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We will not pursue the potential acquisition of FTX

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Re: We will not pursue the potential acquisition of FTX

#331

Post by matheusmoreira »

JumpCrisscross wrote: post #13

In the thick of it, illiquidity and insolvency blur. But not after the fact. As usual, Levine put it best: “the problem is not a timing mismatch, in which FTX’s customers asked for their cash back but FTX did not have enough ready cash because it had long-term but money-good loans out. The problem is that FTX took its customers’ money and traded it for a pile of magic beans, and now the beans are worthless and there’…

> The problem is that FTX took its customers’ money and traded it for a pile of magic beans

Yup. Just yet another bank leveraging its fractional reserve. They just can't resist, can they? Actually I'm not even sure they're fractional in the case of cryptocurrency exchanges. Wouldn't be surprised if they were gambling with their entire reserves.

Re: We will not pursue the potential acquisition of FTX

#332

Post by fspeech »

cturner wrote: post #327
fspeech wrote: post #324

Earlier quoted context omitted.

What do you mean "toy model"? It is how it works operationally. Banks have to settle up by end of each business day or they are out of the business. The fact money is created with loans in a fractional reserve system does not negate operational constraints.

The toy model is the idea that a bank gets deposit from one customer and loans it to another. This is not how it works. If you go to a bank for a loan, they do a risk assessment of you, and then make some marks on a ledger. As a result of this, new money appears in your account. But - what stops banks from creating infinite money? There is a byzantine system of rules laid out by the Basel Accords and national regulat…

Actually the "toy model" is exactly how it works. When you take a loan from the bank and deposit their check your bank must pay whoever the amount on their check. There is not some mysterious ledger they just mark.

The fact that a bank takes an illiquid asset - your promise to pay them back - and turns it into a liquid claim on themselves is not creating money out of "thin air". Your promise to pay the bank is not "thin air" as you will quickly find out if you break your promise.

Re: We will not pursue the potential acquisition of FTX

#333

Post by matheusmoreira »

chii wrote: post #254
panarky wrote: post #237

Earlier quoted context omitted.

Gambling with customers' funds works great for you when you win, and bad for your customers when you lose.

and this is why banks are not allowed to use customer deposits for such activities. And if they do, they must have equity value to back it up - aka, the bank's share holders lose value _first_ when shit hits the fan, before customer deposits. Then lastly, the gov't has put up guarantees on the deposits in case bank equity cannot cover customer deposits when shit hits the fan. Crypto has none of the above - so basical…

This isn't a cryptocurrency problem though. It's a cryptocurrency exchange problem. As you noted, they have essentially reinvented centralized fractional reserve banking with none of the benefits and all of the drawbacks. They're all unregulated banks in disguise.

Cryptocurrencies were meant to put an end to such things. Ironic how corporations ended up reinventing it all on top of crypto. Exchanges are everything that's wrong with this space.

Re: We will not pursue the potential acquisition of FTX

#334

Post by nr2x »

cellis wrote: post #86
mumbisChungo wrote: post #23

The silly thing is that FTX was a money printing machine. There was no reason to start gambling with user funds, aside from greed, hubris, and stupidity. Similarly, Sam's fund Alameda was delta-neutral until some time in 2021, which is something that also could have profitably continued in perpetuity, but they got greedy and started making directional bets with leverage.

There’s a Bloomberg article that goes over why this is a bit more nuanced than “gambling with customers funds”. In short, it’s either one or both of poor risk management ( margin traders can’t post collateral and the collateral they had was FTT which went to zero ) and black swan bank runs ( Binance CEO tweets about risky FTT causing bank run causing further drops ). In fact “gambling with customer funds” was by desi…

Bloomberg is currently the only news source I feel makes me smarter after I read an article.

Re: We will not pursue the potential acquisition of FTX

#335

Post by quickthrower2 »

lokedhs wrote: post #311
quickthrower2 wrote: post #310

Earlier quoted context omitted.

Liquidity means something though. Think of a bank. If everyone withdraws their funds at the same time they may not have the liquidity to pay out. In order to be able to pay out everyone at the same time, they would need to keep it all uninvested/unlent, and then charge you a banking fee instead of paying you interest on it. So there is a tradeoff there.

But banks don't really pay interest anymore, so in some sense I'd expect them to keep it uninvested.

They have fixed costs though

Re: We will not pursue the potential acquisition of FTX

#337

Post by quickthrower2 »

porb121 wrote: post #328
SilasX wrote: post #152

Earlier quoted context omitted.

That’s why I hate when people in these discussions refer to needing/providing “liquidity”. It feels like such a weasel word. Unless you know enough to conclude it’s really a cash flow mismatch, then don’t mince words or overcomplicate it. Money. They need some g/d m/fing money. Maybe they need it as arms-length loans on legitimately illiquid capital. Maybe they need underpriced loans for the risk of the business. May…

> You can absolutely find a buyer instantly! At about the same price it traded for five minutes ago! Just not at the price you need it to be. this is extremely stupid. you can't just sell arbitrary amounts of coin without moving the market a ton and paying a fortune in slippage. they do need liquidity.

You are strengthening their point though. It now becomes:

You can absolutely find a buyer instantly! At about the same price it traded for five minutes ago, actually scratch that, it even worse, it is that price MINUS SLIPPAGE! Just not at the price you need it to be.

Re: We will not pursue the potential acquisition of FTX

#338

Post by Godel_unicode »

eitland wrote: post #320
FormerBandmate wrote: post #282

Earlier quoted context omitted.

Banks inherently gamble with customers deposits, every loan is a gamble. They also can invest in certain types of debt securities, there’s security regulations but that isn’t bad on its own. What FTX did is much worse . They spent their customer’s money on stupid shit like the Miami Heat stadium, political donations, and charity work (which was legitimately really good but not their choice to make), and then replenis…

> Banks inherently gamble with customers deposits, every loan is a gamble. I wouldn't exactly call a residential mortgage a gamble. Not the loan for my car either, the bank has first priority in both and demands I insurance them for the full value and for all eventualities.

Lehman brothers would like a word with you.

Re: We will not pursue the potential acquisition of FTX

#339

Post by colinmhayes »

seabrookmx wrote: post #312
FormerBandmate wrote: post #282

Earlier quoted context omitted.

Banks inherently gamble with customers deposits, every loan is a gamble. They also can invest in certain types of debt securities, there’s security regulations but that isn’t bad on its own. What FTX did is much worse . They spent their customer’s money on stupid shit like the Miami Heat stadium, political donations, and charity work (which was legitimately really good but not their choice to make), and then replenis…

> Banks inherently gamble with customers deposits, every loan is a gamble While there's a ton of nuance here, in the general case it doesn't work how you've implied. When you take out a mortgage, the bank doesn't take a bunch of money other people have deposited. It's literally created out of thin air and marked as a liability on their balance sheet. This is how the majority of money is created in a fractional reserv…

No, banks loan customer funds out as mortgages. It is not literally created out of thin air. You deposit money, the bank gives it to joe to buy a house, he sends it to the seller. Now the seller has your physical money, and joe owes the bank what the bank owes you.

Re: We will not pursue the potential acquisition of FTX

#340

Post by SilasX »

amluto wrote: post #294
SilasX wrote: post #152

Earlier quoted context omitted.

That’s why I hate when people in these discussions refer to needing/providing “liquidity”. It feels like such a weasel word. Unless you know enough to conclude it’s really a cash flow mismatch, then don’t mince words or overcomplicate it. Money. They need some g/d m/fing money. Maybe they need it as arms-length loans on legitimately illiquid capital. Maybe they need underpriced loans for the risk of the business. May…

This is somewhere between a gross oversimplification and wrong. Sure, most problems can be solved by “money” — if someone just gave FTX $10bn in the form of a wire, they’d probably be fine. But this misses the point. If a bank holds short term debt, due in one week, but a customer is withdrawing funds now, the bank needs liquidity — they need dollars today, and all they have is dollars next week. If a dealer owes a c…

I thought my comment made clear that liquidity is a valid concept, and there are valid times to bring it up -- just that most usages in these crises are by people who are throwing the term around hastily, without sufficient basis to isolate liquidity per se as "the problem".

If you agree with that, you're agreeing with my original comment, even and especially if you (correctly) believe that some problems are rightly called "liquidity crises".

As it turns out, FTX was not merely illiquid; no amount of time or low-interest loans would have coordinated the cash flows, and yet every apologist was happy to identify the core deficiency as one of "liquidity", rather than honestly say what they could reasonably have known, at the time, from their perspective: no money, with specifics to be filled in later.

>If a dealer owes a customer 500 BTC that they’re trying to withdraw today, they need liquid Bitcoins, not money.

Even granting the tenuous propositions that Bitcoin isn't a money nor could be purchased therewith, the right diagnosis still wouldn't be "they don't have enough liquidity", but rather "they don't have enough Bitcoin", since the former is specifically making a (bold, overconfident) assertion that the exchange is good for the money if only they could get a few loans. That assertion was false, and almost certainly lacked sufficient basis from its proponent even at the time.

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