Charles Hugh Smith on counterparty risk and the dominos from the FTX collapse

The full exposure to the risks inherent in extreme leverage and illiquidity can be cloaked, buried in off-balance sheet assets and liabilities, etc., while pages of mind-numbing disclosures were duly signed by blinded-by-greed marks. 

These quasi-legal versions are just as prone to unraveling and collapse as the blatantly fraudulent varieties. Properly disclosed leverage and illiquidity are just as prone to unraveling as undisclosed leverage and illiquidity. 

Mismatches of duration, liquidity and risk are just as toxic to full-disclosure firms as they are to fraudulent firms. 

This is why we can predict the dominoes of FTX's financial fraud have yet to fall.  When there are mismatches in counterparty asset durations and liquidity, assets that theoretically cover loans that are called can't be sold or can only be sold at ruinous discounts.

~ Charles Hugh Smith, "FTX: The Dominoes of Financial Fraud Have Yet to Fall," OfTwoMinds.com, November 16, 2022