5 ms·

> First very simple point, to become insolvent you have to actually take a loss somewhere. This has absolutely NOTHING to do with being insolvent. "Insolvency

> First very simple point, to become insolvent you have to actually take a loss somewhere. This has absolutely NOTHING to do with being insolvent. "Insolvency In accounting, insolvency is the state of being unable to pay the debts, by a person or company, at maturity; those in a state of insolvency are said to be insolvent. There are two forms: cash-flow insolvency and balance-sheet insolvency. " Insolvency deals with the inability to repay your debts (insufficient cash flow is the most common).

toyg 4y ago
- internet person says he works in the crypto space - is actually financially illiterate Checks out, sadly.
- shorthistory 4y ago
  Why would a market maker hold so much of an asset. Market makers do not typically hold $B of anything. Alameda does not need to borrow so much FTT to make markets.
  - amluto 4y ago
    In conventional markets, market makers need the ability to sell that which they make a market in. This can be done by actually owning the asset, by having a credit relationship enabling sales without owning the asset, by naked shorting, etc. If you can’t naked short, and if sales settle effectively immediately (cryptocurrency confirmation may well be slow, but you can’t usefully sell something and buy it back using the sale proceeds without confirming or at least generating and signing the transactions), then you need access to the actual token so you can sell it. In contrast, one can make a market in EUR/USD without actually sitting on a big pile of EUR and USD. In fact, market makers are likely to target an average position of zero in every currency except their home currency unless they are also trying to make some sort of long term bet. Similarly, I doubt you’ll find that most market makers in, say, grain futures have warehouses full of grain. (Grain wants to be eaten, not hoarded for the life of a business. Also, making commodity markets is an entirely different business than growing, storing, transporting, and using commodities.) (This is not trading or market advice, obviously.)
- dcolkitt 4y ago
  I graduated with a degree in finance from Wharton, worked as a quant at Citadel Securities, and have been a high-frequency trader for more than a decade. But I'm more than sure that your credentials at finance or trading are more qualified. :)
  - testrun 4y ago
    You should ask the money back from Wharton. One of the respondents below explains what insolvency means (correction: pretty much all of the comments below).
  - adamsmith143 4y ago
    Lmao. So did all the guys at Lehman, Bear Stearns and LTCM.
  - senttoschool 4y ago
    Ouch. Care to comment now?
  - darth_aardvark 4y ago
    So...
deetsb 4y ago
I'd argue balance sheet insolvency is really the most colloquial definition insolvency. You can always sell assets (at a haircut of course) to evade cash flow insolvency (arguably that's closer to illiquidity really), but you can't do anything to get out of balance sheet insolvency except restructure your liabilities. Alameda being in balance sheet insolvency would depend on their assets taking enough of a hit to wipe out the equity buffer. To Doug's point the junk tokens are likely at book value on their balance sheet
- JumpCrisscross 4y ago
  > can always sell assets (at a haircut of course) to evade cash flow insolvency (arguably that's closer to illiquidity really) For financial institutions, particularly those with short-term liabilities, illiquidity is insolvency. The initial liquidity depresses prices which marks down the balance sheet.
- DebtDeflation 4y ago
  >You can always sell assets (at a haircut of course) to evade cash flow insolvency If the assets in question are marketable securities (stocks and bonds), traded commodities, or real estate, then that's generally true. If the asset is some shitcoin for which no real market exists, not so much.
- fddhjjj 4y ago
  > To Doug's point the junk tokens are likely at book value on their balance sheet The linked article in turn links to coin desk which writes >> Also, token values may be low. In a footnote, Alameda says “locked tokens conservatively treated at 50% of fair value marked to FTX/USD order book.” That suggests to me the unlocked coins are on the balance sheet at market value and the locked at a 50% haircut.
dchftcs 4y ago
Given the assumption that their balance sheet is liquid enough or they have the cash flow to pay the debts, it's reasonable to say that they have take losses as a trading firm to be potentially insolvent. In fact you could turn your argument around to critize the article too, as they are based on the assumption that some of the assets should marked to zero, rather than examining empirically whether those assets could be either collateral or be used to pay the debt.
the_mitsuhiko 4y ago
More importantly in some jurisdictions (eg: Germany) insolvency is not just a fun little accounting definition but comes with criminal charges if a company doesn't immediately file for insolvency.
dcolkitt 4y ago
Alice is a trading firm. Alice borrows $1 billion, Alice then uses $1 billion to go out and buy $1 billion of assets. To become insolvent, the value of Alice's assets has to fall below the value of her liabilities. Otherwise, Alice can simply liquidate her assets to repay her debts. The only way this can happen is if the value of Alice's assets falls below the cost basis in which she purchased those assets (plus some relatively minor short-term secured interested rate). For a trading firm engaged in mark-to-market accounting that condition represents a loss in the income statement. This isn't strange voodoo, this is just simple accounting identities.
- gamblor956 4y ago
  To put it bluntly: Alice becomes legally and technically insolvent if the market value of the acquired assets falls below $1 billion: the value of the assets is no longer sufficient to pay off the $1 billion loan.
  - dcolkitt 4y ago
    So you agree with me? For Alice to become insolvent the price of her assets has to fall below her cost basis. Alameda's cost basis on Solana is the seed round at approximately ten cents, and it's currently trading at $30. Similar story for all the Solana protocol tokens. I don't know what Alameda's cost basis is on FTT (if it's even holding a significant amount financed with hard currency), but we can almost certainly say it's close to the seed round price because the founder of Alameda is literally the founder of FTX. To make this story make sense Alameda at one point must have bought some asset that has fallen significantly from its cost basis. What exactly is this supposed asset? Because Alameda certainly isn't known for going out and taken levered long exposure on BTC, ETH or other post-seed liquid tokens.
    - shorthistory 4y ago
      Still doesn't explain why they are holding $5.8B FTT
    - gamblor956 4y ago
WastingMyTime89 4y ago
>> First very simple point, to become insolvent you have to actually take a loss somewhere. > This has absolutely NOTHING to do with being insolvent. This has everything to do with being insolvent. If you don’t lose money somewhere - interests costing more than what you win being a loss for exemple - you should be able to pay back what you owe in the end. You could be temporary insolvent because you have issues with payment delays and are strapped for cash but there are ways to deal with that especially at Alameda size.

toyg 4y ago

- internet person says he works in the crypto space - is actually financially illiterate Checks out, sadly.

shorthistory 4y ago
Why would a market maker hold so much of an asset. Market makers do not typically hold $B of anything. Alameda does not need to borrow so much FTT to make markets.
- amluto 4y ago
  In conventional markets, market makers need the ability to sell that which they make a market in. This can be done by actually owning the asset, by having a credit relationship enabling sales without owning the asset, by naked shorting, etc. If you can’t naked short, and if sales settle effectively immediately (cryptocurrency confirmation may well be slow, but you can’t usefully sell something and buy it back using the sale proceeds without confirming or at least generating and signing the transactions), then you need access to the actual token so you can sell it. In contrast, one can make a market in EUR/USD without actually sitting on a big pile of EUR and USD. In fact, market makers are likely to target an average position of zero in every currency except their home currency unless they are also trying to make some sort of long term bet. Similarly, I doubt you’ll find that most market makers in, say, grain futures have warehouses full of grain. (Grain wants to be eaten, not hoarded for the life of a business. Also, making commodity markets is an entirely different business than growing, storing, transporting, and using commodities.) (This is not trading or market advice, obviously.)
dcolkitt 4y ago
I graduated with a degree in finance from Wharton, worked as a quant at Citadel Securities, and have been a high-frequency trader for more than a decade. But I'm more than sure that your credentials at finance or trading are more qualified. :)
- testrun 4y ago
  You should ask the money back from Wharton. One of the respondents below explains what insolvency means (correction: pretty much all of the comments below).
- adamsmith143 4y ago
  Lmao. So did all the guys at Lehman, Bear Stearns and LTCM.
- senttoschool 4y ago
  Ouch. Care to comment now?
- darth_aardvark 4y ago
  So...

deetsb 4y ago

I'd argue balance sheet insolvency is really the most colloquial definition insolvency. You can always sell assets (at a haircut of course) to evade cash flow insolvency (arguably that's closer to illiquidity really), but you can't do anything to get out of balance sheet insolvency except restructure your liabilities. Alameda being in balance sheet insolvency would depend on their assets taking enough of a hit to wipe out the equity buffer. To Doug's point the junk tokens are likely at book value on their balance sheet

JumpCrisscross 4y ago
> can always sell assets (at a haircut of course) to evade cash flow insolvency (arguably that's closer to illiquidity really) For financial institutions, particularly those with short-term liabilities, illiquidity is insolvency. The initial liquidity depresses prices which marks down the balance sheet.
DebtDeflation 4y ago
>You can always sell assets (at a haircut of course) to evade cash flow insolvency If the assets in question are marketable securities (stocks and bonds), traded commodities, or real estate, then that's generally true. If the asset is some shitcoin for which no real market exists, not so much.
fddhjjj 4y ago
> To Doug's point the junk tokens are likely at book value on their balance sheet The linked article in turn links to coin desk which writes >> Also, token values may be low. In a footnote, Alameda says “locked tokens conservatively treated at 50% of fair value marked to FTX/USD order book.” That suggests to me the unlocked coins are on the balance sheet at market value and the locked at a 50% haircut.

dchftcs 4y ago

Given the assumption that their balance sheet is liquid enough or they have the cash flow to pay the debts, it's reasonable to say that they have take losses as a trading firm to be potentially insolvent. In fact you could turn your argument around to critize the article too, as they are based on the assumption that some of the assets should marked to zero, rather than examining empirically whether those assets could be either collateral or be used to pay the debt.

the_mitsuhiko 4y ago

More importantly in some jurisdictions (eg: Germany) insolvency is not just a fun little accounting definition but comes with criminal charges if a company doesn't immediately file for insolvency.

dcolkitt 4y ago

Alice is a trading firm. Alice borrows $1 billion, Alice then uses $1 billion to go out and buy $1 billion of assets. To become insolvent, the value of Alice's assets has to fall below the value of her liabilities. Otherwise, Alice can simply liquidate her assets to repay her debts. The only way this can happen is if the value of Alice's assets falls below the cost basis in which she purchased those assets (plus some relatively minor short-term secured interested rate). For a trading firm engaged in mark-to-market accounting that condition represents a loss in the income statement. This isn't strange voodoo, this is just simple accounting identities.

gamblor956 4y ago
To put it bluntly: Alice becomes legally and technically insolvent if the market value of the acquired assets falls below $1 billion: the value of the assets is no longer sufficient to pay off the $1 billion loan.
- dcolkitt 4y ago
  So you agree with me? For Alice to become insolvent the price of her assets has to fall below her cost basis. Alameda's cost basis on Solana is the seed round at approximately ten cents, and it's currently trading at $30. Similar story for all the Solana protocol tokens. I don't know what Alameda's cost basis is on FTT (if it's even holding a significant amount financed with hard currency), but we can almost certainly say it's close to the seed round price because the founder of Alameda is literally the founder of FTX. To make this story make sense Alameda at one point must have bought some asset that has fallen significantly from its cost basis. What exactly is this supposed asset? Because Alameda certainly isn't known for going out and taken levered long exposure on BTC, ETH or other post-seed liquid tokens.
  - shorthistory 4y ago
    Still doesn't explain why they are holding $5.8B FTT
  - gamblor956 4y ago

WastingMyTime89 4y ago

>> First very simple point, to become insolvent you have to actually take a loss somewhere. > This has absolutely NOTHING to do with being insolvent. This has everything to do with being insolvent. If you don’t lose money somewhere - interests costing more than what you win being a loss for exemple - you should be able to pay back what you owe in the end. You could be temporary insolvent because you have issues with payment delays and are strapped for cash but there are ways to deal with that especially at Alameda size.