What the FTX Collapse Tells Us About Regulators and ESG
The $32 billion collapse of cryptocurrency exchange FTX came seemingly without warning. Yet it provides plenty of warnings about some ongoing trends in corporate governance.
First, regulators often can’t stop investors from fraud.
Second, companies that work closely with regulators often do so for their own benefit.
Third, and perhaps most importantly, the current fad for “ESG” (environmental, social and governance) investing obscures much of what we need to know about companies.
If there is an early warning system about trouble in a company, it’s not in the SEC or any other financial regulator. It’s the short sellers who take money out of companies whose stock they expect to fall in value. As my colleague John Berlau has noted, short seller Marc Cohodes sounded the alarm about FTX as early as August 1, saying, “Nothing here fits. Everything reads like it’s a complete scam. This thing is dirty and rotten to the core.”
So what was the SEC doing in August? Focusing most of its efforts on developing a new rule on climate-related disclosures, part of an ESG approach to investing rules. The SEC had apparently started an investigation of FTX, but it appears to have been too little, too late.
Meanwhile, FTX founder and principal Sam Bankman-Fried (known by his initials SBF) had actively been working with another regulator, the Commodity Futures Trading Commission, to devise regulations for the cryptocurrency industry.
As economists often point out, companies that face potential challenges from competitors often try to get regulators to write rules that create barriers to entry into their market in order to lessen competition. Sometimes they work in conjunction with ideological or charitable groups, creating a “bootlegger and Baptist” alliance — after the combination of seemingly opposing constituencies that joined together to ban the legal drinking of alcohol on Sundays.
In SBF’s case, he was known for funding progressive causes and could be described as a one-man bootlegger and Baptist. Rep. Tom Emmer (R-Minn.) reports that his office has received allegations that SBF was with SEC Chairman Gary Gensler to gain a “regulatory monopoly” for FTX.
As for the ESG, which seems close to Gensler’s heart, the FTX collapse has exposed it as an emperor without clothes. ESG attempts to rate companies according to how they will weather environmental and social change and how well they are governed. FTX reportedly had stellar ESG scores from a number of different rating agencies.
And no wonder! FTX was working toward being “carbon neutral” and bringing solar power to the Amazon. It was concerned about every trendy environmental or social issue you can think of — global warming, pandemic preparedness and animal welfare, to name a few. On corporate governance, the ESG ratings agency Truvale gave it a higher rating than Exxon-Mobil.
Yet when FTX’s bankruptcy filing revealed that its internal governance protocols were so lax they’d make a child’s lemonade stand look like the pinnacle of accounting practice. Massive personal loans were made to corporate officers like SBF, board meetings were nonexistent and employees submitted expense claims over chat that were approved by emoji. Better than Exxon-Mobil, really? As British commentator Douglas Murray says, ESG “ought by now to be a great big warning flag to investors and speculators everywhere.” There are all sorts of other vehicles, like non-profits or benefit corporations, that allow for people who want to do good to invest their money that way.
Even SBF has now admitted all this ESG talk was “a dumb game where woke westerners play where we say all the right shiboleths [sic] and so everyone likes us.” He also noted that regulators “can’t actually distinguish between good and bad.” He should know. The emperor truly has no clothes.
Read the full article at American Liberty.