How Congress Can Stop the Next FTX
With the U.S. House of Representatives and U.S. Senate divided by razor-thin margins, many are pondering what, if anything, they can accomplish in the new Congress. Yes, it's true that House and Senate leadership will struggle to pass all but the most milquetoast of legislation, with the possible exception of legislation to regulate cryptocurrencies. And it's true that many of the bills that pass one chamber will not receive the blessing of the other half. However, that doesn't mean the legislature can't enact meaningful change for the American people. It just means that federal representatives will need to work hard to find more opportunities.
Given the current news cycle, which remains transfixed on collapsed cryptocurrency exchange FTX, Congress should find exploring more bipartisan, gridlock-preventing avenues easier than ever before. It should start this process by finding consensus reform solutions to protect Americans’ savings from another FTX scandal.
The playbook utilized by Sam Bankman-Fried and his associates of donating heavily to noteworthy causes to shield its illegal activities from scrutiny is not an anomaly. Many of the world's most influential companies and organizations use it widely and regularly to convince others about the soundness of their causes and business models.
On Wall Street, major investments firms have adopted a similar strategy by adopting and advancing Environmental, Social, and Governance (ESG), which even Bankman-Fried recently admitted has been “perverted beyond recognition" — and for much of the same reason that FTX became corrupted.
ESG-aligned investment firms judge companies based on various factors such as their carbon emissions, labor standards, and commitment to racial justice. While ESG advocated claims to represent meaningful reform of the economy, various state treasurers and legislators are concerned that, like FTX, the leaders of this movement’s purported commitment to advancing social causes is nothing more than cover to advocate the left’s social and climate agenda and artificially increase the value of their investment interests over those of their competitors.
Members of Congress have expressed worry that ESG ratings agencies are using arbitrary ratings criteria to pick winners and losers in the economy to benefit certain Wall Street firms’ bottom lines. If their suspicions prove correct, it presents an ethical dilemma and a potential legal quandary. States like Louisiana and West Virginia have already barred state entities from using ESG, arguing these firms’ primary concern is advancing a political agenda rather than the investment returns of state pension funds and other investors. Others will soon follow suit.
Congress has a duty to seek answers to these questions through hearings and subpoenas to ensure that the American people's hard-earned money has not been marginalized on the financial whims of Wall Street under the auspices of humanitarian, social, and political activism. And if it has been, they must hold the entities responsible and accountable.Even the private institutions that supposedly serve as bulwarks against corruption in the financial services industry appear in on the shell game of faux altruism.
Legislators need look no further than Better Markets, the nonprofit that says it works with policymakers and regulators to promote pro-market, pro-business and pro-growth policies, as well as hold accountable those who fail to serve the public. While Better Markets’ CEO, Dennis Kelleher, recently blasted FTX for being unaccountable to regulators and for pushing “special interest” legislation to benefit the crypto industry, it appears that his organization may have its own skeletons for which to account.
His comments should surprise no one since Mr. Kelleher has inserted himself into every major financial services issue over the last decade while juggling conflicts from his primary funding source. For example, under the guise of protecting the little guy, Mr. Kelleher was recently called out for testifying before Congress about meme stocks like GameStop and Bed Bath & Beyond without at the same time disclosing that, in the same quarter he testified, Better Markets’ hedge fund co-founder, Michael Masters, and near-exclusive funder had held multi-million-dollar positions in these stocks.
While they’re at it, Congress might want to examine Better Markets’ status as a non-profit, public charity. IRS regulations generally require public charities to receive at least one-third of their financial support from the public. In the first five years of its existence, however, public filings show that Better Markets received 99 percent of its funding from its wealthy hedge-fund co-founder through Spring Foundation. Perhaps recognizing that this would jeopardize its status as a public charity, it appears that Better Markets re-classified these annual donations as “unusual grants,” which don’t count in the public support calculation. One might presume that Better Markets would find such maneuvers inconsistent with its own mission, let alone draw the attention of the IRS. At a minimum, we should really question whether this is the type of organization that policymakers and regulators should rely on for advice regarding the integrity of our markets and the future of crypto regulation.
If Congress, investors, and the American public can't even trust the organizations created with the supposed intent of watching out for their economic interests, then who can they trust?
FTX didn't start this problem of faux altruism in the financial services industry, but it should be treated as the final straw. The FTX fallout occurred because the world remained blinded by the company's purported dedication to charitable causes, which prevented everyone from seeing its bankruptcy coming.
The legislative branch can't allow the financial services industry to continue down this dangerous, unsustainable path. Congress needs to create a more forward-driven set of consumer protections that prevent the next FTX from ever materializing. That process should start with holding hearings to receive more information on the causes of FTX's collapse while receiving answers on the purported foul play of other industry "do-gooders." If there's anything that can unite the divided chambers this Congress, it should be this.
Lee Zeldin served as a Member of Congress from 2015-2023, where he served on the Committee on Financial Services.
