The Prof G Pod with Scott Galloway The FTX Meltdown Explained — with David Yermack
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Nov 15, 2022 David Yermack, a renowned finance professor at NYU Stern with expertise in cryptocurrencies, breaks down the dramatic collapse of FTX. He discusses the complexities of leverage in crypto and the systemic risks it poses. Yermack explains how FTX misused customer funds and lacked regulatory oversight, leading to its downfall. He also draws parallels between FTX and historical failures like MF Global, highlighting the implications for the market and the future of blockchain in finance. A must-listen for anyone curious about crypto's volatile landscape!
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Hidden Leverage and Bank Run
- FTX lent customer funds to Alameda Trading, its affiliated private investing firm.
- This hidden leverage, exposed by journalists, triggered a bank run due to insufficient funds backing customer deposits.
FTX's Consolidated Role
- FTX differed from traditional brokers like Charles Schwab by operating as both an exchange platform and a clearinghouse.
- Consolidating these functions removed the checks and balances provided by separate entities and regulators.
Alameda's Leveraging and Investments
- Alameda used inflated FTX coin value to leverage more investments in illiquid assets like Robinhood and an Uzbeki mining firm.
- FTX customers were unaware their funds were backing these high-risk investments.