Also in the US at least banks are FDIC insured, so if the bank is breaking the law and gambling inappropriately consumers are still protected.
"How is crypto different than a bank" is a reductive and foolish comparison. There are many, many differences. The primary one being that almost every cryptocurrency system is a fraud at its heart.
The reason I asked is because it seems to me that people are clutching their pearls and saying this is stealing. But as I see it, the difference between FTX and Chase Bank are that Chase has a lot of rules and regulations, and a good insurance policy. But "at it's heart" SFB is no different than Jamie Dimon. The ethics of what SFB did and what American banks would like to do is exactly the same.
I'm not sure I agree with you on that part.
Fraud is defined as "wrongful or criminal deception intended to result in financial or personal gain." Encryption-based currency by itself does not meet that definition.
Can people use crypto to commit fraud? Yes, just the same as they could use fiat or anything else that has perceived value.
imho the main value of crypto as a technology is that it is A) decentralized, and B) removes many intermediaries & inefficiencies involved in handling + distributing money. </$0.02>
A thread where we're discussing a guy using $10B of $16B of cryptocurrency customer deposits to finance his private hedge fund gambling is not a good place to try to make your argument.
That moves it into fraud territory.
And even the banks that did so, given they were FDIC insured and part of the Fed Reserve banking system did not leave any customers in the hole.
We can argue about taxpayer bailouts and bad incentives, but the system worked the way it was supposed to - normal people can put their money in a bank account knowing they will be able to get it back out, come hell or high water.
True that the Volcker rule of Dodd-Frank 2010 eliminated banks using deposits for prop trading as well as other gambling loopholes. That is, until it was weakened in 2019 by R Congress and Trump admin.
https://www.americanprogress.org/article/hollowing-volcker-r...
In any case, I would agree that the FDIC is the big difference, backed by the Fed printing press.
Fed doesn't print money, Treasury prints money. Money is created when banks lend. The FDIC DIF (deposit insurance fund) is $125B and funded entirely by private contributions from member banks. They have a $100B line of credit at Treasury if things go pear shaped but generally they have the authority to seize failing institutions and sell the accounts to other banks without touching the DIF let alone the backup line of credit. They did this in 2008, selling WaMu to JPMorgan.
However, yes the treasury is an actual printing press, but the money supply is controlled by The Fed. They tell the treasury how much to print, they can provide unlimited liquidity to banks, and they are the largest backer of govt debt.
There are quite strict rules about their capitalization and the quality of the underlying assets.
SBF has neither liquidity nor assets sufficient to cover its deposits, because most of his assets was a pile of worthless fartcoin that he printed for himself, but pretended that it was worth billions. And because he was not properly audited[1], his equity wasn't immediately liquidated to cover the gap, when the gap could still be covered.
... Also, reserve requirements have nothing to do with this particular failure case. They have everything to do with issuing loans, and the rate at which money is created (inflation!), but this wasn't a failure caused by issuing loans.
[1] It's weird how VC due diligence seems to go out the window as soon as their money starts funding a hot new crypto scam. It's almost as if they are playing a heads-we-win-big, tails-we-lose-nothing-but-our-investment game...
That's how it's supposed to work. We've all found out in 2008 that's no longer the case.
The FDIC took over and sold or liquidated a few hundred small banks and a handful of medium sized banks. The big ones were considered to be too big to fail and were bailed out. The shareholders of these bing banks did not lose everything, and even the subordinated debt was payed (e.g. Citi).
1. Not every bank that became insolvent had a hole on their balance sheet that required all of their equity to be wiped out to fill. The shareholders got a haircut proportionate to how big those holes were.
2. The rot would have gone far deeper, and the holes could not have been covered if those bank balance sheets looked anything like FTX's did. Banks, for the most part, faced a liquidity crisis, not an insolvency crisis, and the owners of the ones that faced the latter were, for all intents and purposes, wiped out.
3. The FDIC is funded by banks, not by taxpayers. The FDIC only cares about customer deposits, it doesn't give two figs about investments.
The controversial, taxpayer bailouts were not for retail banks (The FDIC was designed a very long ago to handle this case, and handled it well, without dipping into the public purse), they were for shit like AIG. And speaking of shareholder equity, that didn't do so hot. Their public valuation went down 98% from 2007 to 2008, and is, as of today, down 75% from their peak. I wouldn't have wanted to have been a shareholder.
https://www.nytimes.com/2018/08/06/books/review/james-freema...
This was a massive intervention in saving a failed bank.
However I stand by my argument that the US will be repaid in full for its 2008 bail-outs. There's already been $109B in profit, and still $191B in principal left from Fannie and Freddie alone - and they continue to pay massive dividends of about $20B/yr. They US will come out ahead on this and faith in the dollar was restored. Jobs and the economy were saved. And a known good path forward (restoring Glass-Steagall for instance) exists.
I'm not defending Citi. However equating Citi within the economic system with FTX is nonsense. One's a bank which made poor, legal decisions and was saved because of its role in the broader ecosystem. The other is a shady off-shore bucket shop run by a CEO (and his 9 closest bone-bros) who allegedly fraudulently gambled away everyone's money and is on a plane to Argentina.
tl;dr: Even with the Citi bailouts from your article at face value the government will recoup far more than it spent on 2008.
This whole post feels like the dril tweet about the wise man explaining there's actually no difference between good things and bad things.
A failed bank like Citi should have been handled like smaller banks at the same situation were handled - taken over by the government, shareholders wiped out, new honest management installed, and criminal referrals made as appropriate. In addition, they should've broken up the bank to smaller units that will not be too big to fail.
The way it was done, most of the management layer remained and had a vested interest in covering up problems and their own complicity. Worse, it made it clear to other institutions that the bigger they become, the less likely they are to be allowed to fail. The incentives are perverse.
Edit: fairness is also important. A large, politically connected, bank benefited from bailouts that smaller, less well-connected banks and regular people did not get.
Absent follow-up regulation, I definitely agree.
> A failed bank like Citi should have been handled like smaller banks at the same situation were handled - taken over by the government, shareholders wiped out, new honest management installed, and criminal referrals made as appropriate. In addition, they should've broken up the bank to smaller units that will not be too big to fail.
Sure, I can get behind that. I do suspect that part of not doing so was pragmatic. Once you get to a certain scale just swapping out management without massive knock-on effects is very hard and the whole point of the intervention was to minimize knock-on effects. Twitter was a few thousand employees and I wouldn't wish that kind of handover on my worst enemies let alone one of the pillar retail banks. Can you imagine just replacing leadership at Apple and assuming it'd go well?
> Edit: fairness is also important. A large, politically connected, bank benefited from bailouts that smaller, less well-connected banks and regular people did not get.
You owe the bank $1M it's your problem, you owe the bank $100M it's their problem and if the bank owes everyone $400B it's the government's problem. Certainly not fair, but pragmatic.
btw, based on your reply I think our positions are probably much closer together than they are far apart. I want Glass-Steagall back.
Yes, except that the government has the powers (and had them in 2008) to handle the situation.
> btw, based on your reply I think our positions are probably much closer together than they are far apart.
Agreed.
> I want Glass-Steagall back.
Glass-Steagall was explicitly repealed to allow the merger of Citicorp and Travelers Group which created Citigroup.
Robert Rubin, Clinton's treasury secretary, who promoted for the repeal, joined Citi immediately after leaving government and served as chairmen. He made around $140 million until he had to resign because of the financial crisis.
Citi was too big, too connected, and too corrupt. As long as it so large, it will not be effectively regulated, and it will be bailed out again and again.
If there is no effective regulation, and no legal sanctions, management has a strong financial incentives to take actions that are likely to bankrupt the bank.
There's a great paper about it by two winners of the Nobel Memory Prize in Economic Science. It is based on the lessons of the Savings & Loan crisis.
George Akerlof and Paul Romer: Looting: The Economic Underworld of Bankruptcy for Profit
https://www.brookings.edu/wp-content/uploads/1993/06/1993b_b...
1. Banks create money when they lend. This is the job that their Fed has conferred to them. They do so under a strict regulatory framework and with very tight risk requirements. Lending is where money comes from.
2. Fractional reserve works because banks are backed by the FDIC which has a massive deposit insurance fund ($125B). The FDIC has a massive line of credit ($100B) with the Treasury in case that ever runs out. And they have the authority to take possession of failed institutions and sell the accounts like they did in 2008 with WaMu (under OTS). When WaMu went under the bank was sold to JPMorgan and nobody lost a penny without touching the DIF.
3. FTX was backed by nobody and nothing.
4. We know how banks operate, it's public and transparent. If FTX told depositors it was taking their money and gambling with it, and planned to stick them with the losses while keeping all the profit for themselves (a) that would be one thing and (b) nobody would sign up for that.
> Most deposits are used for gambling by banks
No they're not.
> The US fractional reserve requirement for banks is 10%.
No it's not, it's 0%.
> If SBF was gambling with only 10B of 16B that's a 37% reserve - conservative by banking standards.
No it's not. It's wildly irresponsible by any standard.