Starfish BCB - Loans and Deposits

[TheBible]

I'm still curious why people that are recently registered and have little real knowledge continue to scour these threads, unless it is simply for entertainment, or they are a sock-puppet for someone else - there are a few that have turned up.  The usual insults and speculation from the likes of Joel is rather ho-hum.  And the myopia for the last decade of US economics is also a bit tedious, but then reading textbooks is quite a bit different from having your own money at risk.

Although unlikely for most people browsing, I'll go back to being on-topic.

We are very well educated on the vast, vast number of scams that continuously pour out of this community, and yours is prime for a drama filled explosion.  Go ahead and deny it and make a bunch of promises about how you'll never default, they all do, and the forumites always, always believe them.

Congrats on all the money you're about to ferret away from this place.  Take it and never look back; these people have been scammed so many times and so transparently that there's no way they can't see it coming.  They want to be scammed.

[peasant]

Most people if they learn will only learn the hard way.

[BorderBits]

Most people if they learn will only learn the hard way.

Most people yes. . . this community wants to be scammed over and over _{and over and over and over}

[peasant]

Good for them. 

[Yolocoin]

Most people if they learn will only learn the hard way.

Most people yes. . . this community wants to be scammed over and over _{and over and over and over}

Pretty much.

[mb300sd]

Received a small payment today. Keep it up

[PatrickHarnett]

Yes, payments have been processed and sent.

[memvola]

So a contract becomes something other than what it states, not because the risk is high, but the return is "insincere". So I don't have to pay what I borrowed from you and can just say "did you honestly believe that I was making that kind of profit?" and you're okay with this.

Yes, exactly. This is called "common mistake". http://en.wikipedia.org/wiki/Mistake_%28contract_law%29

I would need to see an analogous case and then agree with it, I can't imagine one myself. Anything can be a common mistake. For instance, I don't believe that there is a "common mistake" in my example, the borrower is just being an asshole. A lender is not a partner. You're not at fault if I tricked you.

Also, even though GLBSE shutdown was a known risk, I don't think anyone had predicted such a mess. This was almost engineered in a way to cause as much trouble as possible.

That's practically the definition of force majeure. http://en.wikipedia.org/wiki/Force_majeure

These are all reasons a contract won't, and shouldn't, be enforced as agreed.

Then why do you pursue the hotel's assets after the earthquake and not the casino?

Everyone is responsible for honoring their contracts to the furthest extent possible. The only reason I wouldn't ask someone to honor their contract is if I see that other contracts they have is in conflict with it, and I have more regard for those contracts; like starving kids and whatnot.

[dooglus]

Yes, payments have been processed and sent.

You didn't update the balances like you usually do.  And it looks like last week you updated the balances, but not the date of the last update.

[JoelKatz]

I would need to see an analogous case and then agree with it, I can't imagine one myself. Anything can be a common mistake. For instance, I don't believe that there is a "common mistake" in my example, the borrower is just being an asshole. A lender is not a partner. You're not at fault if I tricked you.

If both sides have a mutual misunderstanding that causes the contract to misallocate costs or risks, fairness requires that the misallocation be corrected unless the contract shows an intent to allocate the risk. Not all legal systems recognize a concept of "equitable mistake", but I don't think there's any serious disagreement that it's equitable.

A classic example would be two parties who each believe that a ship sunk in a particular place and negotiate a fixed-cost contract to retrieve the ship for a specified fee. If it turns out the ship was elsewhere and is therefore much more expensive to recover, fairness requires the fee be adjusted appropriately. This, of course, only applies if the party seeking the re-adjustment is not comparatively more at fault for the incorrect information. It also only applies if the contract doesn't show an intent to allocate the risk that the information was incorrect to the party being paid to recover the ship.

This situation is analogous. Both parties incorrectly (arguably, equally negligently) believed Starfish's high-interest loan model was sound. There's no evidence in the contract that the risk that the business model was fundamentally unsound was intended to be allocated to Patrick. So the contract cannot equitably be enforced as drafted because a situation not foreseen by the contract came to be. The risk of the unsound business model has to be allocated among the parties somehow, the contract doesn't specify how to allocate it, equity demands it be split.

Again, not all legal systems recognize a doctrine of equitable mistake. Some will insist a contract be enforced as written even if a risk that contract fails to allocate (due to a common mistake of fact shared by both partied to the contract and forming part of the basis of the actual "mental" agreement) materializes unless that makes complying with the contract impossible. But there are very few people who think this is actually fair.

[bigbox]

Both parties incorrectly (arguably, equally negligently) believed Starfish's high-interest loan model was sound. There's no evidence in the contract that the risk that the business model was fundamentally unsound was intended to be allocated to Patrick. So the contract cannot equitably be enforced as drafted because a situation not foreseen by the contract came to be. The risk of the unsound business model has to be allocated among the parties somehow, the contract doesn't specify how to allocate it, equity demands it be split.

Patrick described his deposits as guaranteed. He stated that he carries the risk from bad loans. That means that he takes the loss if his loans go bad.

Patrick knew that the loans were risky and had the "potential to lose serious money":

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 have a diversified portfolio of investments, a good mix of customers and carry the risk from bad loans and the timing of requests.

This isn’t a charity and there is real money at stake. For January 2012 I have done a dozen loans, have one bad and another was “impaired” for a while before being paid back. There are two others due in February that I've flagged as higher risk, that’s why the interest rates are high.

Lending and Seeking a Loan
I decide if you’re a good credit risk or not.

These quotes show that the risk that the business model was unsound was intended to be allocated to Patrick. Even though he knew he had the "potential to lose serious money" on his loans, Patrick guaranteed his deposits and explicitly stated that he carries the risk for bad loans. Thus, Patrick is on the hook for all of the losses and is responsible for paying pack his deposits. Simple.

Patrick is doing his best to live up to his promise, as he should, and I commend him for it.

[cantor]

Greetings, how can I deposit in Starfish BCB?  There is no info in the OP, does that mean that it's closed to new depositors?  Also, is there a minimum amount to deposit, or any other kind of limits?  Thanks!

[JoelKatz]

Greetings, how can I deposit in Starfish BCB?  There is no info in the OP, does that mean that it's closed to new depositors?  Also, is there a minimum amount to deposit, or any other kind of limits?  Thanks!

Since it's in partial default and has no reasonable business model that would permit it to pay you interest, you probably don't want to deposit.

[PatrickHarnett]

Yes, payments have been processed and sent.

You didn't update the balances like you usually do.  And it looks like last week you updated the balances, but not the date of the last update.

Correct - will update it again this week.

[coinft]

I would need to see an analogous case and then agree with it, I can't imagine one myself. Anything can be a common mistake. For instance, I don't believe that there is a "common mistake" in my example, the borrower is just being an asshole. A lender is not a partner. You're not at fault if I tricked you.

If both sides have a mutual misunderstanding that causes the contract to misallocate costs or risks, fairness requires that the misallocation be corrected unless the contract shows an intent to allocate the risk. Not all legal systems recognize a concept of "equitable mistake", but I don't think there's any serious disagreement that it's equitable.

A classic example would be two parties who each believe that a ship sunk in a particular place and negotiate a fixed-cost contract to retrieve the ship for a specified fee. If it turns out the ship was elsewhere and is therefore much more expensive to recover, fairness requires the fee be adjusted appropriately. This, of course, only applies if the party seeking the re-adjustment is not comparatively more at fault for the incorrect information. It also only applies if the contract doesn't show an intent to allocate the risk that the information was incorrect to the party being paid to recover the ship.

This situation is analogous. Both parties incorrectly (arguably, equally negligently) believed Starfish's high-interest loan model was sound. There's no evidence in the contract that the risk that the business model was fundamentally unsound was intended to be allocated to Patrick. So the contract cannot equitably be enforced as drafted because a situation not foreseen by the contract came to be. The risk of the unsound business model has to be allocated among the parties somehow, the contract doesn't specify how to allocate it, equity demands it be split.

Again, not all legal systems recognize a doctrine of equitable mistake. Some will insist a contract be enforced as written even if a risk that contract fails to allocate (due to a common mistake of fact shared by both partied to the contract and forming part of the basis of the actual "mental" agreement) materializes unless that makes complying with the contract impossible. But there are very few people who think this is actually fair.

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.

[JoelKatz]

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.

[bigbox]

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.

[bigbox]

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.

[JoelKatz]

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.

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.

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.

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.

[bigbox]

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?