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Author Topic: Starfish BCB - Loans and Deposits  (Read 58313 times)
JoelKatz
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October 24, 2012, 08:10:14 PM
 #621

I do not quite agree with the contract being risk neutral. The contract implicitly allocates the risk on Patrick's side by promising only a fixed and capped rate. In the opposite event of this business going better than expected there'd be no doubt the excess goes to Patrick for the risk taken.
If you believe the contract implicitly allocates that risk to Patrick, then equitable mistake wouldn't apply. I don't think it allocates the risk that a large number of loans will fail at about the same time due to a hidden interdependency. I believe the contract was premised on a shared understanding that the loans were fundamentally sound.

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October 24, 2012, 09:10:54 PM
 #622

If you believe the contract implicitly allocates that risk to Patrick, then equitable mistake wouldn't apply.

Patrick explicitly allocated the risk to himself. Thus, equitable mistake doesn't apply.

I know there are some risks involved and potential to lose serious money on some of the loans I have out in the wild.

I... carry the risk from bad loans and the timing of requests.

This is explained a few posts up:
https://bitcointalk.org/index.php?topic=61262.msg1291861#msg1291861

As coinft points out, if the loans had done better than expected the excess profits wouldn't have been equitably split, they would have gone to Patrick.
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October 24, 2012, 09:31:12 PM
 #623

I do not quite agree with the contract being risk neutral. The contract implicitly allocates the risk on Patrick's side by promising only a fixed and capped rate. In the opposite event of this business going better than expected there'd be no doubt the excess goes to Patrick for the risk taken.

Now for Kraken, this argument might hold better.

The argument does not hold better for Kraken. Patrick also explicitly stated that any losses in Kraken would be covered by himself personally, and that he "insured" contributed deposits. Patrick caps the rate in Kraken too, and explicitly states that excess profits are kept by Patrick, and losses will be covered by Patrick.

Contributed capital is backed by my personal funds.
...
any losses will be funded personally.
...
Returns obtained over and above 2.5% are taken as my fee - that's how I can afford to support the minimum return and "insure" the capital.

In both Starfish BCB and Kraken, Patrick gets to keep any profits above the rate cap, and he has to cover any losses.

Edit: Here's another quote from Patrick stating that he guarantees the full 100BTC value of a 100BTC Kraken deposit unit and is responsible for losses:

I am guaranteeing a minimum 100BTC price so am exposed to losses.
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October 25, 2012, 03:11:27 AM
 #624

If you believe the contract implicitly allocates that risk to Patrick, then equitable mistake wouldn't apply.

Patrick explicitly allocated the risk to himself. Thus, equitable mistake doesn't apply.
I read this as allocating the risk that individual loans will default, not the risk that of correlated default. He can't have explicitly allocated a risk he didn't know existed.

Quote
I know there are some risks involved and potential to lose serious money on some of the loans I have out in the wild.
This is talking again about the risk of individual loans defaulting, not coordinated default due to common risk.

Quote
I... carry the risk from bad loans and the timing of requests.
Again, in context, this referred to the risk that individual loans would default.

Quote
As coinft points out, if the loans had done better than expected the excess profits wouldn't have been equitably split, they would have gone to Patrick.
That's true, but I don't see why that matters. The issue is whether and how they agreed to allocate the risk of coordinated default. I agree the contract allocates any "excess" profit to Patrick. But that says nothing about whether or how it allocates the risk of coordinated default.

It was a common mistaken belief that the loans were not correlated and that there did not exist a common event that would or could cause a significant fraction of loans to default at the same time. The question is whether the contract allocated this specific risk.

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October 25, 2012, 09:08:13 AM
 #625

That's true, but I don't see why that matters.

Nothing specified what would happen in the event of a coordinated payback (everybody paid their loans back to Patrick, giving him more profit than he expected). Thus, in this hypothetical case, Patrick should equitably split all profits with his depositors (above and beyond the stated rate)? You are saying no, and in the opposite case, he doesn't get to push losses to his depositors when he guaranteed their funds.

Patrick guaranteed his deposits and did not place any conditions on that guarantee. Obviously one of the risks to Patrick is that many loans default at the same time, possibly because they are correlated. That is an obvious risk that a lender faces.

Patrick is one of the few people trying to make good on his obligations. I respect Joel, but I don't see why he is now encouraging Patrick to turn into a scammer. Even Patrick hasn't suggested that he should renege on his guarantee. I think it's time for Patrick to respond. Patrick, are you going to stand by your guarantee and be the honest person most people believe you to be, or are you going to let Joel turn you into a scammer?
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October 25, 2012, 10:34:25 AM
 #626

Nothing specified what would happen in the event of a coordinated payback (everybody paid their loans back to Patrick, giving him more profit than he expected). Thus, in this hypothetical case, Patrick should equitably split all profits with his depositors (above and beyond the stated rate)?
I've never heard of equitable mistake being applied to an unforeseen boon. If you think equitable mistake should apply to a boon, then you could make this argument. Though I'm not sure how it would result in more profit than expected, but if you accept that for the sake of argument.

Quote
Patrick guaranteed his deposits and did not place any conditions on that guarantee. Obviously one of the risks to Patrick is that many loans default at the same time, possibly because they are correlated. That is an obvious risk that a lender faces.
I don't agree that that's an obvious risk. In fact, I can show you places where many people (including people who invested with Patrick) denied that such a risk existed.

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Patrick is one of the few people trying to make good on his obligations. I respect Joel, but I don't see why he is now encouraging Patrick to turn into a scammer. Even Patrick hasn't suggested that he should renege on his guarantee.
I'm not sure what you're arguing here. Are you saying I should keep my mouth shut and not say what I honestly believe because it might cost people money? I'm not telling Patrick what to do.

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I think it's time for Patrick to respond. Patrick, are you going to stand by your guarantee and be the honest person most people believe you to be, or are you going to let Joel turn you into a scammer?
It's not scamming for Patrick to equitably allocate an unforeseen risk. I'm going to go out on a limb here and speculate that you have some connection to someone Patrick owes money to.

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October 25, 2012, 07:14:46 PM
 #627

It was a common mistaken belief that the loans were not correlated and that there did not exist a common event that would or could cause a significant fraction of loans to default at the same time. The question is whether the contract allocated this specific risk.


I believe they call that "fat tail" risk or a Black Swan event.

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October 25, 2012, 07:50:01 PM
 #628

I don't agree that that's an obvious risk.

A big reason I deposited with Patrick is because he is assuming the risk of loans going bad. If I knew that his guaranteed deposits really meant "guaranteed unless loans go bad", then I never would have deposited with Patrick.  If I wanted to assume the risk of loss (and thus potentially higher profit), I could have made loans to other people myself.

You're saying I couldn't have foreseen the possibility of Patrick's loans going bad, and thus Patrick shouldn't have to pay me back. That's false. I did expect there was a possibility Patrick's loans could go bad. That's the whole point of depositing with Patrick: he guarantees his deposits against that scenario.
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October 25, 2012, 09:06:01 PM
 #629

Updated list @ https://bitcointalk.org/index.php?topic=61262.msg981017#msg981017

With GLBSE it's own little fiasco, and having stopped taking on productive loans a couple of months ago, it is no longer sensible or appropriate to accrue interest.  Everyone is on the same payout formula.

Found another borrower indirectly exposed to BS&T and have arranged for their repayment (300BTC) to be delayed another month.
jme621, despite his claim to the contrary, has not made any further contact in the last month
There are still a few good people making their regular scheduled payments, but they remain the minority in BTCland

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October 25, 2012, 09:19:49 PM
 #630

There are still a few good people making their regular scheduled payments, but they remain the minority in BTCland

such as who? Tongue x
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October 25, 2012, 09:21:59 PM
 #631

There are still a few good people making their regular scheduled payments, but they remain the minority in BTCland

such as who? Tongue x

Yes, you're happily in that list.
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October 26, 2012, 01:37:26 AM
 #632

I don't agree that that's an obvious risk.

A big reason I deposited with Patrick is because he is assuming the risk of loans going bad. If I knew that his guaranteed deposits really meant "guaranteed unless loans go bad", then I never would have deposited with Patrick.  If I wanted to assume the risk of loss (and thus potentially higher profit), I could have made loans to other people myself.
I think you're misunderstanding my argument. It isn't about the foreseeable risk that loans would go bad. I agree that Patrick assumed that risk.

Quote
You're saying I couldn't have foreseen the possibility of Patrick's loans going bad, and thus Patrick shouldn't have to pay me back. That's false. I did expect there was a possibility Patrick's loans could go bad. That's the whole point of depositing with Patrick: he guarantees his deposits against that scenario.
I agree. I'm talking about the risk that the loans were correlated, that is, that a common event would make a significant number of the loans go bad at the same time. If you have some evidence that you and other depositors considered that specific risk or that this risk was allocated to Patrick, I'd like to see it. All the evidence I've seen suggests that both Patrick and his depositors (at least those who spoke on the issue) either denied that this risk existed or never considered it.

By the way, this was the same type of missed risk that resulted in the mortgage collapse. People who thought they were "diversified" didn't realize that a significant fraction of their assets were vulnerable to a drastic drop in the housing market because they were all ultimately tied to residential mortgages. It always seems obvious in hindsight.

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October 26, 2012, 02:30:53 AM
 #633


By the way, this was the same type of missed risk that resulted in the mortgage collapse. People who thought they were "diversified" didn't realize that a significant fraction of their assets were vulnerable to a drastic drop in the housing market because they were all ultimately tied to residential mortgages. It always seems obvious in hindsight.


That was also helped by the closely interrelated nature of the businesses - cascading collapse.  It remains a significant risk in the world economy currently.

As you note, something similar happened in bitcoin, but rather than simply having a bunch of people lying about what they were doing with coins and loans, there were also those that were simply dishonest, and the diversification into other assets saw a fair share of failures (uncorrelated) and then chronic illiquidity (correlated events).  What has become obvious - in hindsight - is that the average level of honesty just isn't high enough.  That's without the scams, thefts, hacks and other crap that goes on.
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October 27, 2012, 05:32:53 AM
 #634

I think you're misunderstanding my argument.
I understand your argument. I'm saying you're wrong. I understood Patrick's guarantee to mean that my funds were guaranteed regardless of whether any or all loans went bad, correlated or uncorrelated. Any other kind of guarantee isn't a guarantee, it's pointless.
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October 27, 2012, 07:22:50 AM
 #635

I understood Patrick's guarantee to mean that my funds were guaranteed regardless of whether any or all loans went bad, correlated or uncorrelated. Any other kind of guarantee isn't a guarantee, it's pointless.
I don't believe you. If you have any evidence to suggest that you understood that there was a real risk that the loans were correlated, and that this risk was allocated to Patrick, please present it. All the evidence I have suggests that people either never considered that risk or rejected it as implausible. If you have any evidence that might change my mind, I'd be glad to take a look at it.

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October 28, 2012, 01:22:33 AM
 #636

I understood Patrick's guarantee to mean that my funds were guaranteed regardless of whether any or all loans went bad, correlated or uncorrelated. Any other kind of guarantee isn't a guarantee, it's pointless.
I don't believe you. If you have any evidence to suggest that you understood that there was a real risk that the loans were correlated, and that this risk was allocated to Patrick, please present it. All the evidence I have suggests that people either never considered that risk or rejected it as implausible. If you have any evidence that might change my mind, I'd be glad to take a look at it.


I don't believe Patrick ever explicitly stated that these funds were vulnerable to any risks from the depositors perspective.  In most countries any ambiguities in contracts favor the person who did not write the contract, I.E. depositors.  He would have needed to explicitly state that these funds were vulnerable and he did not.

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October 28, 2012, 02:27:00 AM
 #637

I don't believe Patrick ever explicitly stated that these funds were vulnerable to any risks from the depositors perspective.  In most countries any ambiguities in contracts favor the person who did not write the contract, I.E. depositors.  He would have needed to explicitly state that these funds were vulnerable and he did not.
I'm not arguing that there's an ambiguity in the contract. I'm arguing that there's a common mistake underlying the contract.

The analogy would be two people who both believe that a ship sank in a particular place who contract to have one party recover the ship for a fixed fee. If it turns out that they were both incorrect and the ship was actually someplace else that is either more expensive or less expensive to recover, the disadvantaged party could not be equitably required to comply with the terms of the contract. The exception, of course, would be if the contract explicitly assigned this risk to one party or the other. The failure to assign this risk doesn't make the contract ambiguous, it just doesn't address this possibility because neither party to the contract considered it likely.

In this case, the common mistake was the belief that the loans were not subject to significant correlated risk. The contract doesn't appear to assign this risk to either party. It's not that it's ambiguous about who bears this risk, it simply didn't include assigning that risk inside its scope because neither party considered that risk likely.



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October 28, 2012, 09:11:32 AM
 #638

I don't believe Patrick ever explicitly stated that these funds were vulnerable to any risks from the depositors perspective.  In most countries any ambiguities in contracts favor the person who did not write the contract, I.E. depositors.  He would have needed to explicitly state that these funds were vulnerable and he did not.
I'm not arguing that there's an ambiguity in the contract. I'm arguing that there's a common mistake underlying the contract.

The analogy would be two people who both believe that a ship sank in a particular place who contract to have one party recover the ship for a fixed fee. If it turns out that they were both incorrect and the ship was actually someplace else that is either more expensive or less expensive to recover, the disadvantaged party could not be equitably required to comply with the terms of the contract. The exception, of course, would be if the contract explicitly assigned this risk to one party or the other. The failure to assign this risk doesn't make the contract ambiguous, it just doesn't address this possibility because neither party to the contract considered it likely.

In this case, the common mistake was the belief that the loans were not subject to significant correlated risk. The contract doesn't appear to assign this risk to either party. It's not that it's ambiguous about who bears this risk, it simply didn't include assigning that risk inside its scope because neither party considered that risk likely.




What is the correlated risk you are talking about is it GLSBE? If so why would people borrow money at a 2% compounding interest rate to invest in flakey unregulated businesses on there when most of them yielded less than that and how is that the depositors fault?
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October 28, 2012, 09:24:19 AM
 #639

I understood Patrick's guarantee to mean that my funds were guaranteed regardless of whether any or all loans went bad, correlated or uncorrelated. Any other kind of guarantee isn't a guarantee, it's pointless.
I don't believe you. If you have any evidence to suggest that you understood that there was a real risk that the loans were correlated, and that this risk was allocated to Patrick, please present it. All the evidence I have suggests that people either never considered that risk or rejected it as implausible. If you have any evidence that might change my mind, I'd be glad to take a look at it.


Yeah, it would be hard to prove what people in general perceived at some point in the past, though I'm not sure the burden is on the lender to prove their historical beliefs. FWIW, I certainly thought most loans would be correllated, regardless of "pirate exposure". That kind of high interest loans couldn't likely have diverse destinations. I admit that I considered there was a high-risk of this sort of thing happening but assumed the borrowers were prepared to pay out of their pockets. I certainly thought they should, even if they wouldn't.
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October 28, 2012, 03:47:41 PM
 #640

I understood Patrick's guarantee to mean that my funds were guaranteed regardless of whether any or all loans went bad, correlated or uncorrelated. Any other kind of guarantee isn't a guarantee, it's pointless.
I don't believe you. If you have any evidence to suggest that you understood that there was a real risk that the loans were correlated, and that this risk was allocated to Patrick, please present it. All the evidence I have suggests that people either never considered that risk or rejected it as implausible. If you have any evidence that might change my mind, I'd be glad to take a look at it.


Yeah, it would be hard to prove what people in general perceived at some point in the past, though I'm not sure the burden is on the lender to prove their historical beliefs. FWIW, I certainly thought most loans would be correllated, regardless of "pirate exposure". That kind of high interest loans couldn't likely have diverse destinations. I admit that I considered there was a high-risk of this sort of thing happening but assumed the borrowers were prepared to pay out of their pockets. I certainly thought they should, even if they wouldn't.

+1

At some point in time about every non-PPT asset issuer (including Patrick) has been accused of investing in pirate secretly, or having much higher indirect exposure than expected. The dependence on pirate has been discussed on this board repeatedly. The possible correlation of a lot of investments is a logical conclusion, which is hard to assume has not happened in the minds of at least some investors.


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