4 ms·

Would the CEO ever say "Yes we are a ponzi scheme as well"?

BlueTemplar 4y ago
FTX pretty much did, 7 months ago : https://www.bloomberg.com/news/articles/2022-04-25/sam-bankman-fried-described-yield-farming-and-left-matt-levine-stunned https://www.bloomberg.com/news/articles/2022-04-25/sam-bankm... Though it then, by definition, makes it not a Ponzi (at that specific point), since Ponzi implies deception : banks are also unable to pay everyone at once, yet they typically aren't called "Ponzi".
- pjc50 4y ago
  Banks have a liquidity and term mismatch, but are required to be solvent. Ponzi schemes offer fake balances and are insolvent. It's not clear at what exact point FTX became insolvent, but I think the CEO writing an $8bn disguised accounting entry for tokens he'd lent to his girlfriend may have been it.
  - SnowHill9902 4y ago
    When you are big enough liquidity and solvency are the same thing.
  - BlueTemplar 4y ago
    There's also maybe the option of being insolvent but nobody caring because the money is too good..? Not sure what to call this since I assume this has been regulated to death in normal finance ? But it wouldn't surprise me if it had happened at some point at FTX, considering all the greed and hype around crypto... Though I guess it might be a moot point : information doesn't travel instantly, and a judge might still deem you "guilty of Ponzi" (or whatever term is appropriate) if you haven't literally been shouting "We are insolvent !" from the rooftops ? See again : regulation.
    - pjc50 4y ago
      "Trading while insolvent" we call it in the UK; the legal obligation is to call in the administrators when you realize you're insolvent. Which they have now done. And insolvent companies generally do themselves, because it's less painful than the alternative. There will probably be a lengthy argument in court (but which court - Bahamas?) as to whether they should have realized this earlier and whether their accounting was deceptive or incompetent. (those interested should read "Lying for Money" by Dan Davies, it's an entertaining and escalating history of fraud)
    - lupire 4y ago
      "Trading while insolvent" is called "equity" or "unsecured loan", and it's legal and regulated.
- jasonwatkinspdx 4y ago
  > banks are also unable to pay everyone at once, yet they typically aren't called "Ponzi". There's a distinction between liquidity and solvency. Banks can run into liquidity issues, but in theory if they do their job right they should stay solvent, and will be backed by insurance / reinsurance and such. Basically a very different world from these yolo crypto outfits running out of offshore tax havens.
  - BlueTemplar 4y ago
    I am not sure there is a clear distinction between the two for fractional reserve banking ? The bank can have done nothing "wrong", yet if the situation is bad enough : bank run + entities it has been lending to going bankrupt + entities that could bail it out going bankrupt too ; then the bank IS going bankrupt, and taking most of the opposite fraction of the money it claimed to "hold" with it...
    - pjc50 4y ago
      This is where the "lender of last resort", i.e. the government, comes in. Depositor losses are sufficiently bad for the economy as a whole that it makes sense to prevent them at almost any cost. The UK ended up owning RBS: https://commonslibrary.parliament.uk/royal-bank-of-scotland-bailout-10-years-and-counting/ https://commonslibrary.parliament.uk/royal-bank-of-scotland-... Ireland got hit pretty hard: https://www.irishtimes.com/business/financial-services/2022/09/30/net-cost-of-irish-banks-bailout-rises-to-457bn-comptroller-says/ https://www.irishtimes.com/business/financial-services/2022/... but did at least manage to send Sean Quinn to actual jail. Cyprus had too large and too dodgy a banking sector for its government to cover, so there depositors did incur real losses ("haircut").
    - lupire 4y ago
      It's statistical, like everything, and the difference is whether you have a guaranteed valuation for your illiquid assets. If you are backed by the full faith and credit if the US (taxation, IRS, and military), you are 99% solvent. In Brazil, maybe 80%
    - nemothekid 4y ago

FTX pretty much did, 7 months ago : https://www.bloomberg.com/news/articles/2022-04-25/sam-bankman-fried-described-yield-farming-and-left-matt-levine-stunned https://www.bloomberg.com/news/articles/2022-04-25/sam-bankm... Though it then, by definition, makes it not a Ponzi (at that specific point), since Ponzi implies deception : banks are also unable to pay everyone at once, yet they typically aren't called "Ponzi".

pjc50 4y ago
Banks have a liquidity and term mismatch, but are required to be solvent. Ponzi schemes offer fake balances and are insolvent. It's not clear at what exact point FTX became insolvent, but I think the CEO writing an $8bn disguised accounting entry for tokens he'd lent to his girlfriend may have been it.
- SnowHill9902 4y ago
  When you are big enough liquidity and solvency are the same thing.
- BlueTemplar 4y ago
  There's also maybe the option of being insolvent but nobody caring because the money is too good..? Not sure what to call this since I assume this has been regulated to death in normal finance ? But it wouldn't surprise me if it had happened at some point at FTX, considering all the greed and hype around crypto... Though I guess it might be a moot point : information doesn't travel instantly, and a judge might still deem you "guilty of Ponzi" (or whatever term is appropriate) if you haven't literally been shouting "We are insolvent !" from the rooftops ? See again : regulation.
  - pjc50 4y ago
    "Trading while insolvent" we call it in the UK; the legal obligation is to call in the administrators when you realize you're insolvent. Which they have now done. And insolvent companies generally do themselves, because it's less painful than the alternative. There will probably be a lengthy argument in court (but which court - Bahamas?) as to whether they should have realized this earlier and whether their accounting was deceptive or incompetent. (those interested should read "Lying for Money" by Dan Davies, it's an entertaining and escalating history of fraud)
  - lupire 4y ago
    "Trading while insolvent" is called "equity" or "unsecured loan", and it's legal and regulated.
jasonwatkinspdx 4y ago
> banks are also unable to pay everyone at once, yet they typically aren't called "Ponzi". There's a distinction between liquidity and solvency. Banks can run into liquidity issues, but in theory if they do their job right they should stay solvent, and will be backed by insurance / reinsurance and such. Basically a very different world from these yolo crypto outfits running out of offshore tax havens.
- BlueTemplar 4y ago
  I am not sure there is a clear distinction between the two for fractional reserve banking ? The bank can have done nothing "wrong", yet if the situation is bad enough : bank run + entities it has been lending to going bankrupt + entities that could bail it out going bankrupt too ; then the bank IS going bankrupt, and taking most of the opposite fraction of the money it claimed to "hold" with it...
  - pjc50 4y ago
    This is where the "lender of last resort", i.e. the government, comes in. Depositor losses are sufficiently bad for the economy as a whole that it makes sense to prevent them at almost any cost. The UK ended up owning RBS: https://commonslibrary.parliament.uk/royal-bank-of-scotland-bailout-10-years-and-counting/ https://commonslibrary.parliament.uk/royal-bank-of-scotland-... Ireland got hit pretty hard: https://www.irishtimes.com/business/financial-services/2022/09/30/net-cost-of-irish-banks-bailout-rises-to-457bn-comptroller-says/ https://www.irishtimes.com/business/financial-services/2022/... but did at least manage to send Sean Quinn to actual jail. Cyprus had too large and too dodgy a banking sector for its government to cover, so there depositors did incur real losses ("haircut").
  - lupire 4y ago
    It's statistical, like everything, and the difference is whether you have a guaranteed valuation for your illiquid assets. If you are backed by the full faith and credit if the US (taxation, IRS, and military), you are 99% solvent. In Brazil, maybe 80%
  - nemothekid 4y ago