The standard excuses made by flacks for bankrupt financiers have long fallen into three categories: (1) we were solvent but for the discount risk imposed on the value of our assets, (2) our gamble...
The sad fact that a brilliant guy like Ian Ayres can place any credibility in any aspect of the crypto world is deeply disheartening. Money Go Up spells out some of the real, physical damages to people that crypto has enabled. I check the price of BTC every day, just waiting for the implosion. This is greater fool theory investing, and at some point, there will be no more fools.
There's a magic billboard just out of town that predicts crashes. In the late 90s, it was advertising tech stocks. In the mid 00s, it was advertising real estate investments. I'll know that bitcoin is dead for sure when I see bitcoin on the sign. (Right now, it's an ad for a marijuana shop. Make of that what you will.) The first fools are probably in big cities where the boom started. They aren't real fools, because they can usually get their money out in time. Then the fools in other cities get in on the deal. Then fools in smaller and smaller cities and their suburbs get roped in. When they start having to hunt for fools out where I live, they're getting pretty hard up for fools.
I can’t understand what Ian is thinking with what is at best a misguided act of friendship. “If it had been a bank,” it would have been regulated, subject to risk-based capital requirements, and collapsed a lot earlier.
Every Alt-A and subprime mortgage company in 2008: "I'm solvent! I'm solvent!" Every creditor: "I don't care, I'm taking my money back now!" Don't like it, then don't use leverage.
Also, I'd be the richest man in the world if I could count Musk's assets as my own.
Bankman-Fried is hardly sui generis; Martin Shkreli also went to prison for gambling on resurrection and his defense that he won his gamble did not help him.
Discounting one's assets for credit risk is generically termed Credit Valuation Adjustment; its corollary is that *the market value* of one's liabilities must be discounted for one's own credit risk ("Debit Valuation Adjustment".) People get mad about this, but the liquidation value of a firm just isn't the same thing as the going concern value. So many "controversies" turn on mistaking or deliberately obfuscating this distinction.
Investors are more interested in the liquidation point of a firm than the liquidation value. In corporate bankruptcy law, this is the point at which creditors refuse to roll debt over. In (idealized) bank insolvency law, it is the point at which the regulators pull the plug. In real bank insolvency law, it is the point of the run.
There is a difference between a run and a refusal to roll over. Corporates have temporally laddered liabilities, so a refusal to roll over can often be matched for some time by asset sales. Banks (and things like FTX) are mostly demand liabilities (deposits) or pseudo-demand liabilities (derivatives; repo). They go down more explosively.
This post reminds me of the ride I then had with my employer of the 1980s and early 90s: VMS Realty Partners, a Chicago based high leverage real estate investment company. They mostly began as a tax shelter for the wealthy and when Reagan changed the tax laws they never quite got their footing. At least that is what several analysts told me at the time I worked there (1984-1992), when I served as Corporate Records Manager
A balance sheet that incudes "Loteries to be won" among the assets, likely points to insolvency.
The sad fact that a brilliant guy like Ian Ayres can place any credibility in any aspect of the crypto world is deeply disheartening. Money Go Up spells out some of the real, physical damages to people that crypto has enabled. I check the price of BTC every day, just waiting for the implosion. This is greater fool theory investing, and at some point, there will be no more fools.
There's a magic billboard just out of town that predicts crashes. In the late 90s, it was advertising tech stocks. In the mid 00s, it was advertising real estate investments. I'll know that bitcoin is dead for sure when I see bitcoin on the sign. (Right now, it's an ad for a marijuana shop. Make of that what you will.) The first fools are probably in big cities where the boom started. They aren't real fools, because they can usually get their money out in time. Then the fools in other cities get in on the deal. Then fools in smaller and smaller cities and their suburbs get roped in. When they start having to hunt for fools out where I live, they're getting pretty hard up for fools.
I can’t understand what Ian is thinking with what is at best a misguided act of friendship. “If it had been a bank,” it would have been regulated, subject to risk-based capital requirements, and collapsed a lot earlier.
Every Alt-A and subprime mortgage company in 2008: "I'm solvent! I'm solvent!" Every creditor: "I don't care, I'm taking my money back now!" Don't like it, then don't use leverage.
Also, I'd be the richest man in the world if I could count Musk's assets as my own.
Bankman-Fried is hardly sui generis; Martin Shkreli also went to prison for gambling on resurrection and his defense that he won his gamble did not help him.
Discounting one's assets for credit risk is generically termed Credit Valuation Adjustment; its corollary is that *the market value* of one's liabilities must be discounted for one's own credit risk ("Debit Valuation Adjustment".) People get mad about this, but the liquidation value of a firm just isn't the same thing as the going concern value. So many "controversies" turn on mistaking or deliberately obfuscating this distinction.
Investors are more interested in the liquidation point of a firm than the liquidation value. In corporate bankruptcy law, this is the point at which creditors refuse to roll debt over. In (idealized) bank insolvency law, it is the point at which the regulators pull the plug. In real bank insolvency law, it is the point of the run.
There is a difference between a run and a refusal to roll over. Corporates have temporally laddered liabilities, so a refusal to roll over can often be matched for some time by asset sales. Banks (and things like FTX) are mostly demand liabilities (deposits) or pseudo-demand liabilities (derivatives; repo). They go down more explosively.
“Maybe I die, maybe the king dies, maybe a horse learns to talk.”
Not just crypto. Deregulated markets generally. Even if the product is real it can still be a scam.
https://pluralistic.net/2024/01/27/here-comes-the-sun-king/#sign-here
This post reminds me of the ride I then had with my employer of the 1980s and early 90s: VMS Realty Partners, a Chicago based high leverage real estate investment company. They mostly began as a tax shelter for the wealthy and when Reagan changed the tax laws they never quite got their footing. At least that is what several analysts told me at the time I worked there (1984-1992), when I served as Corporate Records Manager
Here is one part of the story from the NY Times: https://www.nytimes.com/1994/11/02/business/when-the-investors-came-second.html?smid=url-share
And here is another part of the story
That is not an argument I would have expected to see from Ian Ayres.