Welcome back to the blog, coordinating with Fredrik and this week’s episode! Today, we’re dissecting two financial catastrophes separated by fifteen years: the 2008 Global Financial Collapse and the swift, stunning implosion of FTX in 2022. While one involved complex mortgage instruments and the other concerned unregulated crypto derivatives, the anatomy of failure—unchecked power, ideological blindness, and deliberate fraud—is eerily similar.

The overwhelming conclusion from the U.S. government’s own Financial Crisis Inquiry Commission (FCIC) regarding the 2008 collapse was that it was an avoidable catastrophe, born of human action, inaction, and systemic failure. The FTX saga, similarly, stemmed primarily from fraud and mismanagement. Let’s dive into how these two houses of cards were built and why the warnings were ignored.

Part I: The Avoidable Crisis of 2008 – An Architecture of Ruin

The 2008 crisis was not an unpredictable storm, but the culmination of a decade of choices that systematically dismantled financial safeguards. This period, termed the “Architecture of Ruin,” saw deregulation fuel a toxic credit machine.

1. The Dismantling of Guardrails

In the years leading up to 2008, powerful legislative changes removed the restraints designed to manage risk:

* The Gramm-Leach-Bliley Act (GLBA) of 1999 tore down the wall between commercial banks and high-risk investment banks (the Glass-Steagall Act). This merged conservative banking culture with high-risk Wall Street culture, creating a moral hazard problem where speculative activities operated with an implicit taxpayer safety net.

* The Commodity Futures Modernization Act (CFMA) of 2000 explicitly prohibited the regulation of over-the-counter derivatives, most notably Credit Default Swaps (CDS). This allowed a multi-trillion-dollar, unregulated casino to mushroom without oversight. CDSs later proved to be the instrument that brought down insurance giant AIG.

* In 2004, the SEC allowed the five largest investment banks, including Lehman Brothers, to dramatically increase their leverage ratios. By 2008, Lehman Brothers was leveraged 44-to-1, ensuring that a minimal decline in asset value would cause insolvency.

2. The Toxic Debt Machine

This deregulated system was fed by a flood of cheap money and channeled through a ruthless “originate-to-distribute” mortgage machine. Lenders were incentivized to maximize loan volume, not loan quality. This led to predatory lending practices, including “Liar Loans” and Adjustable-Rate Mortgages (ARMs) with unaffordable “teaser” rates.

The final step was Financial Alchemy: investment banks bundled these toxic subprime mortgages into Mortgage-Backed Securities (MBS), and then repackaged the riskiest parts into Collateralized Debt Obligations (CDOs). Through this engineering, a pool of risky, B-rated debt could be transformed into a new security, 70–80% of which was rated AAA—the highest possible rating. This illusion was sustained by credit rating agencies that were paid by the very investment banks whose products they rated, creating a corrosive conflict of interest.

When the housing market collapsed nationwide, the supposed diversification proved to be an illusion, and the entire structure came crashing down. The consequences were devastating: nearly $17 trillion in household wealth was vaporized in the U.S., and the economy remained permanently smaller.

Part II: The SBF Saga – Fraud in the Crypto Wild West

A decade and a half later, the FTX collapse presented a modern version of the same failures, yet rooted in deliberate, internal fraud rather than systemic market misunderstanding.

1. The Intertwined Entities and Secret Backdoor

FTX, founded by Sam Bankman-Fried (SBF) in 2019, quickly grew into a $32 billion powerhouse, heavily promoted by celebrities. However, the exchange was fatally intertwined with SBF’s sister trading firm, Alameda Research.

* Diversion of Funds: Over $8 billion in customer funds were secretly diverted from FTX to Alameda Research.

* A “Backdoor” Code: The fraud was enabled by a secret “backdoor” code implemented since 2019 that granted Alameda a virtually unlimited line of credit. This allowed Alameda to rack up billions in losses from failed bets without being liquidated.

* Lack of Controls: New CEO John Ray III, who oversaw Enron’s liquidation, declared a “complete failure of corporate controls“ at FTX. Basic functions like accounting were lacking, and critical decisions were concentrated in the hands of SBF and an inexperienced inner circle.

2. The Collapse and Consequences

The unraveling began in November 2022 when a CoinDesk report leaked Alameda’s balance sheet, revealing its heavy reliance on FTX’s illiquid token, FTT, as its primary asset. This sparked a bank run, leading rival exchange Binance to dump its FTT holdings and subsequently pull out of a rescue deal upon seeing the true financial holes.

The result was FTX’s bankruptcy filing on November 11, 2022. SBF, who had cultivated an image as a benevolent genius and proponent of “effective altruism”, was convicted on seven counts of fraud and conspiracy in November 2023. He was sentenced to 25 years in prison in March 2024.

Part III: The Common Threads: Trust, Greed, and Ignored Warnings

Despite the differences in scale and technology, both the 2008 and FTX crises share fundamental flaws that highlight enduring risks in finance:

1. The Ignored Cassandras: In both instances, early warnings were dismissed.

* In 2008, economists like Raghuram Rajan and Nouriel Roubini were ridiculed as “misguided” or “Dr. Doom” for predicting a catastrophic meltdown based on complex derivatives and the housing bubble.

* In the FTX case, internal whistleblowers who discovered the $65 billion backdoor code were allegedly fired or silenced. External warnings from short-sellers also went unheeded.

2. Moral Hazard and Deception: Both systems relied on deception and a profound failure of ethics.

* In 2008, Countrywide Financial’s CEO privately called one of his company’s most popular loan products “the most dangerous product in existence and there can be nothing more toxic” while publicly championing homeownership expansion.

* In the FTX case, SBF’s fraud was systematic, involving deceptive accounting gimmicks and the use of customer deposits as a personal piggybank.

3. The Inconsistent Government Response: The government’s handling of the 2008 crisis established the “too big to fail” doctrine. The decision to allow Lehman Brothers to fail was a catastrophic miscalculation that instantly froze global credit markets, leading to a panicked, complete reversal of policy just 48 hours later to bail out AIG. The AIG rescue, in particular, was seen as a stealthy bailout of its powerful global bank counterparties, cementing public cynicism that there were different rules for the powerful.

The long-term legacy of both events is an erosion of public trust. While Dodd-Frank addressed many symptoms of 2008 by creating the CFPB and regulating derivatives, the FTX saga underscores that greed transcends tech, and that the fundamental incentive structures rewarding short-term profits and concentrated power remain troubling.

The takeaway for us? Whether it’s AAA-rated toxic debt or an unregulated crypto exchange, when oversight fades, and complex structures conceal simple fraud, the financial system remains vulnerable. The greatest tragedy is accepting the notion that “no one could have seen it coming” when, in both cases, the warning signs were clear.

Tune into the podcast episode of “Coordinated with Fredrik” for our full discussion on the enduring lessons of financial collapse.

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