and played Darth Vader’s theme song. At one event, the New York Times noted that many crypto “enthusiasts” watching Gensler discuss regulation with his predecessor “called for their incarceration or worse.”
But it wasn’t just the courts who were an impediment. Gensler wasn’t the only cop on the beat. Other regulators, like those at the Commodities Futures Trading Commission, the Federal Reserve, or the Office of Comptroller of the Currency, not only refused to take action, but actively defended their regulatory turf against an attempt from the SEC to stop the scams.
It’s telling that there is is so much anger directed at Gensler, considering he was one of the only regulators actually trying to do something about the problem. (Consumer Financial Protection Bureau chief Rohit Chopra also did what he could, but the CFPB only has consumer-focused rule-making authority.) The others were like Caroline Pham, a Republican Commodities Futures Trading Commissioner who was also an eager fan of SBF and used her meeting with him to take pictures in her office.
Behind this was the fist of political power. Everyone saw the incentives the Senate laid down when every single Republican, plus a smattering of Democrats, defeated the nomination of crypto-skeptic Saule Omarova in becoming the powerful bank regulator at the Comptroller of the Currency. (Ted Cruz and Pat Toomey led the way in calling her a secret Communist, but it was all just big banks upset she would regulate them.)
Instead of strong figures like Omarova, we had a weakling acting comptroller Michael Hsu at the OCC, put there by the excessively cautious Treasury Secretary Janet Yellen. Hsu refused to stop bank interactions with crypto or fintech because, as he told Congress in 2021, “These trends cannot be stopped.” He joined Federal Reserve Board member Randy Quarles and then-FDIC chair Jelena McWilliams to try and craft a legal regime—nicknamed the ‘crypto sprint’—so banks could get involved in crypto, saying that regulation could “enable more innovation in crypto and make those innovations more durable.” Hsu then refused to revoke the charter of crypto-bank Anchorage despite egregious violations, and extended other crypto-bank charters. Quarles and McWilliams are gone, and Pham and Hsu are pretending they are skeptics, but when the Ponzi was flying high, they weren’t.
It’s not just these regulators; everyone wanted a piece of the bureaucratic pie. In March of 2022, before it all unraveled, the Biden administration issued an executive order on crypto. In it, Biden said that virtually every single government agency would have a hand in the space. Here’s the endless list of bureaucrats involved in trying to address a sector which probably should just be banned. You don’t have to read it, just scroll down and get as annoyed as I am:
The interagency process shall include, as appropriate: the Secretary of State, the Secretary of the Treasury, the Secretary of Defense, the Attorney General, the Secretary of Commerce, the Secretary of Labor, the Secretary of Energy, the Secretary of Homeland Security, the Administrator of the Environmental Protection Agency, the Director of the Office of Management and Budget, the Director of National Intelligence, the Director of the Domestic Policy Council, the Chair of the Council of Economic Advisers, the Director of the Office of Science and Technology Policy, the Administrator of the Office of Information and Regulatory Affairs, the Director of the National Science Foundation, the Administrator of the United States Agency for International Development, Board of Governors of the Federal Reserve System, the Consumer Financial Protection Bureau (CFPB), the Federal Trade Commission (FTC), the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and other Federal regulatory agencies.
That’s… insane. If everyone’s in charge, no one is.
There’s a lot more backstory here, with the CFTC fighting Gensler over whether various cryptocurrencies would be considered “securities” or “commodities,” which have very different legal regimes, and the Fed/Treasury fighting to keep “stablecoins” out of the hands of the SEC. There’s also a problem with judges hostile to the “administrative state,” who routinely clog up needed government action against Ponzi schemers in the name of “due process.”
And behind all of these fights was the money and political prestige of some most powerful people in Silicon Valley, who were funding a large political fight to write the rules for crypto, with everyone from former Treasury Secretary Larry Summers to former SEC Chair Mary Jo White on the payroll. (Even now, even after it was all revealed as a Ponzi scheme, Congress is still trying to write rules favorable to the industry. It’s like, guys, stop it. There’s no more bribe money!)
Moreover, the institution Gensler took over was deeply weakened. Since the Reagan administration, wave after wave of political leader at the SEC has gutted the place and dumbed down the enforcers. Courts have tied up the commission in knots, and Congress has defanged it. Under Trump, crypto exploded because his SEC chair Jay Clayton had no real policy on crypto (and then immediately went into the industry after leaving). The SEC was so dormant that when Gensler came into office, some senior lawyers actually revolted over his attempt to make them do work.
In other words, the regulators were tied up in the courts, they were against an immensely powerful set of venture capitalists who have poured money into Congress and D.C., they had feeble legal levers, and they had to deal with “crypto enthusiasts” who thought they should be jailed or harmed for trying to impose basic rules around market manipulation.
The bottom line is, Gensler is just one regulator, up against a lot of massed power, money, and bad institutional habits. And we as a society simply made the choice through our elected leaders to have little meaningful law enforcement in financial markets, which first became blindingly obvious in 2008 during the financial crisis, and then became comical ten years later when a sector whose only real use cases were money laundering, Ponzi scheming or buying drugs on the internet, managed to rack up enough political power to bring Tony Blair and Bill Clinton to a conference held in a tax haven billed as “the future.”
And yet, now we have the chance to correct course. In 1932, FDR made the point clearly, as I noted above. “The public has burned its fingers in the flame of wild speculation and has learned to fear the fire,” he said. “While it still fears the fire is the time for us to act.” Well Gensler is acting. Now it’s time to investigate and reinvigorate our enforcers. Otherwise, we’ll always be asking the question, “Where were the regulators!?!” And the answer, which we don’t want to hear, is “Exactly where we put them.”
This article is republished with permission from BIG, a newsletter on the history and politics of monopoly power. Subscribe here.
Editor’s note: Caroline Pham’s office reached out to Fast Company after the story was published to provide the following statement:
“It’s important that the public has access to their government. This post is dated April 20 and was part of a series of posts sharing pictures from my first week as a Commissioner and my meetings with the ag, energy, and digital asset sectors. Although the Chairman and other Commissioners also met with FTX, unfortunately, this post became distracting from the key issues of their CFTC application. I deleted the post 4 days later on April 24 to make sure that the attention was back on the CFTC’s important work to understand the implications of non-intermediated clearing and ensure market integrity over both existing and new asset classes.”
The New York Times covered this on May 14, 2022 (link).
Please also note that since Commissioner Pham began her term, she has consistently called for regulators to take immediate action on crypto to protect the public, including strong enforcement. Some examples (hyperlinks included):
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