A tradition of loose oversight and regulations has been the hallmark of Anglo-American capitalism, writes Amy Froide.
Sam Bankman-Fried, once considered a star in the freewheeling world of cryptocurrency, has been charged with conspiracy, fraud and money laundering. (Stefani Reynolds/AFP via Getty Images)
By Amy Froide
University of Maryland, Baltimore County
EIn modern capitalism, it seems as if stories of companies and managers who engage in fraud and swindle their investors occur like the changing of the seasons.
In fact, these scandals can be traced back to the origins of publicly traded companies, when the first stockbrokers bought and sold company shares and government securities in the coffee houses of London’s Exchange Alley during the 1700s.
As a historian of 18th century finance, I am struck by the similarities between what’s known as the Charitable Corporation Scandal and the recent collapse of FTX.
A Noble Cause
The Charitable Corporation was established in London in 1707 with the noble mission of providing “relief of the industrious poor by assisting them with small sums at legal interest.”
Essentially, it sought to provide low-interest loans to poor tradesmen, shielding them from predatory pawnbrokers who charged as much as 30 percent interest. The corporation made loans available at the rate of 5 percent in return for a pledge of property for security.
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The Charitable Corporation was modeled on Monti di Pietà, a charitable institution of credit established in Catholic countries during the Renaissance era to combat usury, or high rates of interest.
Unlike the Monti di Pietà, however, the British version – despite its name – wasn’t a nonprofit. Instead, it was a business venture. The enterprise was funded by offering shares to investors who, in return, would make money while doing good. Under its original mission, it was like an 18th century version of today’s socially responsible investing, or “sustainable investment funds.”
Raiding the Fund
In 1725, the Charitable Corporation diverted from its original mission when a new board of directors took over.
These men turned the corporation into their own piggy bank, taking money from it to buy shares and prop up their other companies. At the same time, the company’s employees began to engage in fraud: Safety checks ceased, books were kept irregularly and pledges went unrecorded.
Investigators would ultimately find that £400,000 or more in capital was missing — roughly $108 million in today’s U.S. dollars.
In the autumn of 1731, rumors began to circulate about the solvency of the Charitable Corporation. The warehouse keeper at the time, John Thomson, who was in charge of all loans and pledges but also in league with the five fraudulent directors, hid the company’s books and fled the country.
“Let ’em be ruined so we are made,” a man says in a 1734 satirical print criticizing the Charitable Corporation and its ties to government. (© The Trustees of the British Museum)
At the shareholders’ quarterly meeting, they found that money, pledges and accounts had all gone missing. At this point, the proprietors of the Charitable Corporation stock appealed to the British Parliament for redress. One-third of those who petitioned were women, a proportion that equaled the percentage of women who held shares in the Charitable Corporation.
Many women were drawn to the corporation because of its public mission in providing small loans to working people. It’s also possible that they had been intentionally targeted for fraud.
The parliamentary investigation led to various charges being leveled against both managers and employees of the Charitable Corporation. Many of them were forced to appear before Parliament and were arrested if they did not. The managers and employees deemed most responsible for the 1732 fraud, such as William Burroughs, had their assets seized and inventoried in order to help pay back the shareholder losses.
Bankruptcy proceedings were started against the banker and broker, George Robinson, and the warehouse keeper, Thomson. Both Sir Robert Sutton and Sir Archibald Grant were expelled as members of the House of Commons, with Grant being prevented from leaving the country and Sutton ultimately prosecuted in several courts.
In the end, the shareholders received a partial government bailout – Parliament authorized a lottery that reimbursed only 40 percent of what the corporation’s creditors had lost.
Risks of Concentrated Power
There are several key characteristics that stand out in the collapses of both the Charitable Corporation and FTX. Both companies were offering something new or venturing into a new sector. In the former’s case, it was microloans. In FTX’s case, it was cryptocurrency.
Meanwhile, the management of both ventures was centralized in the hands of just a few people. The Charitable Corporation got into trouble when it reduced its directors from 12 to five and when it consolidated most of its loan business in the hands of one employee – namely, Thomson. FTX’s example is even more extreme, with founder Sam Bankman-Fried calling all the shots.
In both cases, the key fraud was using the assets of one company to prop up another company managed by the same people. For example, in 1732, the corporation’s directors bought stock in the York Buildings Company, in which many of them were also involved. They hoped to juice stock prices. When that didn’t happen, they realized they couldn’t cover what they had taken out of the Charitable Corporation’s funds.
Fast forward nearly 300 years, and a similar story seems to have played out. Bankman-Fried allegedly took money out his customer accounts in FTX to cover his cryptocurrency trading firm, Alameda Research.
News of both frauds also came as a surprise, with little advance warning. Part of this is due to the ways in which managers were well respected and well connected to both politicians and the financial world. Few public figures mistrusted them, and this proved to be a useful screen for deceit.
I would also argue that in both cases the company’s connection to philanthropy lent it another level of cover. The Charitable Corporation’s very name announced its altruism. And even after the scandal subsided, commentators pointed out that the original business of microlending was useful. FTX’s founder Bankman-Fried is an advocate of effective altruism and has argued that it was useful for him and his companies to make lots of money so he could give it away to what he deemed effective causes.
After the Charitable Corporation’s collapse in 1732, Parliament didn’t institute any regulation that would prevent such a fraud from happening again.
A tradition of loose oversight and regulations has been the hallmark of Anglo-American capitalism. If the response to the 2008 financial crash is any indication of what will come in the wake of FTX’s collapse, it’s possible that some bad actors, like Bankman-Fried, will be punished. But any regulation will be undone at the first opportunity – or never put in place to begin with.
Amy Froide is professor of history, University of Maryland, Baltimore County.
This article is republished from The Conversation under a Creative Commons license. Read the original article.
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Wolfgang Kohler, biologist and ethologist, suspended a banana out of the reach of a chimpanzee named Sultan. The chimp assembled two sticks together to make a single instrument, then piled up boxes to reach the bananas.
This is much like financial manipulations…if there is a ‘banana’, a clever human-chimp will find the boxes to pile up to get to it….and we only see how it was done after the fact. It becomes even more interesting when the bananas are virtual.
Thanks to the author and to CN for continuing to feature the domestic scams that are driven by the same greed/secrecy/corruption/lack of oversight that underpin the horrors of R foreign policy endless wars.
e.g. Glass Steagall : In the 1930’s Congress voted in the Glass Steagall ACT to protect depositors from the collapse of their bank. Glass Steagall established taxpayer insurance on accounts of $100,000 per acct later revised to $250,000 per acct – available only at commercial banks (NOT FINANCIAL BANKS) – Commercial Banks were institutions that had to follow strict rules for the investment of those deposits – “secure loans” to scrutinized borrowers. Under Reagan (S&L’s) then Clinton (Banks) the restrictions on the lending side were eliminated while the taxpayer remained on the hook for the insured deposits. Greed took over – reckless use of depositor funds began – bankruptcy and bailouts became the norm – e.g. – and whatever is looming now.
The Freedman’s Bank established in 1865 held the savings of many newly emancipated slaves and was bankrupted in 1874 with a loss to the depositers of 3 million. The robber baron Jay Cooke was on the Banks board and diverted assets to his personal acount. Banking should be a public utility.
I would not blame the FTX crisis or Enron on loose regulation. Just the opposite. These companies are in bed with the government influencing policy one way or another. Remove the government and these gigantic organizations are less likely to develop.
This is definitely the hallmark of Venice, of the the city of London and every earlier scam and predatory system, but not always the the history of American capitalism. Specifically, in fact, the history of US monetary policy from the time of the American Revolution was a war against this policy. That fight was won by Hamilton, with the establishment of the First Bank of the United States, won again by Lincoln, and his allies such as Carey in the Civil War, with his National Banking system, and again by FDR, in his “throwing the money changers out of the Temple”, and his banking legislation, most importantly the passage of the Glass Steagall bill which separated speculative capital from productive capital. That kept the US safe for a long time, until people like Greenspan, Wendy Graham, et al and the introduction of derivatives and other more and more exoctic form forms of speculation.. You are right that these schemes are nothing new, existing long before the Charitable Corporation – the only difference is the “instrument” – be it tulips, mortgage backed securities, or crypto currencies. Whatever “charitable intent” is mentioned, including only systems where the role of monetary policy and credit policy to protect the general welfare, will not be predatory schemes, corruption of politicians, and looting of the general populati
If one works on the assumption, as I do, that nearly all capitalism is fundamentally predatory and exploitative under the guise of meeting demand, then that implies a degree of dishonesty and deception against not just the consumer but also the primary producers of goods and services when sold by intermediaries.
This in turn explains, to some extent anyway, why there has always been loose oversight and regulation – to protect the perpetrators against claims by the consumers, producers or constraint by governments. In western ‘democracies’ capitalists use various methods, some of them illegal, to prevent politicians and governments from regulating their activities.
Very interesting, good historical article! The whole cryptocurrency scam is so symptomatic of the ‘hyper-financialization’ of our economy over the past 20+ years, that I’m not the least surprised by the whole FTX debacle. Sadly, I agree with her dismal prognosis for the few regulations (if-any) that might come out of this — this country thrives on hucksterism.
(aside: I never felt that NOT having an alternate currency was my financial problem — having enough of the prevailing local $$ currency was the problem! And this FTX currency dissolving overnight proves how NON-secure crypto is. The US $ may have its ups-and-downs, but it’s never been dissolved, or come close to it, even during the Depression)
Sam BANKMAN-Fraud is out on Bail; $250 Million Bail. He gave the SEC Millions, CFTC Millions, Biden Millions via Ukraine Money Laundering Scam. Has the CREEPTO Genius bought a Get out of Jail-Free Card ?
The ‘big’ fish gets away…the little ‘fish’ is fried.