I'm genuinely starting to wonder if you are delusional. You posted a log that *very* clearly shows the complete opposite of this.

Aug 10 08:06:54 <mircea_popescu>   hey. your deposits still bs&t free ?
Aug 10 08:07:21 <patrickharnett>   I run a slightly complicated business, but most of the deposit accounts I run are BS&T free
Aug 10 08:07:39 <patrickharnett>   that's what the market wanted
Aug 10 08:07:58 <mircea_popescu>   you deem yourself able to repay your depositors in the event bs&t goes bankrupt, and nothing is recovered ?
Aug 10 08:08:00 <patrickharnett>   back in a couple of minutes - grabbing a glass of wine - friday evening here
Aug 10 08:09:57 <patrickharnett>   back
Aug 10 08:10:17 <patrickharnett>   in the event BS&T goes bust, I have more than enough assets to cover that
Aug 10 08:10:41 <patrickharnett>   mainly because the 15,500 coins I hold on deposit are not invest in BS&T
Aug 10 08:10:56 <mircea_popescu>   well that works. i'd like to put 500 bitcoins with you

In fact, you argued yourself that the contract was based on Patrick's business model:


The difference between our positions comes from the fact that you hold Patrick 100% responsible for this mistake while I hold both parties roughly equally responsible for it.

You really are delusional.

This is called the parol evidence rule. It is important to remember three things:

1) The parol evidence rule only applies to things that occurred *before* the contract was reduced to writing. The logic is that if the parties intended their previous agreements or terms to be part of the final agreement, they would have included them in that final agreement. This can't apply to subsequent acts. (Though if the contract specifically states how the contract may be modified, this is usually enforceable.)

2) The parol evidence rule does not apply to evidence of fraud, mistake, or other ways to invalidate the contract. These are not forms of extrinsic evidence seeking to modify terms of the contract, and so are not restricted by this rule.

3) The parol evidence rule only applies if the written agreement appears to have been intended by the parties to encompass their complete agreement. This is why many contracts specifically state that they are the entire agreement.

The only information needed to know that Patrick had significant Pirate exposure was the basic methodology of his business (bitcoin loans at high interest rates) and the existence of Pirate. You can search the posts to this forum and you'll see many people arguing, from just that information, that he had to have significant Pirate exposure. The transcript, and common sense, shows that those who loaned to Patrick knew that he was loaning the money back out. Obviously, the interest rate couldn't have been lower. And everyone knew that Pirate exists.

Without their mutual erroneous belief that Patrick's business model was sound, the contract would never have occurred. Of course, I agree this doesn't mean Patrick gets to keep all the money. Some equitable solution to share the harm would have to be found.

I think everyone can agree that Patrick should pay at least 40% over three years. That's *ridiculously* generous to him. That's why I've said that if he isn't committed to, and on track towards, paying at least that, he definitely deserves a scammer tag.

This is faulting Patrick for not doing the impossible. Please learn something from the Pirate fiasco -- there is no way to provide high returns at low risk. Patrick's belief was obviously wrong and was shared by those who loaned him money. They both made precisely the same mistake.

There will always be Patricks, Hashkings, and Pirates. We'll never stop that. If nobody holds the people who paid them to screw the community over accountable, this will never end.

And Patrick made the mistake of trusting the people he loaned money to. Same mistake.

Right.

That's not true. They could have imposed any restrictions they wanted to on how the funds were invested. And they chose to invest with Patrick.

He didn't offer a risk-free contract. He stated that he believed he had sufficient diversity in his loans to cover a Pirate default.

Right, but in this case that was after both parties agreed that he had sufficient diversity to cover a Pirate default. If two people agree on X and then agree "therefore Y", if X turns out to be false, they didn't actually agree on Y. Read the transcript:

Aug 10 08:06:54 <mircea_popescu>   hey. your deposits still bs&t free ?
Aug 10 08:07:21 <patrickharnett>   I run a slightly complicated business, but most of the deposit accounts I run are BS&T free
Aug 10 08:07:39 <patrickharnett>   that's what the market wanted
Aug 10 08:07:58 <mircea_popescu>   you deem yourself able to repay your depositors in the event bs&t goes bankrupt, and nothing is recovered ?
Aug 10 08:08:00 <patrickharnett>   back in a couple of minutes - grabbing a glass of wine - friday evening here
Aug 10 08:09:57 <patrickharnett>   back
Aug 10 08:10:17 <patrickharnett>   in the event BS&T goes bust, I have more than enough assets to cover that
Aug 10 08:10:41 <patrickharnett>   mainly because the 15,500 coins I hold on deposit are not invest in BS&T
Aug 10 08:10:56 <mircea_popescu>   well that works. i'd like to put 500 bitcoins with you
Aug 10 08:11:02 <mircea_popescu>   do you mind id'ing with gribble ?

Both parties agreed that Patrick's loan portfolio was significantly free from correlated risk. Patrick concluded, based on that agreed fact, that he would have enough equity in his portfolio to cover a Pirate default. However, Patrick's loan portfolio was not significantly free from correlated risk, and thus he didn't have enough equity in his portfolio to cover a Pirate default. The parties never discussed what would happen if the portfolio had significant correlated risk -- it was something neither party considered.

For example:

A: My house is 1,200 square feet.
B: I'll paint it for $2,500.
A: Deal.
-
If the house isn't 1,200 square feet, A is responsible.

B: I measured your house, it's 1,200 square feet. I can paint it for $2,500.
A: Deal.
-
If the house isn't 1,200 square feet, B is responsible.

A: My house is 1,200 square feet.
B: I know, I measured it. I can paint it for $2,500.
A: Agreed.
-
Common mistake. If the house isn't 1,200 square feet, A and B are jointly responsible.

This is like the last case. Both parties, with sufficient information to realize otherwise, concluded that the loan portfolio was free from correlated risk. Patrick's agreement was based on that shared mistaken conclusion.

And the people who paid them to do it bear no responsibility whatsoever, right? The people who loaned Patrick money made precisely the same mistake Patrick did. (Assuming Patrick is telling the truth about his default problems, which is plausible but not confirmed.)

You need to take a step back and realize that the people who loaned Patrick money made precisely the same mistake Patrick did.

People like Patrick, Hashking, and Pirate will always come along. So long as there are idiots willing to lend money at criminally usurious interest rates on the most ridiculous and implausible business plans, and who then feel they can deny any responsibility when the shit hits the fan (as it *always* will, that's the one certainty) this will keep happening over and over and over.

But keep those insults coming. If you're good at something, don't waste it. (But stop the self-righteousness. You're not very good at that.)

And by the way, I basically agree with you. Patrick hasn't, and likely won't ever, make the lifestyle sacrifices he and his wife need to make in order to pay back their fair share of the losses. So he'll almost certainly deserve a scammer tag at some point, if he doesn't already. If he isn't even on track and committed to paying back 40% in 3 years, which is ridiculously little in a very long time, I'd say he clearly deserves to be branded a scammer.

The case for bitcoins would be a bit weaker, but it'd still be pretty strong. First, other countries would still have crappy currencies. Second, Bitcoins can be cheaply and instantly transported around the world without having to ask anyone for permission.

That just seems kind of ugly to me. But I do agree that the current system has at least one major problem -- the term "scammer" strongly connotes intentional fraud. But I think we all agree that a person who borrows some Bitcoins fully intending to pay them back but then can't pay them back (say they lost their job) deserves a scammer tag. The point is not to pass judgment or act like a court but to provide some kind of useful indication of who you cannot trust to keep agreements.

Honestly, I'd say getting rid of the scammer tag would be preferable to a plethora of tags. A broken trust indicator may be worse than none at all.

If so, that would be a terrible shame. It would mean the Bitcoin community learned almost nothing from the Pirate collapse and is likely doomed to repeat it. When people can make mistakes and harm others with no consequences, markets cannot function.

You can usually get the best measurements of something's value or cost from a healthy market. But the lending market at that time was completely infected by such widespread fraud that it was basically meaningless.

If you had a situation where a person could sell a car but keep the car and no law or government would do anything to stop them, the market might show a price of $500 for a car. In that unusual situation, the market is not real, and the $500 price is not a measurement of the value of the car.

The Bitcoin lending market was a market of that type. People could borrow money and avoid paying it back with substantially no consequences. As a result, interest rates got bid up to ludicrous levels by borrowers who had no intention of ever paying people back. Those interest rates were not a sensible measure of any price or value, it was just a broken market.

Broken markets really can happen, just not usually for very long. As soon as people understand the particular breakage, it likely will never happen the same way again. The real estate market got inflated this same way. The securitization of mortgages lead to a broken market where the lenders had no incentive to make sure the mortgages were solid. This caused buyers to overvalue them. As a result, the market gave values for homes and mortgages that were nonsensical. Now that people realize this problem, it is self-fixing. Nobody will buy or value securitized mortgages ever again (or at least, significant numbers of people won't) without making sure the value is based on the actual strength of the mortgages.

With luck, this same problem will never happen in the Bitcoin lending market again. But the first step is recognizing the problem and those who caused it taking responsibility. You should strongly consider whether you really want to continue to oppose that process. I'm still presuming you are acting in good faith, but it's getting harder and harder. Perhaps you are profiting from the widespread fraud and theft?

The point is that reasoning is not like a bus. You can't choose your stop and get off. You have to keep going.

No. In fact, Patrick expressed an erroneous lack of doubt. That is a mistake Patrick made and for which he should be held accountable. But other people who made the same mistake and jointly caused the same losses should also be held accountable.

You can recast any complex argument to make it seem invalid by showing its conclusion can't follow from just one of its premises. The damage was caused by the particular way money was loaned. The money wasn't poisonous, but the usurious loan was. It forced a business model that both parties should have known could not have worked. The collapse is jointly the fault of a mistake made by both parties -- both parties making the same mistake.

The market was horrifically broken. Measuring the sensibility of this loan against that market is silly. It's time to look at these things objectively now. There was no realistic way this loan could have made sense for either party, and both parties should have realized that.

You're much better at insulting people than you are at responding to the arguments they make.

Did the loan harm Patrick? Was the loan based on a mistake on the part of both parties?

Right. So the next question is who is responsible for this situation and how to hold them accountable. Patrick is certainly one of those people, but he's not the only one.

1) Patrick's business suffered an $X loss.

2) Why did Patrick's business suffer an $X loss? Because two people made a mistake for which they can be held accountable.

3) Patrick is one of the people who made that mistake, thus he's responsible for some portion of that loss.

4) The people who loaned Patrick money also made that same mistake and thus they're responsible for some portion of that loss.

I'll give you a real world example of this same principle. A few years ago, a doctor examining my daughter noticed that her pediatrician had noted a heart murmur in her records but that he didn't hear it. The physician felt that she might have grown out of it, but the only way to be sure was to run a test. He assured me my insurance would cover the test. We had the test, and my insurance didn't cover it.

I refused to pay. The physician argued that I had signed a contract saying that I was responsible for any amounts my insurance wouldn't pay. He argued that our contract clearly stated that I was responsible for any amounts my insurance wouldn't cover. I agreed with him, but then pointed out that because I was responsible for any amounts my insurance wouldn't pay, his mistake in assuring me that my insurance would cover the costs damaged me. And he was responsible to me for the loss his mistake caused me, a loss that (because both are between me and him) offsets my responsibility to pay him for the test. He actually checked with his lawyer (I think more because he was curious than anything) and he agreed.

It's substantially the same thing here. It's precisely because Patrick promised to pay that money back that the mistake made by those who loaned him money caused Patrick damages for which they are responsible. Because both mistakes are between the same two people, the losses one party's mistake caused the other offset the losses the other party's mistake caused.

Irresponsible lending is just as much a problem as irresponsible borrowing. We wouldn't have had the Pirate fiasco if not for irresponsible lenders.

That was my concern when it first started. It seemed to me like Patrick knew he had a lot of worthless debt owed to him and a lot of legitimate debt that he owed to others. I feared that his plan with Kraken was to have it buy all his worthless debt and give him the cash to pay people off. But the strange thing is, he *guaranteed* Kraken -- explicitly, after knowing the issues with the debt it was holding, with his eyes fully open. I can't see how that makes sense unless he was planning to run it as a Ponzi, using the initial funds to pay off previous investors in his other funds so preserve his reputation. There seemed, at least to me, to be no plausible way it could ever return principle, much less make a profit, and thus the guarantee of the principle from his personal funds makes it seem like the only plausible business model was 100% scam.

If there's another explanation, I can't think of it.

There's no evidence he lied or mislead. In fact, he explained the factual basis for his incorrect conclusion and those he spoke to drew the same incorrect conclusion from the same facts.

Patrick didn't say, "trust me that X" or "I have secret knowledge that X". He said, "Because of facts A, B, and C, I conclude X". The facts A, B, and C were true. However, the conclusion X did not follow from them. If Patrick is responsible for the damages this mistake caused, so are the other parties who made the very same mistake and made the very same damages occur, drawing the same incorrect conclusion from the same correct facts.

Both parties had facts A, B, and C. Those facts were correct.
Both parties concluded X from A, B, and C. X was incorrect and did not follow from A, B, and C.
Both parties acted on X, jointly causing a loss.
Thus both parties are responsible for the loss and should share it.

I 100% agree. From what I understand about the Kraken fund, there is no excuse for Patrick not repaying principle to anyone who deposited in this fund. (And I strongly fear this fund may be 100% scam.)

I believe that the Kraken fund was only supposed to invest in things that Patrick 100% knew had nothing to do with Pirate or any similar kind of risk. So there should be no reason it shouldn't be able to return 100% of principle. (Other than perhaps a liquidity crunch or the like that might slow repayments.)

Update/Correction: The Kraken fund did make risky investments, but only after Patrick 100% knew precisely what those risks were, and he 100% personally guaranteed repayment of principle.

The FDIC is specifically insurance and specifically assumes the risk of bank failures. In addition, there was no mistake on the part of the people whose funds the FDIC insured. So it would not have been equitable for the FDIC to split the losses with those it insures. (Also, even if equitable, it would have been politically infeasible. Any loss of confidence in the FDIC would defeat the point of the FDIC.)

Yes, Patrick guaranteed his deposits. But as he made quite clear, that guarantee was predicated on his belief that there was no significant correlated risk. (The transcript in the scammer accusation thread makes this clear.) So against someone who didn't make that same mistake, it would be enforceable. But against someone who did, it isn't. If Patrick is responsible for losses caused directly by this mistaken belief, so are others who have that same mistaken belief and it causes the same type of loss. (Unless the agreement was otherwise. It's possible he had different loans with different terms and some weren't predicated on the shared belief that he had limited Pirate exposure. You'd have to look on a case by case basis and decide in each case how to equitably divide the losses.)

See any case involving "common mistake". Couturier v. Hastie (5 HL Cas673), Galloway v. Galloway (30 TLR 531), Copper v. Phibbs (LR 2 HL 149), Davis v. Pennsylvania Company (337 PA 456), Cooper v. Phibbs, Great Peace Shipping Ltd v. Tsavliris Salvage, and on and on and on. "Common mistake" is a concept of contract law, it's not something I made up.

What do you think courts do when two parties enter into a contract and then discover that some element of the subject matter of the contract doesn't actually exist due to fault attributable to neither party or substantially equally attributable to both of them?

There was a common mistake that Patrick's loan portfolio did not have significant correlated risk due to Pirate exposure. If not for that mistake, neither side would have entered into the agreement.

Did you read the transcript? The agreement was not as simple as you make it seem, it was specifically a loan to finance a particular lending strategy. Neither side would have entered into the agreement if not for their mistaken common belief. The lender specifically wanted the assurance that the loans were backed by the strength of Patrick's portfolio. The agreement ties one to the other.

Aug 10 08:06:54 <mircea_popescu>   hey. your deposits still bs&t free ?
Aug 10 08:07:21 <patrickharnett>   I run a slightly complicated business, but most of the deposit accounts I run are BS&T free
Aug 10 08:07:39 <patrickharnett>   that's what the market wanted
...
Aug 10 08:10:17 <patrickharnett>   in the event BS&T goes bust, I have more than enough assets to cover that
Aug 10 08:10:41 <patrickharnett>   mainly because the 15,500 coins I hold on deposit are not invest in BS&T
Aug 10 08:10:56 <mircea_popescu>   well that works. i'd like to put 500 bitcoins with you

What do you think "well that works" means here? It's right before the offer.

On the contrary, that's *all* a contract is. A written agreement may be evidence of what the agreement was. But the agreement itself is purely thought. A "contract" is a meeting of the minds.

You would find it a more productive use of your time to spend the five minutes it would take to understand what a "common mistake" is rather than showing off your ignorance to the world.

A "common mistake" is when a contract is predicated on a belief that both parties shared without which they would not have entered into the contract and wherein the incorrect belief is not due to significantly greater fault on the part of either party. In essence, the parties made an argument that is about something that does not exist. In that case, it may impossible or inequitable to enforce the contract as agreed.

Simple example: Two parties both believe a truck contains 5,000 pounds of cherries. They make an agreement that one party will buy the 5,000 pounds of cherries in the truck from the other party. Due to a mistake equally attributable by both parties, the truck actually contains 4,500 pounds of cherries. It is now impossible (or inequitable) to enforce the contract as agreed -- would that mean the buyer must put 500 pounds more cherries in the truck? Or would that mean the seller must accept the 4,500 pounds of cherries?