5 ms·

These algorithmic stablecoins are just the CDO reinvented. You slice up the risk into different pools and play funny games with the risk. You can therefore bui

These algorithmic stablecoins are just the CDO reinvented. You slice up the risk into different pools and play funny games with the risk. You can therefore build an AAA bond out of subprime mortgage crap, and everything is fine Well, except for 2008 but who was paying attention to that anyway?

dan-robertson 5y ago
Dividing things into different senior/junior tranches or grouping together things to reduce uncorrelated risks is not a recent innovation. It’s been important to finance for a long time. I don’t think this has much to do with CDOs.
- dragontamer 5y ago
  Fair. Still, CDOs are the most recent example where they went wrong on a very large scale, enough to wreck the USA's real estate market in 2008... and then topple down a lot of banks as well.
  - deleted 5y ago
    [deleted]
  - SkyMarshal 5y ago
    And nothing in cryptocurrency is remotely in that same league or that systemically risky… yet. I do worry about down the road, and hope all that hair-brained stablecoin and Ponzi schemes get broken and discredited before then.
    - bb88 5y ago
      2008 was caused by systemic risk. And geniuses in the banks failed to see it. So I guess, I fail to see why I should believe some $RANDOM_INTERNET_COMMENTER could figure out if an asset class has systemic risk.
      - deleted 5y ago
        [deleted]
      - renewiltord 5y ago
        Ironic, considering the source of quite a bit of profit was pretty much random internet blogger 3
        bb88 5y ago
        Ironic or tragically coincidental? There was a song about that a while back. The people I knew that made money off of it, like actually studied it and bet against the trend and were rewarded handsomely.
      - sgt101 5y ago
        Apply Lenin's maxim... the banks made it through 2008; in fact Lehmans were really shocked that they got thrown under the bus. The miscalculation was that the authorities would act irrationally in the crisis and let a broker dealer go under. All the banks had tested this with LTCM and were confident that they would get bailed and could collect on both sides. They were mostly right. The lesson for me is that authorities need to act a bit like an old testament god. Some random smiting would change market behaviour significantly, and for the good.
        ENGNR 5y ago
        I never thought I'd agree with such a thing but.... Yes, random smiting!
        bb88 5y ago
        > All the banks had tested this with LTCM Yeah I was just remembering this tonight. https://en.wikipedia.org/wiki/Long-Term_Capital_Management https://en.wikipedia.org/wiki/Long-Term_Capital_Management The argument there was that LTCM was "too big to fail". Really they probably weren't, but they had 1.25T derivative positions off-book apparently. Love or hate Paul Krugman, he argued that TARP could have been better put to use as a social safety net. The banks who took the risky investments can burn to the ground, but the citizens could be just fine.
  - throwaway2037 5y ago
    To be clear, the great majority of investment bank losses in 2008/2009 did not come from CDOs and even CDO^2s ("CDO squared"). It came from CDS on ABS/CDO. Roughly, you could get long/short on an ABS/CDO/whatever bond that you didn't own. It's like selling fire insurance on your neighbor's home. By itself, not as crazy as it sounds in the financial derivatives landscape, but the underlying collateral were a pile of garbage. There was (and still is) already a huge and healthy CDS on corporate names market, so it seemed reasonable at the time to expand the CDS product. Unfortunately, once the fraud with underlying loans started to unravel, the losses became so large that many CDS counterparties went bankrupt, so the whole thing backed up the investment banks themselves. (See: Fed/Treasury bailouts / bank firesales!) To me: CDOs and CDS on ABS/CDO is just the tip of the fraud iceberg.
- logifail 5y ago
  > grouping together things to reduce uncorrelated risks is not a recent innovation Completely misjudging whether risks are correlated or not is not a recent innovation either.
t_mann 5y ago
Algorithmic stablecoins aren't anything like CDO's at all. They're more like a pawn shop acting as a bank.
- itronitron 5y ago
  >> a pawn shop acting as a bank. I thought that is what CDOs are as well. From Investopedia -> A collateralized debt obligation (CDO) is a complex structured finance product that is backed by a pool of loans and other assets and sold to institutional investors.
  - t_mann 5y ago
    A bank issues money (deposits), and stablecoins try to produce something 'money-like'. CDO tranches promise different rates of return with different riskieness, they never really acted or were meant as money substitutes.
    - dragontamer 5y ago
      No one invests into stablecoins to get crappier versions of USD. They go into UST because they were promised 20% risk free APY from Anchor. CDOs (or really the generation of junior vs senior debt) showed these people how to cut up risks and provide returns for extended periods of time. Much like how CDOs cut up debts and moved risk around in funny ways. But no wealth was actually generated. At least with CDOs the subprime mortgages had high APY, it was just that the risk of widespread default was miscalculated. Furthermore, the senior debt tranches of CDOs had lower returns than the underlying. (3% 'risk free' for example, built out of 5% or 8% subprime mortgages) This Anchor / UST / Luna looks unsustainable. There is no financial instrument that offers 20% risk free returns in today's world.
      - jboy55 5y ago
        There was a off hand comment in the Big Short book, about a Money Market fund, Reserve Primary Fund, that announced they couldn't pay back all debits, during the worst of the 2008 crisis. It was, "Money Markets weren't cash -- they paid interest, and thus bore risk, ..." Its interesting to note that Money Markets pay out <1% interest now. When I searched for Money Markets to get the %, I got an Ad for "Donut" touting a 7% APY DeFi. They advertise they put money into StableCoins and earn a return. Customer Quote on the page, "I make so much money on interest, I can pay rent". My god, the collapse will be huge.
deleted 5y ago
[deleted]

dan-robertson 5y ago

Dividing things into different senior/junior tranches or grouping together things to reduce uncorrelated risks is not a recent innovation. It’s been important to finance for a long time. I don’t think this has much to do with CDOs.

dragontamer 5y ago
Fair. Still, CDOs are the most recent example where they went wrong on a very large scale, enough to wreck the USA's real estate market in 2008... and then topple down a lot of banks as well.
- deleted 5y ago
  [deleted]
- SkyMarshal 5y ago
  And nothing in cryptocurrency is remotely in that same league or that systemically risky… yet. I do worry about down the road, and hope all that hair-brained stablecoin and Ponzi schemes get broken and discredited before then.
  - bb88 5y ago
    2008 was caused by systemic risk. And geniuses in the banks failed to see it. So I guess, I fail to see why I should believe some $RANDOM_INTERNET_COMMENTER could figure out if an asset class has systemic risk.
    - deleted 5y ago
      [deleted]
    - renewiltord 5y ago
      Ironic, considering the source of quite a bit of profit was pretty much random internet blogger 3
      - bb88 5y ago
        Ironic or tragically coincidental? There was a song about that a while back. The people I knew that made money off of it, like actually studied it and bet against the trend and were rewarded handsomely.
    - sgt101 5y ago
      Apply Lenin's maxim... the banks made it through 2008; in fact Lehmans were really shocked that they got thrown under the bus. The miscalculation was that the authorities would act irrationally in the crisis and let a broker dealer go under. All the banks had tested this with LTCM and were confident that they would get bailed and could collect on both sides. They were mostly right. The lesson for me is that authorities need to act a bit like an old testament god. Some random smiting would change market behaviour significantly, and for the good.
      - ENGNR 5y ago
        I never thought I'd agree with such a thing but.... Yes, random smiting!
      - bb88 5y ago
        > All the banks had tested this with LTCM Yeah I was just remembering this tonight. https://en.wikipedia.org/wiki/Long-Term_Capital_Management https://en.wikipedia.org/wiki/Long-Term_Capital_Management The argument there was that LTCM was "too big to fail". Really they probably weren't, but they had 1.25T derivative positions off-book apparently. Love or hate Paul Krugman, he argued that TARP could have been better put to use as a social safety net. The banks who took the risky investments can burn to the ground, but the citizens could be just fine.
- throwaway2037 5y ago
  To be clear, the great majority of investment bank losses in 2008/2009 did not come from CDOs and even CDO^2s ("CDO squared"). It came from CDS on ABS/CDO. Roughly, you could get long/short on an ABS/CDO/whatever bond that you didn't own. It's like selling fire insurance on your neighbor's home. By itself, not as crazy as it sounds in the financial derivatives landscape, but the underlying collateral were a pile of garbage. There was (and still is) already a huge and healthy CDS on corporate names market, so it seemed reasonable at the time to expand the CDS product. Unfortunately, once the fraud with underlying loans started to unravel, the losses became so large that many CDS counterparties went bankrupt, so the whole thing backed up the investment banks themselves. (See: Fed/Treasury bailouts / bank firesales!) To me: CDOs and CDS on ABS/CDO is just the tip of the fraud iceberg.
logifail 5y ago
> grouping together things to reduce uncorrelated risks is not a recent innovation Completely misjudging whether risks are correlated or not is not a recent innovation either.

t_mann 5y ago

Algorithmic stablecoins aren't anything like CDO's at all. They're more like a pawn shop acting as a bank.

itronitron 5y ago
>> a pawn shop acting as a bank. I thought that is what CDOs are as well. From Investopedia -> A collateralized debt obligation (CDO) is a complex structured finance product that is backed by a pool of loans and other assets and sold to institutional investors.
- t_mann 5y ago
  A bank issues money (deposits), and stablecoins try to produce something 'money-like'. CDO tranches promise different rates of return with different riskieness, they never really acted or were meant as money substitutes.
  - dragontamer 5y ago
    No one invests into stablecoins to get crappier versions of USD. They go into UST because they were promised 20% risk free APY from Anchor. CDOs (or really the generation of junior vs senior debt) showed these people how to cut up risks and provide returns for extended periods of time. Much like how CDOs cut up debts and moved risk around in funny ways. But no wealth was actually generated. At least with CDOs the subprime mortgages had high APY, it was just that the risk of widespread default was miscalculated. Furthermore, the senior debt tranches of CDOs had lower returns than the underlying. (3% 'risk free' for example, built out of 5% or 8% subprime mortgages) This Anchor / UST / Luna looks unsustainable. There is no financial instrument that offers 20% risk free returns in today's world.
    - jboy55 5y ago
      There was a off hand comment in the Big Short book, about a Money Market fund, Reserve Primary Fund, that announced they couldn't pay back all debits, during the worst of the 2008 crisis. It was, "Money Markets weren't cash -- they paid interest, and thus bore risk, ..." Its interesting to note that Money Markets pay out <1% interest now. When I searched for Money Markets to get the %, I got an Ad for "Donut" touting a 7% APY DeFi. They advertise they put money into StableCoins and earn a return. Customer Quote on the page, "I make so much money on interest, I can pay rent". My god, the collapse will be huge.

deleted 5y ago

[deleted]