5 signs the world is headed for a recession | CNN Business

New York CNN Business —

Around the world, markets are flashing warning signs that the global economy is teetering on a cliff’s edge.

The question of a recession is no longer if, but when.

Over the past week, the pulse of those flashing red lights quickened as markets grappled with the reality — once speculative, now certain — that the Federal Reserve will press on with its most aggressive monetary tightening campaign in decades to wring inflation from the US economy. Even if that means triggering a recession. And even if it comes at the expense of consumers and businesses far beyond US borders.

There’s now a 98% chance of a global recession, according to research firm Ned Davis, which brings some sobering historical credibility to the table. The firm’s recession probability reading has only been this high twice before — in 2008 and 2020.

Consumer spending accounts for roughly two-thirds of US gross domestic product. That growth engine is beginning to sputter. Richard B. Levine/Levine Roberts/ZUMA Press

When economists warn of a downturn, they’re typically basing their assessment on a variety of indicators.

Let’s unpack five key trends:

The mighty US dollar

The US dollar plays an outsized role in the global economy and international finance. And right now, it is stronger than it’s been in two decades.

The simplest explanation comes back to the Fed.

When the US central bank raises interest rates, as it has been doing since March, it makes the dollar more appealing to investors around the world.

In any economic climate, the dollar is seen as a safe place to park your money. In a tumultuous climate — a global pandemic, say, or a war in Eastern Europe — investors have even more incentive to purchase dollars, usually in the form of US government bonds.

The Bank of England intervened in the bond market this week restore confidence in UK assets. Chris Ratcliffe/Bloomberg/Getty Images

While a strong dollar is a nice perk for Americans traveling abroad, it creates headaches for just about everyone else.

The value of the UK pound, the euro, China’s yuan and Japan’s yen, among many others, has tumbled. That makes it more expensive for those nations to import essential items like food and fuel.

In response, central banks that are already fighting pandemic-induced inflation wind up raising rates higher and faster to shore up the value of their own currencies.

The dollar’s strength also creates destabilizing effects for Wall Street, as many of the S&P 500 companies do business around the world. By one estimate from Morgan Stanley, each 1% rise in the dollar index has a negative 0.5% impact on S&P 500 earnings.

America’s economic engine stalls

The No. 1 driver of the world’s largest economy is shopping. And America’s shoppers are tired.

After more than a year of rising prices on just about everything, with wages not keeping up, consumers have pulled back.

“The hardship caused by inflation means that consumers are dipping into their savings,” EY Parthenon Chief Economist Gregory Daco said in a note Friday. The personal saving rate in August remained unchanged at only 3.5%, Daco said — near its lowest rate since 2008, and well below its pre-Covid level of around 9%.

Once again, the reason behind the pullback has a lot to do with the Fed.

The Federal Reserve, led by Chairman Jerome Powell, is aggressively raising rates to combat inflation — even if it risks triggering a recession. Kevin Lamarque/Reuters

Interest rates have risen at a historic pace, pushing mortgage rates to their highest level in more than a decade and making it harder for businesses to grow. Eventually, the Fed’s rate hikes should broadly bring costs down. But in the meantime, consumers are getting a one-two punch of high borrowing rates and high prices, especially when it comes to necessities like food and housing.

Americans opened their wallets during the 2020 lockdowns, which powered the economy out of its brief-but-severe pandemic recession. Since then, government aid has evaporated and inflation has taken root, pushing prices up at their fastest rate in 40 years and sapping consumers’ spending power.

Corporate America tightens its belt

Business has been booming across industries for the bulk of the pandemic era, even with historically high inflation eating into profits. That is thanks (once again) to the tenacity of American shoppers, as businesses were largely able to pass on their higher costs to consumers to cushion profit margins.

But the earnings bonanza may not last.

In mid-September, one company whose fortunes serve as a kind of economic bellwether gave investors a shock.

FedEx, which operates in more than 200 countries, unexpectedly revised its outlook, warning that demand was softening, and earnings were likely to plunge more than 40%.

In an interview, its CEO was asked whether he believes the slowdown was a sign of a looming global recession.

“I think so,” he responded. “These numbers, they don’t portend very well.”

FedEx, with its global footprint, is an economic bellwether. Its revised outlook has renewed recession fears on Wall Street. Justin Tallis/AFP/Getty Images

FedEx isn’t alone. On Tuesday, Apple’s stock fell after Bloomberg reported the company was scrapping plans to increase iPhone 14 production after demand came in below expectations.

And just ahead of the holiday season, when employers would normally ramp up hiring, the mood is now more cautious.

“We’ve not seen the normal September uptick in companies posting for temporary help,” said Julia Pollak, chief economist at ZipRecruiter. “Companies are hanging back and waiting to see what conditions hold.”

Welcome to bear territory

Wall Street has been hit with whiplash, and stocks are now on track for their worst year since 2008 — in case anyone needs yet another scary historical comparison.

But last year was a very different story. Equity markets thrived in 2021, with the S&P 500 soaring 27%, thanks to a torrent of cash pumped in by the Federal Reserve, which unleashed a double-barreled monetary-easing policy in the spring of 2020 to keep financial markets from crumbling.

The party lasted until early 2022. But as inflation set in, the Fed began to take away the proverbial punch bowl, raising interest rates and unwinding its bond-buying mechanism that had propped up the market.

The hangover has been brutal. The S&P 500, the broadest measure of Wall Street — and the index responsible for the bulk of Americans’ 401(k)s — is down nearly 24% for the year. And it’s not alone. All three major US indexes are in bear markets — down at least 20% from their most recent highs.

In an unfortunate twist, bond markets, typically a safe haven for investors when stocks and other assets decline, are also in a tailspin.

All three major US indexes are in a bear market, down at least 20% from their most recent highs. Michael M. Santiago/Getty Images

Once again, blame the Fed.

Inflation, along with the steep rise in interest rates by the central bank, has pushed bond prices down, which causes bond yields (aka the return an investor gets for their loan to the government) to go up.

On Wednesday, the yield on the 10-year US Treasury briefly surpassed 4%, hitting its highest level in 14 years. That surge was followed by a steep drop in response to the Bank of England’s intervention in its own spiraling bond market — amounting to tectonic moves in a corner of the financial world that is designed to be steady, if not downright boring.

European bond yields are also spiking as central banks follow the Fed’s lead in raising rates to shore up their own currencies.

Bottom line: There are few safe places for investors to put their money right now, and that’s unlikely to change until global inflation gets under control and central banks loosen their grips.

War, soaring prices and radical policies collide

Nowhere is the collision of economic, financial, and political calamities more painfully visible than in the United Kingdom.

Like the rest of the world, the UK has struggled with surging prices that are largely attributable to the colossal shock of Covid-19, followed by the trade disruptions created by Russia’s invasion of Ukraine. As the West cut off imports of Russian natural gas, energy prices have soared and supplies have dwindled.

Those events were bad enough on their own.

But then, just over a week ago, the freshly installed government of Prime Minister Liz Truss announced a sweeping tax-cut plan that economists from both ends of the political spectrum have decried as unorthodox at best, diabolical at worst.

In short, the Truss administration said it would slash taxes for all Britons to encourage spending and investment and, in theory, soften the blow of a recession. But the tax cuts aren’t funded, which means the government must take on debt to finance them.

That decision set off a panic in financial markets and put Downing Street in a standoff with its independent central bank, the Bank of England. Investors around the world sold off UK bonds in droves, plunging the pound to its lowest level against the dollar in nearly 230 years. As in, since 1792, when Congress made the US dollar legal tender.

The BOE staged an emergency intervention to buy up UK bonds on Wednesday and restore order in financial markets. It stemmed the bleeding, for now. But the ripple effects of the Trussonomics turmoil is spreading far beyond the offices of bond traders.

Britons, who are already in a cost-of-living crisis, with inflation at 10% — the highest of any G7 economy — are now panicking over higher borrowing costs that could force millions of homeowners’ monthly mortgage payments to go up by hundreds or even thousands of pounds.

The upshot

While the consensus is that a global recession is likely sometime in 2023, it’s impossible to predict how severe it will be or how long it will last. Not every recession is as painful as the 2007-09 Great Recession, but every recession is, of course, painful.

Some economies, particularly the United States, with its strong labor market and resilient consumers, will be able to withstand the blow better than others.

“We are in uncharted waters in the months ahead,” wrote economists at the World Economic Forum in a report this week.

“The immediate outlook for the global economy and for much of the world’s population is dark,” they continued, adding that the challenges “will test the resilience of economies and societies and exact a punishing human toll.”

But there are some silver linings, they said. Crises force transformations that can ultimately improve standards of living and make economies stronger.

“Businesses have to change. This has been the story since the pandemic started,” said Rima Bhatia, an economic adviser for Gulf International Bank. “Businesses no longer can continue on the path that they were at. That’s the opportunity and that’s the silver lining.”

— CNN Business’ Julia Horowitz, Anna Cooban, Mark Thompson, Matt Egan and Chris Isidore contributed reporting.

US banking crisis: Close to 190 banks could collapse, according to ...

With the failure of three regional banks since March, and another one teetering on the brink, will America soon see a cascade of bank failures?

Bloomberg reported Wednesday that San Francisco-based PacWest Bancorp is mulling a sale.

Last week, First Republic Bank became the third bank to collapse, the second-largest bank failure in U.S. history after Washington Mutual, which collapsed in 2008 amid the financial crisis.

After the demise of Silicon Valley Bank and Signature Bank in March, a study on the fragility of the U.S. banking system found that 186 more banks are at risk of failure even if only half of their uninsured depositors (uninsured depositors stand to lose a part of their deposits if the bank fails, potentially giving them incentives to run) decide to withdraw their funds.

Uninsured deposits are customer deposits greater than the $250,000 FDIC deposit insurance limit.

Learn more: Best current CD rates

Why are regional banks failing?

Regional banks are failing because the Federal Reserve’s aggressive interest rate hikes to tamp down inflation have eroded the value of bank assets such as government bonds and mortgage-backed securities.

Most bonds pay a fixed interest rate that becomes attractive when interest rates fall, driving up demand and the price of the bond. On the other hand, if interest rates rise, investors will no longer prefer the lower fixed interest rate paid by a bond, thus driving down its price.

Many banks increased their holdings of bonds during the pandemic, when deposits were plentiful but loan demand and yields were weak. For many banks, these unrealized losses will stay on paper. But others may face actual losses if they have to sell securities for liquidity or other reasons, according to the Federal Reserve Bank of St. Louis.

Another bank collapse?:As Pacific Western Bank stocks fall, fears of crisis resurface

Banks at risk:Close to 190 banks could collapse, according to study

SVB:Silicon Valley Bank collapse explained in graphics

“The recent declines in bank asset values very significantly increased the fragility of the U.S. banking system to uninsured depositor runs,” economists wrote in a recent paper published on the Social Science Research Network

Of course, this scenario would play out only if the government did nothing.

“So, our calculations suggest these banks are certainly at a potential risk of a run, absent other government intervention or recapitalization,” the economists wrote.

How did Silicon Valley Bank collapse?

In the case of the Santa Clara-based Silicon Valley Bank, which held most of its assets in U.S. government bonds, the market value of its bonds fell when interest rates started going up.

That’s because most bonds pay a fixed interest rate that becomes more attractive if interest rates fall, driving up demand and the price of the bond. But when interest rates rise, the lower fixed interest rate paid by a bond is no longer attractive to investors.

GRAPHICS:Ripple effect: How Silicon Valley Bank collapse is affecting other US banks

The timing coincided with the financial difficulties many of the banks’ customers – largely tech startups – were dealing with, forcing them to withdraw their deposits.

In addition, Silicon Valley Bank had a disproportional share of uninsured funding, with only 1% of banks having higher uninsured leverage, the paper notes. "Combined, losses and uninsured leverage provide incentives for an SVB uninsured depositor run."

A run on these banks could pose a risk to even insured depositors − those with $250,000 or less in the bank − as the FDIC’s deposit insurance fund starts incurring losses, the economists wrote.

Swapna Venugopal Ramaswamy is a housing and economy correspondent for USA TODAY. You can follow her on Twitter @SwapnaVenugopal and sign up for our Daily Money newsletter here.

Updated Covid-19 vaccines boost protection, but may not beat ...

CNN —

The updated Covid-19 booster shots appear to work about as well against the BA.4 and BA.5 Omicron subvariants as the original boosters they replaced, according to two new studies from research teams at Harvard and Columbia universities.

The research suggests that our bodies have been well-trained to fight the original virus, which emerged from Wuhan, China, and that boosters mostly reinforce that response. Getting boosted this fall is still an important way to renew protection, even among people who were previously infected or vaccinated.

But the hope was that by tweaking the vaccine recipe to include currently circulating strains of the Omicron variant, it would help broaden immunity against those variants and perhaps offer better and longer-lasting protection.

When the researchers compared the immune responses of people who got a booster dose of the original shot to people who got the updated bivalent boosters, they looked about the same.

“We see essentially no difference” between the old boosters and the new about a month after the shot, said Dr. David Ho, professor of microbiology and immunology at Columbia, whose team authored one of the studies.

Immunologists say a vaccine against two strains may not be better than a single strain shot because of a phenomenon called immune imprinting. Scientists say imprinting may complicate efforts to stay ahead of new variants as the coronavirus continues to evolve, and it adds urgency to the development of new vaccine technologies to fight the virus.

When the US Food and Drug Administration issued emergency use authorizations for new bivalent Covid-19 vaccines from Pfizer and Moderna at the end of August, it did so on the basis of studies in mice and previous human trials with a different two-strain booster formulation. Little was known about the how protective the shots might be in people; full data from clinical trials testing the BA.4 and BA.5 bivalent vaccines in humans hasn’t yet been made public.

But modeling data suggested that getting the boosters out in September could save tens of thousands of lives if the country had another winter surge, so the FDA authorized the shots, ahead of results from clinical trials, in order to get them to the public more quickly.

The updated shots contain instructions that show cells how to make spike proteins from the original virus that caused Covid-19, as well as spikes from the BA.4 and BA.5 subvariants. These spikes get assembled by our cells and displayed to our immune system so it can make antibodies to fight the real thing during an active infection.

The original strain of the virus, sometimes called the ancestral or wild-type strain, is no longer circulating, however. When we boost, we are mostly boosting antibodies against a virus that’s long gone.

As the virus has evolved, the vaccines have not kept pace. Each new variant has become more and more resistant to the antibodies we make against it, increasing the risk of breakthrough infections, hospitalizations and deaths.

Right now, protection against infection begins to wane just a few months after each booster dose. Protection against severe outcomes – hospitalization or death from Covid-19 – lasts longer, but can also fade, especially for vulnerable groups such as people who are over 65, who have weakened immune systems or who have underlying medical conditions.

Similar immune responses

The studies have important limitations, and they aren’t the final word on the updated boosters.

Both studies were small. Ho’s study looked at the immune responses of 19 people who were boosted with a fourth dose of the original recipe vaccine and 21 people who got a fourth dose of the updated boosters. The other study, from Dr. Dan Barouch, a professor at Harvard and director of the Center for Virology and Vaccine Research at Beth Israel Deaconess Medical Center, looked at 15 people who got the original booster and 18 people who got bivalent shots.

Both reports were posted as preprints, before scrutiny by independent experts.

The studies also measured immune responses over a short period of time – about three to five weeks after the fourth doses. Ho says these results could change with time, as immune cells mature.

“We can’t say that a few months from now, there won’t be any difference,” he said. “We won’t know that until these individuals are followed for a longer period of time.”

Despite these caveats, experts who were not involved in the research say that two studies from well-regarded labs arriving at roughly the same conclusions about the vaccines gives them confidence that the results are correct.

“At least at this time point, there’s no discernible benefit” over the older boosters, Ho said.

Clinical trials being conducted by vaccine makers Pfizer and Moderna involve hundreds of people who have had the updated boosters and are being followed for longer periods of time. Data from those studies are still coming.

Both companies declined to comment on Ho and Barouch’s studies, citing company policies not to weigh in on research they have not been involved in.

In comparing the immune responses of people who got the old boosters with those who got the newer ones, the researchers found that neutralizing antibodies spiked after both shots to about the same high levels, which was good news.

In Barouch’s study, antibody concentrations were 15 times higher after the original boosters, rising from 184 to 2,829. They were 17 times higher after the updated shots, jumping from 211 to 3,693. The difference in antibody levels between shots didn’t pass a statistical test, however, so the results may have been due to chance.

More importantly, that slight difference in antibody levels probably wouldn’t protect people any better in the real world.

“We would not expect this to be clinically significant,” said Barouch, who worked on the development of the Johnson & Johnson Covid-19 vaccine.

But the bulk of the antibodies generated after either shot were ones that would bind the original virus, with fewer directed specifically against the BA.4 and BA.5 subvariants.

Barouch’s team also looked specifically at T cells, which help the body hold the memory of germs it has been exposed to. These cells are thought to play a key role in how long immune protection lasts. Antibody levels naturally drop off over time, but T cells stick around.

The numbers of T cells didn’t budge much after either vaccine.

“Unfortunately, neither one increased T-cell responses very much, and we believe that T-cell responses in addition to antibody responses are important for protection against severe disease,” Barouch said.

‘A booster is a booster’

Dr. Eric Topol, who directs the Scripps Research Translational Institute, said the study results “can be considered a disappointment,” especially because the US government raced to make them available and because there had been high hopes for an improved vaccine in time for a predicted winter Covid-19 surge.

Topol also said it would be a mistake to skip these shots. They still work; they just may not be much of an improvement over the older ones.

“A booster is a booster until proven otherwise and we are in great need of getting more of them in the US,” Topol, who was not involved in the new studies, wrote in an email to CNN.

Fewer than 20 million people – less than 10% of the population ages 5 and up – have gotten the updated booster, according to data from the US Centers for Disease Control and Prevention.

After waiting the recommended three months since his last Covid-19 infection, President Joe Biden got an updated booster Tuesday and urged eligible Americans to do the same.

“Your old vaccine or your previous Covid infection will not give you maximum protection,” Biden said.

Public health officials had hoped that the rollout of the updated boosters would mark a turning point, where Americans might be able to get annual Covid-19 shots instead of boosters every few months.

Dr. Peter Marks, director of the FDA’s Center for Biologics Evaluation and Research, recently told Stat that he wasn’t sure whether the country had reached that point.

“I would be lying to you if [I said] it doesn’t keep me up at night worrying that there is a certain chance that we may have to deploy another booster – at least for a portion of the population, perhaps older individuals – before next September, October,” he said.

“I’m not saying that’s what’s going to happen, but it’s what keeps me up at night, because we see how fast this virus is evolving.”

Imprinting may complicate quest for better immunity

The studies probably didn’t find any difference between the new and old boosters because of immune imprinting, says Michael Worobey, a professor at the University of Arizona who studies the evolution of viruses and the origins and control of pandemics.

“Your body is on a hair trigger to create more antibodies of what it has a good memory of,” said Worobey, who was not involved in the new research.

At the beginning of the pandemic, our immune systems were blank slates when it came to the coronavirus. By now, most of us have been exposed to one version of the virus or another through the vaccine, an infection or both. That exposure programs cells called B cells to make specific kinds of antibodies, and more B cells get this programming during their first exposure to the virus than they do in subsequent brushes with it.

That’s the reason some strains of the flu may hit certain age groups harder than others, too. When viruses look more similar to the first infection or vaccine you had, your body tends to do a better job fighting them off.

Worobey said that both new studies have limitations, “but I think when you put them together, they paint a pretty clear picture that that antigenic imprinting is causing issues here, for sure.”

It’s possible to break through immune imprinting, he said. Certain kinds of vaccine ingredients, or adjuvants – “things that just happen to really wake up the immune system” – can do it.

But it’s not easy to add the kind of adjuvants he’s thinking about to mRNA vaccines like Pfizer and Moderna’s. In this case, he says, judging by the study findings, it probably would have been better to update the vaccine by including only the components against BA.4 and BA.5.

“For me, the take-home message is, if you want to boost and provide protection against Omicron, leave the original variant out of the vaccine.”

Dr. Paul Offit, director of the Vaccine Education Center at the Children’s Hospital of Philadelphia and a member of the FDA’s vaccine advisory committee, says the new studies bear out data that was presented to the FDA’s advisers in June.

He says it’s one of the reasons he voted against the FDA requiring companies to add an Omicron strain to the boosters used in the US.

“Certainly, the hope that this would be significantly better in terms of protection against the circulating strains, I think, is unlikely to be realized,” said Offit, who was not involved in the new studies.

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Worobey says that when the strains are combined as they are in the updated boosters, they actually end up competing. The body’s response to the original strain is so strong, it will end up blocking the updated portion of the vaccine from stimulating those blank slate B cells against the newer variants and reshaping the immune response.

Thus, imprinting will complicate efforts to keep up with the virus, he says. We may need different kinds of vaccine technologies if the virus ever changes so much that it outcompetes our immunity altogether.

That’s something the FDA’s Marks has considered, too.

“I would love to see us have a very ecumenical look over all of the available vaccines and all of the vaccines in development to try to see what’s best moving forward,” he told Stat. “Not to diss the current mRNA vaccines but because we owe it to the population to see what might provide the greatest breadth, depth and duration of immunity against Covid-19.”

Small banks in China are running into trouble. Savers could lose ...

Editor’s Note: A version of this story appeared in CNN’s Meanwhile in China newsletter, a three-times-a-week update exploring what you need to know about the country’s rise and how it impacts the world. Sign up here.

Peter had put his life savings of about $6 million into accounts at three small banks in China’s central Henan province. He says he hasn’t been able to access them since April.

The 45-year-old entrepreneur asked us to call him Peter for security reasons. He’s from the eastern city of Wenzhou and is just one of thousands of depositors who have been fighting to recover their savings from at least six banks in rural provinces in central China.

“I’m close to having a nervous breakdown. I can’t sleep,” Peter told CNN Business.

When he tried to access his accounts online, a statement would pop up on the homepage informing him that the website was under maintenance and services would be unavailable for a while, Peter told CNN Business. Two months later, those services have not been restored.

The trouble began in April, when four banks in Henan suspended cash withdrawals.

In China, local banks are only permitted to obtain deposits from their home customer base, but authorities say that “third-party platforms” were used to acquire funds from depositors outside the region. In Peter’s case, for example, his hometown is over 700 miles away from the banks in Henan.

The national banking regulator has accused a major shareholder of the four banks of illegally attracting money from savers. “Henan New Fortune Group, a shareholder of the four village banks, has illegally absorbed the public’s funds through internal and external collusion, the use of third-party platforms, and fund brokers,” the China Banking and Insurance Regulatory Commission told state-run Xinhua News Agency in May.

Depositors protest in front of the Henan branch of the China Banking and Insurance Regulatory Commission, demanding their money back after their funds were frozen. From Lan Nuo Nuo in February

“The police have opened a case for investigation into the matter,” it added.

Runs on small Chinese banks have become more frequent in recent years and some have been accused of financial improprieties or corruption. But experts worry that a much bigger financial problem could be looming, caused by fallout from a real estate crash and soaring bad debts related to the Covid-19 pandemic.

There are no official estimates yet on the total amount of funds that bank depositors are unable to withdraw. CNN Business did not receive a comment from the local police or the national banking regulator.

As many as 400,000 banking customers across China were unable to access their savings, according to an estimate in April by Sanlian Lifeweek, a state-owned magazine.

That’s a drop in the ocean of China’s vast banking system, but about a quarter of the industry’s total assets are held by around 4,000 small lenders, which often have opaque ownership and governance structures and are more vulnerable to corruption, say experts, and the sharp economic slowdown.

“The scope of the bank scandals where bank officials embezzle and steal funds from depositors is alarming, and what is exposed could only be the tip of the iceberg,” said Frank Xie, a professor at University of South Carolina Aiken who studies Chinese business and the economy.

“As the Chinese economy slows down further, the fiscal shortage worsens, and the debt repayments become more widespread among Chinese companies, especially in the real estate sector, bank runs could become more often and on a larger scale,” he said.

Many savers have had enough. Late last month, hundreds of depositors traveled to Zhengzhou, the capital of Henan, to protest outside the office of the banking regulator and to demand their money back, to no avail.

Another protest was planned in June. But as the depositors arrived in Zhengzhou, they were stunned to find that their health codes — which were green upon departure — had turned red, according to six people who spoke with CNN and social media posts. Anyone with a red code — usually assigned to people infected with Covid or deemed by authorities to be at high risk of infection — immediately becomes persona non grata.

They are banned from all public venues and transport and are often subject to weeks of government quarantine.

CNN has reached out to the Zhengzhou government for comment. The Henan Provincial Health Commission told state-run news website thepaper.cn it was “investigating and verifying” the complaints from depositors who received red codes.

What’s behind the problem in Henan

In Henan, the China Banking and Insurance Regulatory Commission has put the blame on the private investment firm that holds large stakes in all four lenders.

Last week, the Henan police said that a criminal gang headed by the investment firm’s controller “has been suspected of using village banks to commit serious crimes.” Police say several suspects have been arrested.

The Henan New Fortune Group no longer has a website. CNN tried to reach the company for comment on the phone and by email without success. The company has made no public statements and it’s believed to have been annulled.

Later on Monday, the four Henan banks said they would start collecting information from customers who have been affected by the shutdown of their online transaction systems. The move was required by financial regulators, the banks added in separate statements on their website, without elaborating further.

That’s of little comfort to the banks’ customers. Deposits up to 500,000 yuan (almost $75,000) are guaranteed in the event of bank failures, but that’s not enough for some — like Peter — and if the government’s investigation finds that their savings are “non-compliant” transactions, they could lose everything.

“I’m quite worried about how they [authorities] are going to deal with our money,” said Ye, who asked CNN Business to only use his surname. Ye is a 30-year old tech worker from the city of Dongguan in Guangdong province — about 1500 km (900 miles) from the banks he used in Henan. He said he has a total of 160,000 yuan (about $24,000) worth of deposits with them.

“We were told by the banks that the deposit products were legal, and that they were protected by the deposit insurance scheme,” he said. “We just want to get our money back.”

The four banks — Yuzhou Xinminsheng Village Bank, Shangcai Huimin County Bank, Zhecheng Huanghuai Community Bank, New Oriental Country Bank of Kaifeng — have not replied to requests for comment.

Risky liabilities

In early 2021, Beijing banned banks from selling deposit products via third party online platforms, fearing that the rapid expansion of the fintech sector could increase risks in the wider financial system. The People’s Bank of China called such practices “illegal financial activities.”

So why were small local banks in Henan apparently ignoring the ban and raising deposits from savers — like Ye, who live on the other side of the country?

China’s national banking and insurance regulator says third party online platforms allowed them to bypass these geographical restrictions and grow their business nationwide.

In the Henan case, various state-run media are reporting that the deposit products were sold via platforms affiliated with, or owned by, giants of China’s tech scene such as Baidu (BIDU) and JD.com. (JD)

Those platforms — Du Xiaoman Financial, which is the financial affiliate of Baidu, as well as JD Finance — have not responded to requests for comment.

“The central government regulators seem to be incapable of enforcing those regulations aimed at preventing this kind of bank run from occurring,” said Frank Xie, the Chinese economy expert. He added that corruption was “rampant” at local levels of financial institutions.

“Perpetrators such as the person stealing millions from the depositors often get shielded by accomplices in governments and in the upper-level management of the banks,” Xie said.

“The core problem is that China’s financial system simply expanded far too fast relative to the size of the economy over the previous decade,” said Logan Wright, director of China markets research at Rhodium Group.

China’s banking sector has increased sixfold in size since 2008, with total assets reaching over $50 trillion, according to government statistics.

The funding structure of small lenders also makes them more risky, say experts.

Compared with big banks, they are more reliant on deposits for funding. Many of them offer high interest rates to attract commercial and interbank deposits. But as the slowing economy means borrowers struggle to repay the banks, it becomes difficult for them to deliver the returns they offered savers.

“The funding structure of liabilities in many of China’s mostly smaller and regional banks is most likely still vulnerable to deposit runs, lender caution, and deteriorating economic performance and rising unemployment,” said George Magnus, an associate at the China Centre at Oxford University and former chief economist at UBS.

Deteriorating financial health

The Henan crisis arrived at a time when public confidence in China’s banking system was already waning.

In the past decade, Beijing has been clamping down on “shadow banking” activities — which means unregulated, off-the-book lending by financial institutions — on worries that most of the funds had been diverted to property developers and local government infrastructure projects, leading to a rapid run-up in debt and growing financial risks.

In 2019, China seized control of Baoshang Bank, based in Inner Mongolia, citing serious credit risks posed by the lender.

It was the first bank seizure in China in more than 20 years and the lender was declared bankrupt.

The following year, there were at least five bank runs at small lenders, mostly triggered by public fears following reports of financial distress at the banks or anti-graft investigations into bank executives.

“Financial institutions are still grappling with some of the losses that have resulted, particularly in China’s northeast, central provinces, and western regions, where shadow banking activities had expanded the fastest over the past decade,” Wright said.

Making matters worse, “the ongoing slowdowns in the economy during the Covid-19 pandemic have further exposed financial institutions to new credit risks as well,” Wright added.

Spillover effects

Investors are closely watching the government’s investigation into the Henan bank run. Analysts are gauging possible spillover effects to other banks.

“The economy is a key reason why affected banks might be experiencing difficulties, and it is quite possible that other banks will be affected, perhaps even larger banks, given that the fate of the property market and real estate prices hang in the balance,” said Magnus from Oxford University.

The Chinese economy has been struggling with the country’s zero-Covid policy. Many cities have been placed under full or partial lockdowns since March, wreaking havoc on activity. Analysts are worried that the economy could contract in the second quarter.

“This could have multiplier effects given that real estate as an asset class could be compromised now for a few years,” Magnus said.

China’s gigantic real estate sector, which accounts for as much as 30% of its GDP, is in a worsening downturn. Sales by the country’s top 100 developers collapsed 59% in May from a year ago, according to a recent survey by property research firm Cric China.

Evergrande — one of the country’s biggest developers — is undergoing a huge restructuring after it defaulted on its debts late last year. Analysts have long feared Evergrande’s collapse could have ripple effects across the property industry and spill over to the financial system.

Property loans accounts for nearly 30% of outstanding loans with China’s financial institutions.

Analysts aren’t yet worrying about a financial crisis — because the PBOC is likely to ensure that larger and systemically more important banks are protected.

But the discontent triggered by the bank runs could be a major concern for the government.

When Covid health codes of depositors turned red early last week, derailing a planned protest in Zhengzhou, it sparked a massive outcry on social media.

“Now (the authorities) can stop you from petitioning by directly putting digital shackles on you, aka giving you red codes,” said one comment on Weibo, China’s Twitter-like platform.

Dozens of depositors were taken into a quarantine hotel guarded by police and local officials, before being sent away on trains bound for their hometowns the next day; others were “quarantined” at several other locations in the city, including a college campus, according to the witnesses and online posts.

“Many people lost their lifetime savings because of this and [if] more incidences like this takes place, and [if] a bank run is met with a government crackdown, social unrest will be the only end result,” Xie said.

— Nectar Gan, CNN’s Beijing bureau, and Wayne Chang contributed to this report.

Netflix's collapse is a warning sign for stocks | CNN Business

A version of this story first appeared in CNN Business’ Before the Bell newsletter. Not a subscriber? You can sign up right here. You can listen to an audio version of the newsletter by clicking the same link.

London CNN Business —

Shares of Netflix (NFLX) are imploding after the company reported its first quarterly loss of subscribers in more than a decade, far underperforming expectations and worrying investors that had been betting that a handful of big tech companies would continue to grow at a rapid clip.

What’s happening: Netflix’s stock dropped 30% when the market opened on Wednesday, instantly wiping more than $45 billion off the value of the company.

Netflix said it shed 200,000 subscribers in the first three months of the year, when it had been expecting to add 2.5 million.

The streaming giant, whose stock had already dropped more than 40% year-to-date, blamed the attrition on increased competition for viewers and Russia’s invasion of Ukraine.

Netflix said its decision to pull out of Russia cost the company 700,000 subscribers. But the economy isn’t helping, either.

Inflation is forcing households to reevaluate their budgets. People in Great Britain canceled about 1.5 million streaming subscriptions in the first three months of 2022. More than a third did so to save money, according to a new report by media consultancy Kantar.

“Food and energy are people’s priorities right now, not watching ‘Stranger Things,’” CMC Markets chief market analyst Michael Hewson told me.

Netflix signaled it could make big changes to its business as it tries to stem the bleeding. It’s taking another look at how to address password sharing. CEO Reed Hastings also told analysts that the company will consider a lower-price subscription option with advertising.

“I’ve been against the complexity of advertising and a big fan of the simplicity of subscription,” Hastings said Tuesday. “But as much as I’m a fan of that, I’m a bigger fan of consumer choice.”

Big picture: Hewson said the stock plunge shows that Netflix was extremely overvalued, as investors — flush with cash during the pandemic recovery — fed a huge rally. Shares of Netflix rose 86% from the end of 2019 through 2021, while the S&P 500 climbed 48%.

“They were assuming people were going to be locked down forever,” Hewson said, adding that unlike Apple and Amazon, Netflix doesn’t have many alternative sources of revenue.

Clearly, the market mood has changed. The strong reaction could set the stage for another turbulent earnings season, with investors already on edge after disappointing results from the big banks.

When companies reported fourth quarter results earlier this year, Netflix and Facebook experienced huge stock losses as investors signaled growing sensitivity to downbeat predictions for the future. That was because the Federal Reserve was set to start raising interest rates, a move that would weigh on high-growth companies. Facebook’s disastrous results triggered the biggest loss in market value for an S&P 500 company on record.

Now, rates are officially on the rise, and there’s daily debate about whether the Fed could be even more aggressive than expected. The war in Ukraine is also dragging down sentiment. That could tee up big swings for top stocks as they disclose results.

Attention turns to Tesla earnings

Investors have been spending a lot of time following CEO Elon Musk’s ploy to buy Twitter. But come Wednesday evening, attention will turn back to a company he already controls.

Tesla (TSLA) reports first quarter results after markets close. Analysts have strong expectations, my CNN Business colleague Chris Isidore reports.

The electric carmaker’s earnings are forecast to jump 142% from a year ago. Other traditional automakers, such as General Motors, Ford, Toyota and Volkswagen are all expected to report a drop in earnings due to supply chain problems and production issues.

Watch this space: Musk joined the call with analysts last quarter. Will he be on this time around?

If he isn’t, that could feed Wall Street’s worries that he’s too busy trying to take Twitter private to deal with his management responsibilities. If Musk does dial in, there could still be risks, given his tendency to speak off the cuff.

Another point of focus will be lockdowns in China, which have affected Tesla’s production in Shanghai. Credit Suisse analysts estimate that the recent shutdown there prevented the manufacture of 90,000 vehicles.

Shareholders will want to know if the plant can stay open given restrictions, and how suppliers of critical parts such as batteries are faring.

Investor insight: A lot is riding on Tesla’s performance. Disappointing results could further disrupt a stock market that’s already unsteady.

Gas prices are creeping higher again

Prices at the pump have stopped falling from their recent highs — and some forecasters are warning of another uptick as the summer driving season looms and the war in Ukraine drags on, my CNN Business colleague Matt Egan reports.

After a slow-but-steady decline, the national average price for regular gasoline bottomed out at $4.07 a gallon last week, according to AAA. Since then the national average has increased five days in a row, climbing to $4.11 a gallon on Wednesday.

It’s the first increase in gas prices since early March, when turmoil in energy markets hit a crescendo following the invasion of Ukraine. And it dashes hopes that the national average would drop to $4 a gallon, taking pressure off inflation that’s running at the fastest pace in 40 years.

“It isn’t going down anymore,” said Andy Lipow, president of consulting firm Lipow Oil. “This is terrible news for inflation.”

Previously, Lipow had been forecasting a return to $4 gas. But he abandoned that call because of renewed concerns about Russia’s oil supplies and a pop in gasoline futures, a major driver of wholesale and retail prices.

Up next

Procter & Gamble (PG) reports results before US markets open. SL Green Realty (SLG), Tesla (TSLA), Alcoa (AA) and United Airlines (UAL) follow after the close.

Also today: US existing home sales for March arrive at 10 a.m. ET.

Coming tomorrow: Earnings from American Airlines (AAL), AT&T (T) and Snap (SNAP).

Soaring food and fuel prices are destabilizing countries on the brink ...

London CNN Business —

When people took to the streets in Egypt in 2011, protesters chanted about freedom and social justice — but also bread. The cost of pantry staples had jumped because of the skyrocketing price of goods like wheat, stoking fury with President Hosni Mubarak.

Now, more than a decade after the Arab Spring, global food prices are soaring again. They had already reached their highest level on record earlier this year as the pandemic, poor weather and the climate crisis upended agriculture and threatened food security for millions of people. Then came Russia’s war in Ukraine, making the situation much worse — while also triggering a spike in the cost of the other daily essential, fuel.

The combination could generate a wave of political instability, as people who were already frustrated with government leaders are pushed over the edge by rising costs.

“It is extremely worrisome,” said Rabah Arezki, a senior fellow at Harvard’s Kennedy School of Government and former chief economist at the African Development Bank.

Unrest in Sri Lanka, Pakistan and Peru over the past week highlights the risks. In Sri Lanka, protests have erupted over shortages of gas and other basic goods. Double-digit inflation in Pakistan has eroded support for Prime Minister Imran Khan, forcing him from office. At least six people have died in recent anti-government protests in Peru sparked by rising fuel prices. But political conflict isn’t expected to be limited to these countries.

“I don’t think people have felt the full impact of rising prices just yet,” said Hamish Kinnear, a Middle East and North Africa analyst at Verisk Maplecroft, a global risk consultancy.

Lessons from the Arab Spring

In the run-up to the anti-government protests that became known as the Arab Spring — which began in Tunisia in late 2010 and spread through the Middle East and North Africa in 2011 — food prices were climbing sharply. The Food Price Index from the United Nations’ Food and Agriculture Organization reached 106.7 in 2010 and jumped to 131.9 in 2011, then a record.

“Mohamed Bouazizi didn’t set himself on fire because he couldn’t blog or vote,” an Emirati commentator wrote in January 2011, referring to the street vendor whose protest act helped launch the revolution in Tunisia and, ultimately, the Arab world. “People set themselves on fire because they can’t stand seeing their family wither away slowly, not of sorrow, but of cold stark hunger.”

Circumstances in individual countries differed, but the bigger picture was clear. Surging wheat prices were a major part of the problem.

The situation now is even worse than it was then. Global food prices have just hit a new record high. The FAO Food Price Index published Friday hit 159.3 in March, up almost 13% from February. The war in Ukraine, a major exporter of wheat, corn and vegetable oils, as well as harsh sanctions on Russia — a key producer of wheat and fertilizer — is expected to spur further price increases in the coming months.

“Forty percent of wheat and corn exports from Ukraine go to the Middle East and Africa, which are already grappling with hunger issues, and where further food shortages or price increases could stoke social unrest,” Gilbert Houngbo, head of the International Fund for Agricultural Development, said last month.

Adding to the pain is the surge in energy prices. Global oil prices are almost 60% higher than they were a year ago. The cost of coal and natural gas has spiked, too.

Many governments are struggling to protect their citizens, but fragile economies that borrowed heavily to make it through the 2008 financial crisis and the pandemic are most vulnerable. As growth slows, hurting their currencies and making it harder to keep up with debt payments, maintaining subsidies for food and fuel will be difficult, especially if prices keep climbing.

“We are now in a situation where countries are indebted,” Arezki said. “As a result, they have no buffers to try to contain the tensions that will emerge from such high prices.”

According to the World Bank, close to 60% of the poorest countries were “already in debt distress or at high risk of it” on the eve of the invasion of Ukraine.

Where tensions are simmering

Asia: In Sri Lanka, an island nation of 22 million, an economic and political crisis is already boiling over, with protesters taking to the streets in defiance of curfews and government ministers stepping down en masse.

Grappling with high debt levels and a weak economy reliant on tourism, Sri Lanka was forced to run down its reserves of foreign currency. That prevented the government from making payments for key imports such as energy, creating devastating shortages and forcing people to spend hours lining up for fuel.

Its leaders have also devalued its currency, the Sri Lankan rupee, as they try to secure a bailout from the International Monetary Fund. But that just made inflation worse at home. In January, it reached 14%, almost double the rate of price increases in the United States.

Pakistan’s parliament issued a vote of no confidence in Khan on Sunday, ousting him from power and upending his government. While his political problems date back years, claims of economic mismanagement as the cost of food and fuel leaped, as well as the depletion of foreign exchange reserves, made matters worse.

“The extent of economic chaos has united opposition to Imran Khan,” Kinnear of Verisk Maplecroft said.

Middle East and Africa: Experts are also watching for signs of political distress in other countries in the Middle East that are heavily dependent on food imports from the Black Sea region, and often provide generous subsidies to the public.

In Lebanon, where nearly three-quarters of the population was living in poverty last year as the result of a political and economic collapse, between 70% and 80% of imported wheat comes from Russia and Ukraine. Key grain silos were also destroyed during the 2020 explosion at the Beirut port.

And Egypt, the world’s largest buyer of wheat, is already seeing enormous pressure on its huge subsidy program for bread. The country recently set a fixed price for unsubsidized bread after prices spiked, and is trying to secure wheat imports from countries like India and Argentina instead.

With an estimated 70% of the world’s poor living in Africa, the continent will also be “very exposed” to rising food and energy prices, Arezki said.

Droughts and conflict in countries like Ethiopia, Somalia, South Sudan and Burkina Faso have created a food security crisis for more than a quarter of the continent’s population, the International Committee of the Red Cross said this week. The situation risks getting worse in the coming months, it continued.

Political instability has already been building in parts of the continent. A series of coups have taken place in West and Central Africa since the start of 2021.

Europe: Even countries with more developed economies, which have greater buffers to shield citizens from painful price increases, won’t have the tools to fully cushion the blow.

Thousands of protesters gathered in cities across Greece this week to demand higher wages to counter inflation, while France’s presidential election is narrowing as far-right candidate Marine Le Pen plays up her plans to reduce the cost of living. President Emmanuel Macron’s government said last month it was considering issuing food vouchers so that middle and low-income families could afford to eat.

— Jessie Yeung, Rhea Mogul and Sophia Saifi contributed reporting.

Bankrupt crypto exchange FTX may have over 1 million creditors as ...

New York CNN —

Bankrupt crypto exchange FTX could have more than 1 million creditors and has been in contact with “dozens” of regulators around the world, according to court documents, underlining the far-reaching impact from the stunning collapse of one of the industry’s biggest players.

The new bankruptcy court filings also offer new details into the liquidity crisis that caused FTX to implode and called out the role of Sam Bankman-Fried, the exchange’s 30-year-old founder and one of the faces of the crypto industry.

In filings dated Monday, FTX’s lawyers say there is “substantial interest in these events” from regulatory authorities around the world.

In just the past 72 hours, FTX says its representatives have been in touch with “dozens” of federal, state and international regulatory agencies, including with the US Attorney’s Office, the US Securities and Exchange Commission and the Commodity Futures Trading Commission.

A person familiar with the matter confirmed to CNN on Monday that federal prosecutors in New York are investigating the FTX collapse.

FTX filed for bankruptcy last week and at the time estimated it had more than 100,000 creditors. Now, FTX has dramatically upped that estimate.

“In fact, there could be more than one million creditors in these Chapter 11 cases,” lawyers for FTX wrote.

The court filing also explained that the “emergency” bankruptcy filing came after FTX faced a “severe liquidity crisis.”

“Questions arose about Mr. Bankman-Fried’s leadership and the handling of FTX’s complex array of assets and businesses under his direction,” thefiling said.

Bankman-Fried resigned last week and apologized for his company’s collapse. The court filing said Bankman-Fried “ultimately agreed to step aside” at about 4:30 a.m. on Friday.

–CNN’s Kara Scannell contributed to this report.

The West's $1 trillion bid to collapse Russia's economy | CNN ...

London CNN Business —

The West has responded to Russia’s invasion of Ukraine with round after round of punishing sanctions. The latest salvo is designed to spark a banking crisis, overwhelm Moscow’s financial defenses and tip the Russian economy into a deep recession.

Never before has an economy with the global importance of Russia’s been targeted with sanctions at this level, according to analysts, who say there is now a high risk that Russia will face a financial crisis that pushes its largest banks to the brink of collapse.

Western officials have described their campaign as an economic war meant to punish President Vladimir Putin and turn the country he leads into an international pariah — even if it takes years for sanctions to destroy the defenses of Russia’s “fortress economy.”

“We will provoke the collapse of the Russian economy,” French Finance Minister Bruno Le Maire told a local news channel on Tuesday.

Russia’s status as a global energy supplier will make that mission all the more difficult. Europe gets nearly 40% of its natural gas and 25% of its oil from Russia, and any disruptions to those exports would cause already elevated global prices to rise even further.

How the West is fighting

Putin’s invasion of Ukraine has been met with an unprecedented response from the United States, the United Kingdom, the European Union, Canada, Japan, Australia and other countries. Even Switzerland, famous for its neutrality and banking secrecy, has pledged to impose sanctions on Russia.

The West has cut off Russia’s two largest banks, Sberbank (SBRCY) and VTB, from direct access to the US dollar. It has also taken steps to remove some Russian banks from SWIFT, a global messaging service that connects financial institutions and facilitates rapid and secure payments.

The coalition is trying to prevent Russia’s central bank from selling dollars and other foreign currencies to defend the ruble and its economy. In total, nearly $1 trillion worth of Russian assets have now been frozen by sanctions, according to Le Maire.

“Western democracies have surprised many by pursuing a strategy of exerting intense economic pressure on Russia through effectively cutting it off from global financial markets,” Oliver Allen, markets economist at Capital Economics, said in a research note.

“If Russia continues on its current path, it is quite easy to see how the latest sanctions could be just the first steps in a severe and enduring severing of Russia’s financial and economic ties with the rest of the world,” he added.

Western countries have ruled out sending troops to fight in Ukraine, leaving sanctions as the primary means of challenging Russia. The measures could wipe as much as 6% off Russia’s gross domestic product, according to Oxford Economics.

“Our strategy, to put it simply, is to make sure that the Russian economy goes backward as long as President Putin decides to go forward with his invasion of Ukraine,” a senior US administration official told reporters.

Russia’s ‘fortress’ economy

Since 2014, when the United States and its Western allies imposed sanctions on Moscow following the annexation of Crimea and the downing of Malaysian Airlines Flight 17, Putin has been trying to sanction-proof Russia’s $1.5 trillion economy, the 11th largest in the world.

Moscow has attempted to wean its oil-dependent economy off the dollar, limited government spending and stockpiled foreign currencies.

Putin’s economic planners have also sought to boost domestic production of certain goods by blocking equivalent products from abroad. Russia’s central bank has meanwhile amassed a war chest of $630 billion in reserves including foreign currencies and gold — a huge sum compared to most other countries.

Those defenses are now being severely tested.

The sanctions have rendered roughly 50% of Russia’s foreign reserve stockpile useless, according to Capital Economics.

“External conditions for the Russian economy have drastically changed,” the Russian central bank said Monday, announcing that it would roughly double interest rates to 20%. “This is needed to support financial and price stability and protect the savings of citizens from depreciation,” the bank added.

Russia is also imposing capital controls. The central bank ordered companies to sell foreign currencies on Monday to prop up the ruble as it plunged to a record low against the US dollar. And Putin is planning a decree that would temporarily ban foreign companies and investors from selling Russian assets — which have become toxic for many since the invasion.

“The $600 billion-plus war chest of Russia’s foreign reserves is only powerful if Putin can use it,” a senior Biden administration official told reporters.

What happens next

All eyes are on the Russian financial system.

There were reports over the weekend that Russians were standing in long lines to withdraw cash from ATMs, raising the prospect of a run on the country’s banks. Already the main target of sanctions, Russian banks could come under even greater pressure if borrowers are unable to repay loans as the inevitable recession hits businesses and households.

Liam Peach, an emerging markets economist at Capital Economics, said that Russian banks could be forced to respond by selling assets — probably on the cheap. Credit could become scarce, making the economic pain from sanctions even worse.

“The ratcheting up of Western sanctions over the weekend has left Russian banks on the edge of crisis,” said Peach.

One early casualty was the European subsidiary of Sberbank, Russia’s biggest lender that has been sanctioned by Western allies. The European Central Bank said Monday that Sberbank Europe, including its Austrian and Croatian branches, was failing, or likely to fail, because of “significant deposit outflows” triggered by the crisis.

Another problem is that Russian banks only have enough foreign cash on hand to cover roughly 15% of the foreign currency deposits on their books. The central bank would normally supply banks with foreign currency, but with half its war chest out of bounds it may not be able to do that, and defend the ruble at the same time.

The central bank could be under pressure for months or even years.

Thanks to oil and gas, the value of Russia’s exports far exceeds imports, and payments into the country are a major source of foreign currency. But investors and businesses could try to move large amounts of foreign cash outside the country as the ruble falls, forcing the central bank to spend up to $100 billion of its available reserves this year, according to Capital Economics.

At the same time, the West could crack down even harder. The United States and its allies could remove more Russian banks from SWIFT and further restrict their access to dollars and euros, according to the Institute of International Finance. They could also cut off Russian energy exports, although that would cause prices to spike.

Further escalation of the economic conflict could have major consequences.

“Don’t forget that in human history, economic wars quite often turned into real ones,” former Russian President Dmitry Medvedev said Thursday in response to Le Maire’s comments.

Tom Brady and Gisele Bundchen named in lawsuit against FTX ...

New York CNN Business —

The fallout from the spectacular implosion of crypto giant FTX has triggered a cascade of wide-reaching effects: It’s ensnared a number of celebrities who endorsed the now-bankrupt platform, and financial contagion is spreading across the vast crypto and digital-asset ecosystem.

On Wednesday, the lending arm of crypto brokerage Genesis suspended redemptions and new loan originations after an “abnormal” number of withdrawal requests that exceeded its current liquidity, citing market turmoil from the failure of FTX.

Genesis said it was working with advisers “to explore all possible options,” adding that it would release a plan for the lending business next week. “We’re working tirelessly to identify the best solutions for the lending business, including among other things, sourcing new liquidity,” the company said.

Genesis’ lending unit had about $2.8 billion in active loans in the third quarter, according to its website.

The suspension comes as the entire crypto industry is on edge following the unraveling of Sam Bankman-Fried’s FTX exchange and Alameda Research hedge fund, both of which filed for bankruptcy late last week.

“In the crypto world, the minute you see a company or firm announce ‘we’re temporarily halting withdrawals’ — yikes,” said Daniel Roberts, editor-in-chief of Decrypt Media, a crypto-focused news outlet. “You put them on death watch now … It’s unusual that someone says ‘we’re halting withdrawals’ and then they say, ‘OK, withdrawals back on, we’re good.’”

That “death watch” is not confined to Genesis.

Soon after the company suspended withdrawals, one of its partners, Gemini — the crypto firm founded by Tyler and Cameron Winklevoss — warned customers that redemptions under its Earn program would be delayed. Gemini said it was working with Genesis to help customers redeem funds from the program, which allowed customers to earn interest on crypto holdings. No other Gemini products or services were affected, the company said.

Meanwhile another big player in the crypto space, BlockFi, halted withdrawals last week as FTX came unglued. On Tuesday, the Wall Street Journal reported BlockFi was preparing for a potential bankruptcy filing.

Of course, major players in the crypto space are rushing to distinguish themselves from FTX and other firms that have gone bust in the past year as token prices have slumped.

One is Brian Armstrong, the CEO of publicly traded exchange Coinbase, who told CNN’s Julia Chatterly on Wednesday that even though the fallout is hurting the industry now, it may ultimately be a positive for companies like his.

“Crypto is not going anywhere,” he said in an interview, which will air Thursday on First Move. “One bad player does not undermine the entire thing — similarly to how Bernie Madoff doesn’t cause us to question the entire traditional financial system.”

Lawsuit names Tom Brady, Gisele Bundchen, others

And the legal headaches for Bankman-Fried, FTX’s founder who resigned as CEO last week, are piling up.

On Wednesday an FTX investor sued Bankman-Fried as well as several celebrities who have endorsed the platform, including Tom Brady, Gisele Bundchen and Steph Curry. “The deceptive FTX platform maintained by the FTX entities was truly a house of cards,” the proposed class-action lawsuit states.

Heavyweight lawyers Adam Moskowitz and David Boies filed the suit on behalf of an FTX customer, Edwin Garrison.

Moskowitz, a Florida lawyer, is also behind a class-action suit against crypto broker Voyager Digital, which also filed for bankruptcy earlier this year. And Boies is perhaps best known for representing Vice President Al Gore in 2000’s Bush v. Gore.

In an email to CNN Business, Moskowitz alleged FTX was “a massive Ponzi scheme larger than the Madoff scheme.”

“FTX were geniuses at public relations and marketing, and knew that … [it] could only be successful with the help and promotion of the most famous, respected, and beloved celebrities and influencers in the world,” Moskowitz wrote.

Representatives for Brady, Bundchen and Curry didn’t immediately respond to CNN Business’ request for comment.

Lawyers who aren’t involved in the case told CNN Business that a key question in the case will be whether cryptos can be treated as securities under the law. The Securities and Exchange Commission has said they are; the industry widely disagrees.

In its heyday, FTX received endorsements from several athletes and celebrities. Brady and Bundchen, notably, took an undisclosed equity stake in the exchange in 2021.

It’s not clear from the lawsuit what economic relationship the celebrities had with FTX, says Charles Whitehead, professor at Cornell Law School, who is not involved in the case. But plugging crypto has different implications than, say, endorsing a sports drink or athletic wear.

“Selling an asset that is a financial instrument … is not the same thing as selling sneakers,” Whitehead says. “There are anti-fraud and consumer-protection rules for selling bad sneakers. There are more restrictive rules when you’re talking about selling financial assets.”

He added: “All these celebrities who are running around and doing these sorts of sponsorships should stop and ask a securities lawyer.”

Growing calls for regulation

In recent days, regulators, policy makers, and even crypto industry leaders have publicly called for Congress to take action on the crypto market, which is largely unregulated and lacks clear guidelines for traders.

“The recent failure of a major cryptocurrency exchange and the unfortunate impact that has resulted for holders and investors of crypto assets demonstrate the need for more effective oversight of cryptocurrency markets,” Treasury Secretary Janet Yellen said in a statement Wednesday. “Where existing regulations apply, they must be enforced rigorously so that the same protections and principles apply to crypto assets and services.”

—CNN Business’ Jennifer Korn contributed to this article.

FTX: Inside the crypto giant's downfall | CNN Business

New York CNN Business —

November 2022 is a month that investors, particularly in cryptocurrencies, will never forget. And the worst may be yet to come.

Over the past two weeks, the digital asset industry has watched in horror as FTX, the multi-billion-dollar crypto exchange created by one of its biggest and brightest stars, Sam Bankman-Fried, imploded.

The failure of FTX, shook the foundations of the entire ecosystem. Token prices tumbled across the board as investors rushed to exit risky positions. Contagion followed. In the panic, depositors scrambled to pull their money out of various crypto platforms, forcing lenders to halt withdrawals — what one industry watcher described a going on “death watch.”

Overnight, Bankman-Fried went from hero to villain.

How did we get here? And can crypto survive? The saga is far from over, but if you’re just tuning in, here’s what you need to know.

Quick recap

On November 2, an article from the crypto trade publication Coindesk cited a leaked financial document that raised questions about the relationship between FTX and Bankman-Fried’s trading house, Alameda. On paper, they were two separate companies that happened to be owned by the same man. But the Coindesk article said that Alameda “rests on a foundation largely made up of a coin that a sister company invented.”

A few days later, the head of FTX’s biggest rival, Binance, said the company would liquidate $580 million worth of FTT, the FTX’s in-house token. That set off a firestorm of draw downs that FTX didn’t have the cash to facilitate.

Sam Bankman-Fried saw his personal fortune of billions of dollars evaporate overnight. Eva Marie Uzcategui/Bloomberg/Getty Images

Panic spread, tanking the value of not only FTT but also more mainstream cryptos including bitcoin, ethereum and solana.

FTX faced a massive liquidity crisis. It needed a bailout, and briefly, it seemed it might be rescued by none other than Binance, its rival whose drawdown escalated the crisis. But Binance bailed on the rescue plan less than a day after announcing it, saying FTX’s problems were “beyond our control or ability to help.”

On November 11, FTX and Alameda filed for bankruptcy, and Bankman-Fried resigned as CEO of the exchange. “I f**ked up,” he wrote in a lengthy Twitter apology.

House of cards

FTX appointed a restructuring expert, John J. Ray III, as CEO to shepherd what’s left of the firm through bankruptcy.

That involves taking a cold hard look at the company’s financials and figuring out exactly how much it holds in assets and liabilities.

It’s only been a week, and Ray has declared it’s the biggest mess he’s ever encountered. That’s coming from an executive who made his name overseeing the liquidation of Enron, the largest bankruptcy reorganization in US history.

“Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here,” Ray wrote in a court filing Thursday.

The filing contains evidence of colossal mismanagement and potential fraud taking place under Bankman-Fried’s leadership.

Bankman-Fried hasn’t been charged with any crimes. His lawyer didn’t respond to CNN Business’ request for comment.

Crypto contagion

The crypto industry is on edge, waiting for the next dominoes to fall. Soon after FTX went down, crypto firms were inundated requests from customers seeking to claw their money back — the crypto equivalent of a run on the bank. Several firms have been forced to suspend withdrawals while they sort out their liquidity problems.

“In the crypto world, the minute you see a company or firm announce ‘we’re temporarily halting withdrawals’ — yikes,” said Daniel Roberts, editor-in-chief of Decrypt Media, a crypto-focused news outlet. “You put them on death watch now … It’s unusual that someone says ‘we’re halting withdrawals’ and then they say, ‘OK, withdrawals back on, we’re good.’”

Among the firms that are at risk is lender BlockFi, which said it has “significant exposure” to FTX. BlockFi has suspended most operations. According to the Wall Street Journal, the company is preparing for a potential bankruptcy filing.

The pain isn’t confined to crypto companies. Venture capital firm Sequoia marked down its $210 million investment in FTX to zero. Similarly, the Ontario Teachers’ Pension Plan, which invested $95 million, said it now believes that investment is worthless. Roughly 1 million others may have lost all the money they put into FTX.

Binance, meanwhile, is stepping in as a potential lifeline for companies hit by FTX’s collapse. Its CEO, Changpeng Zhao, said Monday that his team would establish “an industry recovery fund,” for projects facing a liquidity crisis. Binance and others have been quick to try to distinguish themselves from FTX, assuring customers and investors that their financials are on solid footing.

Zhao, who goes by CZ, told CNN’s Anna Stewart that an FTX-style collapse is not a risk for Binance. Asked what he would say if all his customers wanted to withdraw their money at once, CZ replied: “Yes, no problem…We have always been profitable.”

Quirky genius turns pariah

At the heart of the entire saga is an enigmatic 30-year-old who managed to charm his way into powerful circles dominated by celebrities, lawmakers and deep-pocketed investors.

In recent years, SBF (as he’s known online) appeared on the covers of Forbes and Fortune, hailed as the crypto world’s Warren Buffett. He accumulated a vast personal fortune, estimated at $26 billion at its peak earlier this year.

All of that went up in smoke as FTX unraveled. His fortune was completely wiped out, and now his companies are under investigation by federal prosecutors in New York, according to a person familiar with the matter.

SBF had become a fixture in Washington, too, where he regularly traveled to lobby lawmakers for greater regulatory clarity for the crypto industry. But since losing his companies, SBF has been tweeting erratically and told a Vox reporter that all of his DC trips were little more than white-hat posturing.

“F*ck regulators,” he told Vox in the interview, which was conducted over direct messages on Twitter. “They make everything worse.”

Investigations and regulatory scrutiny

FTX said this week that its representatives have been in touch with “dozens” of federal, state and international regulatory agencies.

In addition to the Southern District of New York’s probe, FTX is reportedly under investigation by the Securities and Exchange Commission and the Commodities and Futures Trading Commission, according to multiple news outlets.

Authorities in the Bahamas, where FTX is based, opened a criminal investigation shortly after the firm filed for bankruptcy.

On Friday, a powerful subcommittee in the House of Representatives said it was seeking internal documents and communications from Bankman-Fried and FTX to understand how the crypto exchange collapsed so suddenly and what is being done to recover customer funds.

Can crypto survive?

In short yes. But there will be a lot more pain.

“In the short term, FTX’s collapse has destroyed trust,” said Matt Hougan, CIO at crypto asset manager Bitwise. “The marginal crypto investor will now think twice before signing up for an account, and many institutional investors will sit on the sidelines waiting to see what other shoes will drop.”

Many observers have compared crypto to the dot-com bubble of the late 90s — plenty of companies went bust, but those that survived, like Amazon, emerged to become the cornerstones of the tech industry.

Another historical comparison making the rounds is the fall of Lehman Brothers in 2008, which set off a global financial crisis. Crypto optimists might be quick to point out that Lehman didn’t take all of Wall Street down with it. Skeptics might counter that that’s only because the US government intervened — an outcome that is highly unlikely in the largely unregulated world of crypto.

“There are attempts to make this about cryptocurrency and sufficient regulation, but this disaster has nothing to do with crypto in and of itself,” said economist Pete Earle of the American Institute for Economic Research, a think tank. “It’s about fraud and the power of virtue signaling.”

He added: “This scandal, far from destroying crypto, practically ensures that crypto will be around for a long, long time.”