Saturday, November 19, 2022

Crypto Funny Money

Yahoo Business
interviewed former FDIC Chair Sheila Bair regarding the implosion of crypto firm FTX, Alameda Research and 130 related entities.  The interview came just days after Bair said of FTX's bankruptcy:

“There is no systemic impact to the real economy,” Bair said, adding that this is all just “funny money in the ether with speculation.”

Bair failed to declare her board role with crypto infrastructure firm Paxos or that FTX bought an equity stake in Paxos in its Series D funding round (summer 2021).  

No business reporter asked:  So, Mrs. Bair that "funny money in the ether" was used to buy equity in a firm where you are on the board of directors.  Is Paxos planning to return that money to FTX customers given it was likely purchased with FTX customer funds?  ....Mrs. Bair?

Paxos put out a statement regarding their exposure to FTX/Alameda.

Paxos affiliates occasionally extend loans to select firms as part of our designated market maker program which included Alameda. These loans are always over-collateralized and must be held on-platform in Paxos’ full control and custody. As with all similar loans, Paxos required Alameda to provide collateral substantially in excess of the original loan and only use the loan for that program. These loans are never funded with customer monies.

The press release did not reveal Paxos' loan exposure to Alameda.  It did not state what form of collateral Alameda gave to Paxos or whether the loan(s) remain over-collateralized. 

Carlyle Group co-founder David Rubenstein became a cryptocurrency fan after his family office Declaration Partners invested in Paxos in several funding rounds.  Rubenstein wants individual retirement funds to have access to private equity and cryptocurrency investments.

Paxos has a tool for that:

Financial advisor crypto trading from Paxos Crypto Brokerage will help broker-dealers create a seamless experience for their financial advisors and their clients to engage in the benefits of the crypto ecosystem including tax, allocation, settlement and commission functionality that also adheres to pricing requirements across other asset classes. 
Many retirees are hesitant to consider crypto investments after the sudden and colossal failure of FTX/Alameda Research.  

Carlyle knows both sides of insolvency.  Carlyle Capital Corporation imploded after the obscenely leveraged mortgage backed security fund saw the underlying value of its holdings rapidly decline.  It was the canary in the financial services industry, failing in early 2008.  Investors sued after being told by Carlyle that the fund was safe.  In a different investor lawsuit Carlyle used puffery as it's defense.

Carlyle sued multiple parties after oil prices plummeted in 2014-2015.  The plunge erased its stake in oil stored at SAMIR, a Moroccan refinery.  

Wide swings in the value of underlying assets is not new to David Rubenstein. The private equity playbook is buy distressed/undervalued assets and flip them after they have been packaged as preferred holdings.

 The Bear Cave Newsletter wrote:

Paxos discloses, “Not all deposits are covered by the FDIC or private insurance, and Paxos may still incur losses in the event of a bank insolvency.” Sheila Bair, the former chair of the FDIC from 2006 to 2011 is on the board of Paxos. 

More alarming, an August 2022 forfeiture application for probable cause filed in Broward County alleges Paxos and Silvergate were connected to a money laundering operation

Paxos is part of the crypto money wash.  Sheila Bair and David Rubenstein don't want to see it unwind.  Their will has a significantly greater likelihood of making it into law or operationalized into regulations.  Expect the usual hidden agendas and double talk.

Update 11-20-22:  Peter Schiff, CEO and chief global strategist at Euro Pacific Capital, stated:

“This is not a crypto winter. That implies spring is coming. This is also not a crypto ice age, as even that came to an end after a couple of million years,” he writes in a tweet. “This is crypto extinction.”

Not if Sheila Bair and David Rubenstein have any say. 

Update 11-29-22:  More funny money implodes:

Crypto lender BlockFi has about $355 million in cryptocurrencies currently frozen on crypto exchange FTX, attorney Joshua Sussberg told a U.S. bankruptcy court on Tuesday.

The $355 million is on top of another $671 million in loan to FTX sister company Alameda Research.