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FTX tapped into customer accounts to fund risky bets, setting up its downfall

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Re: FTX tapped into customer accounts to fund risky bets, setting up its downfall

#651

Post by imtringued »

dools wrote: post #644
baobabKoodaa wrote: post #622

Earlier quoted context omitted.

You claim that the bank needs no existing customer deposits to create a demand deposit and liability in your account. This claim is true only in the pedantic sense: if the bank is otherwise capitalized (e.g. money from investors in the bank), then it could create loans using whatever money it has, as opposed to using money specifically from depositors. However, what you probably meant is that a bank could loan out mo…

Can you describe how a bank uses money that it has to originate loans? EDIT: note that this paragraph (and the one preceding it) directly contradicts what you are saying: This description of money creation contrasts with the notion that banks can only lend out pre-existing money, outlined in the previous section. Bank deposits are simply a record of how much the bank itself owes its customers. So they are a liability…

One thing that should raise an obvious flag is that if the bank lends your bank account balance, why isn't it telling you that you cannot withdraw or spend it? After all, that money is supposed to be in your or someone else's bank account! It can't be in both simultaneously. The only conclusion is that your bank account isn't actually your money but a bank's promise to pay you money and those promises are obviously created by the bank. The only confusion is over whether highly regulated promises that people use in their day to day activity as money substitute can be considered money or not.

The classic "bank takes your deposit and lends it out" only applies to certificates of deposit, after all, you have no access to that money. You can't transfer or withdraw it until the agreed date.

Re: FTX tapped into customer accounts to fund risky bets, setting up its downfall

#652

Post by imtringued »

lupire wrote: post #598
JamesianP wrote: post #471

Earlier quoted context omitted.

It's more accurate to say they loan out a multiple of deposits based on the inverse of the fraction (the "money multiplier"). If someone puts 1 million in the bank and the fractional reserve is 20 percent, they can now create loans of up to 4 million. Such that the reserve is 20 percent of their total assets of 5 million (= 4 million loans + 1 million cash).

No, fractional reserve means that they can lend out $800K of the $1M deposited, even though the $1M is still counted as the depositor's money and also $800K is a available to lend. https://en.m.wikipedia.org/wiki/Fractional-reserve_banking

Ok you then make an agreement with another bank and that constraint is literally irrelevant.

Re: FTX tapped into customer accounts to fund risky bets, setting up its downfall

#653

Post by selimthegrim »

erincandescent wrote: post #639
lupire wrote: post #585

Earlier quoted context omitted.

That doesn't answer where deposits go in a bank run.

You deposit $10k in the bank The bank originates a mortgage to someone. It uses (some of) your $10k to give cash to the customer getting the mortgage, and the customer then uses that cash to buy the house. For whatever reason, a bank run happens, i.e. everyone comes to make a withdrawal all at once You try to withdraw your $10,000. The problem is that everyone wants cash, not shares of houses, but the bank only has s…

Illiquid but solvent

Re: FTX tapped into customer accounts to fund risky bets, setting up its downfall

#654

Post by new2this »

steveBK123 wrote: post #50
guardiangod wrote: post #15

Earlier quoted context omitted.

>ponzi scheme This is not a ponzi scheme. This is a good old "not firewalling your customer's money and your investment money" that everyone suffered from in 2008. The situation is cataphoric enough without people mis-using terms.

Even in 2008 that is not what happened. Tell me which retail brokerages lost their customers assets because they gambled them away? There is no glossing over the fact that all these crypto explosions are a result of largely re-implementing a pre-Fed, pre-FDIC, pre Great Depression style banking system with all its long-patched defects.

>Tell me which retail brokerages lost their customers assets because they gambled them away?

Banks are required to keep a percentage of deposits in risk free assets as part of the Basel Accord[1].

Banks were marking risky assets such as Super Senior tranches of CDO's as risk free when, guess what, they were actually super risky. When the value of those tranches dropped, the banks lost tons of value and all of the sudden couldn't cover their debts because they were gambling with what should have been cash.

So to answer your question: all of the banks (who were dealing in CDO's) did this.

https://en.wikipedia.org/wiki/Basel_III#US_version_of_the_Ba...

Re: FTX tapped into customer accounts to fund risky bets, setting up its downfall

#655

Post by Waterluvian »

PostOnce wrote: post #629
Waterluvian wrote: post #323

Earlier quoted context omitted.

Diablo 2 taught me this. Along with my other favourite word: Gargantuan.

From Gulliver's Travels by Jonathan Swift, the lands of Lilliput and Gargantua. In one, every resident is tiny, Lilliputian, and in the other: huge, ...Gargantuan Notably, the book reads in a very modern way, it's a bit shocking to know it was written in the 1700s when stylistically, and according to its vocabulary, it feels so very modern.

Wow. Embarrassingly I admit I’ve never read it but you’ve sold me.

Also I love how Gargantua sounds right. Just like Morlocks and Eloi. Language is fun.

Re: FTX tapped into customer accounts to fund risky bets, setting up its downfall

#656

Post by zen21 »

lupire wrote: post #594
zen21 wrote: post #545

Earlier quoted context omitted.

Luckily in many cases this is in fact not “on you”, but rather is a crime , or is subject to civil litigation depending on the nature of the fraud in question. This helps to avoid instances of retributive violence, which is the general solution when a legal system isn’t available.

That's fiat thinking, which is exactly what crypto people want to avoid.

How do they plan to avoid violence when there are betrayals of trust?

Re: FTX tapped into customer accounts to fund risky bets, setting up its downfall

#657

Post by imtringued »

lupire wrote: post #599
JamesianP wrote: post #485

Earlier quoted context omitted.

I'm describing what fractional reserve means. Technically that fraction has been set to zero very recently so it is trivial though still not false. This was discussed a lot elsewhere on this board.

If that you say is true then banks could lend infinite money to their friends and never collect it.

Well, except the friend part the money supply has never shrunk so far.

Re: FTX tapped into customer accounts to fund risky bets, setting up its downfall

#658

Post by zen21 »

twawaaay wrote: post #626
zen21 wrote: post #512

Earlier quoted context omitted.

What about if you buy something you thought you understood, but that’s only because you were lied to?

There has never been a shortage of liars of every kind that seek to steal your money. Somewhat rarer, incompetents who handle your property stupidly. If you care for your money at all, the only person to fault is you. I can try to seek "justice", but this rarely happens with cons that really know what they are doing. It is what I call victim thinking. That you do something stupid and then get bailed out by some autho…

It seems like you believe that trusting anyone is stupid.

Re: FTX tapped into customer accounts to fund risky bets, setting up its downfall

#659

Post by eric_cc »

zukzuk wrote: post #505
astrange wrote: post #486

Earlier quoted context omitted.

Giving away other people’s money is both effective and altruistic, it seems to me.

I suppose it's easier to justify this to yourself when you know most of the people whose money you're gambling with are also driven by the same greed. The cryptocurrency bubble was very transparently built on delusion and avarice, and everyone involved knew it. There are very few truly innocent victims here.

> There are very few truly innocent victims here.

Are you suggesting FTX customers deserved this?

Re: FTX tapped into customer accounts to fund risky bets, setting up its downfall

#660

Post by imtringued »

UncleEntity wrote: post #345
dools wrote: post #312

Earlier quoted context omitted.

> banks at least tell you they are loaning your deposits out Side not but that’s not really how banking works. Banks create deposits when they originate loans and separately look for the assets they need in order to satisfy any regulatory requirements and net flows of funds for inter bank settlements. https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...

But that’s the principle of how banking works. Nobody expects that their money deposited into a savings account is going to sit in a bank vault until it’s time to go pick it up — they know the bank is going to loan it out and pocket the difference between what they charge the borrower and what they pay in interest. Checking accounts are different in that they should have the money on hand to settle whatever spending…

In theory we could do 100% reserve banking with negative interest rates on cash and demand deposits but then "savers" will start complaining how it is draconian to get a certificate of deposit.

It's an interesting double standard.

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