And definitely was never the case if that chain of assets had the same par value.
E.g. a 100% dollar-backed worth $1000 can never be backed by $1000 of B-rated mortgages. It would have been e.g. $2000 of B-rated mortgages. Obviously, this still had a massive flaw as we saw.
The point still stands though that USDT's profits are probably all based on it's float, so they want to go as risky as possible to generate more profits. They get all the upside of high-yield assets, and not the downside.
The problem in 2008 is correlated risk — basically, the difference between rolling once per mortgage (uncorrelated defaults) or just once that impacts all the mortgages (correlated defaults). Creating a “more secure” investment out of nominally more “less secure” for investments depends on the risk being uncorrelated, ie every risky investment is a separate roll.
But as we saw in 2008, many people may default at once if the economy becomes unhealthy.
-JUST- on the housing side you had Inflated assessments (A lot of places got in trouble for this in the aftermath,) a tendency to do ARMs and being unprepared for an interest spike, NINJA loans, and the general expectation by too many people (both securities handlers and homeowners) about correlated vs individual risk.
On the homeowner side, correlated risk and the subsequent drop in their home's value resulted in a good number of defaults, leading to a second drop in values (lest we forget the 'goodbye parties' some of these people threw in their temper tantrums on defaulting, a coworker of mine was able to buy one of those on the cheap but it needed a lot of repairs.)
We cannot forget however that general the whole populace, both citizen and corporation, were drunk on 'cheap' credit. (Which is my biggest concern about our current situation, I think some people still are.) When they were unable to refinance existing debt on terms as good as before, or rates on other lines of credit went up, it became harder to service said debt.
I can think of at least two cases where 'expansion' efforts in the age of cheap credit (In one case it was expanding a chain, in another it was launching a new line of business,) led to death spirals of the companies in question.
It was ignoring solvency != liquidity. Most of the structured mortgage products paid out fine. You really can skim cream off crap through payment prioritisation. But that was not clear ex ante. If you’re leveraged or in dire straits, that a security will pay as promised over the coming decade is little comfort when it’s going at a dime on the dollar.
Tether was originally 100% ‘backed’ and after more and more pressure, they literally did that exact same thing with the percent that was backed in USD.
“It’s 100%. Okay, it’s absolutely backed by 99% usd. JK, 96! I think they are at like 74% now publicly backed by USD?
For the posterity of this thread American banks are no longer required to hold any reserve requirements at all[1].
Though I guess that is a "different" issue depending on who you ask here.
Ask yourself this - can everyone in the country take their money out at the same time
For these shitty stablecoins: nearly everyone
For the actual money you use everyday: Maybe 2-3% of people can cash out of the system properly.
A system built on trust works until it doesn't.
[1] https://www.federalreserve.gov/monetarypolicy/reservereq.htm
They simply do not have your money nor could they realistically insure every persons savings if their was bankruns, it's a system built upon nothing more than trust. When that trust dwindled in recent times, they brought in FDIC to create more trust out of thin air.
Stablecoins don't offer that. They have their own stabilizing mechanism where in a crisis, the peg collapses so quickly that it's not even worth trying to take any out after considering peak traffic tx fees.
Glorious.
The FDIC has a track record of payouts and they keep meticulous of every bank they insure, going back to the program inception in 1933.
Which, I believe is correct and also about as stabilizing as a deadman’s switch on an explosive vest held by an gorilla. Which, hey, gorillas are pretty smart, if they know they aren’t supposed to let go, they’ll try. But it’s not a good idea to spend much time in their vicinity in such a situation.
I’d assumed it was an attempt at dry humor, straight man/ad-absurdism style, which I appreciated.
That is misleading. Banks are no longer required to hold a certain fraction of their deposits in their bank account at a Federal Reserve bank--that's the reserve requirement that was reduced to 0%. Keep in mind that only money in the bank account qualifies as reserves that requirement; a literal pile of dollar bills would contribute not one cent.
Instead, banks are required to keep on hand sufficient equity for a percentage of their risk-weighted assets--money that, if the assets go to 0, can be raided to make up the losses. The requirement here starts at I believe 8%, and increases if you're a more important bank.
(If I'm computing it correctly, Tether has disclosed a capital ratio of approximately 0%, FWIW. Were Tether actually held to the same standards as a bank, Tether would be considered dangerously undercapitalized if not outright insolvent.)
Define "sufficient", give it an actual number...
> Tether has disclosed a capital ratio of approximately 0%
NYAG accounted for 90% of their assets with that big case last year didn't they?
Banks do have strict Capital requirements.
The "reserve" requirement going to zero is different.