FTX, Debt, Derivatives and Margin-The Things Done in Darkness Will Soon be Brought to Light-An Interview With Financial Expert Bill Holter
/By Stan Szymanski
The corrupted cataclysmic carnival crash of cryptocurrency embodied in the FTX debacle is not something that one can yet, codify.
On Tuesday we got our first glimpse into the forensic effort to see exactly what happened to the money. A Zero Hedge article (courtesy of WSJ and Bloomberg) details the synopsis of the first day of the bankruptcy hearing in the case of FTX. The highlights include:
-…’A “substantial amount” of failed crypto exchange FTX’s assets is missing and may have been stolen’…
-…’FTX was in the control of inexperienced and unsophisticated individuals, and some or all of them were compromised individuals’…
-…’FTX’s rapid downfall triggered an "unprecedented" bankruptcy, causing many standard procedures, such as this hearing, to be delayed.’…
-…’Information about FTX’s biggest creditors will remain redacted for now.‘…
-…’FTX expanded the number of affected customers and creditors from a "million" to millions.’…
I share all of this with you for two reasons. First, it becomes abundantly clear that all the facts about what happened to the FTX money/assets have yet to be discovered. The fact that …’Information about FTX’s biggest creditors will remain redacted for now.‘… highlights the fact that the public will be kept in the dark about who was involved, how much were they involved, what happened to the FTX that was in their possession and did they use that crypto to employ leverage (borrowing from crypto or traditional lenders) in order to make even bigger bets-either in crypto or other markets?
Secondly, and more importantly, the fact that FTX is entwined with crypto lenders like Genesis Trading who are now on the doorstep of bankruptcy themselves, gives the ominous thought as to ‘just how big can this problem get’?
When theft, bankruptcy, millions of customers, use of margin and the involvement of potentially an almost incalculable amount of derivatives collide, a calamity of generational proportions fills the air, our vision and the screens in front of us.
In order to get the complicated and serious answers to the important questions in front of us, I reached out to Financial and Precious Metals expert, Mr. Bill Holter.
Bill Holter worked as a Stockbroker for 23 years and as a Branch Manager for 12 of those at A. G. Edwards. Bill had a multi year collaboration with precious metal legend Jim Sinclair and after writing for them, Bill still represents Miles Franklin as a precious metals broker.
Bill, liquidity is a real issue. Janet Yellen recently alluded to the fact that there are no buyers for long term treasuries. During the last month the Japanese 10 year Benchmark JGB did not trade for four consecutive trading sessions. When investors don’t want to buy long term, supposedly high quality 1st world debt, they are either opting for other credits or just staying out of the way. Does this mark a pending implosion of the credit markets? If so, what effect has the central bank money printing had and what effect does this type of market activity have on the derivatives market for these securities?
What Janet Yellen is talking about here is "monetization" without using the word itself. She describes a situation where there are no natural buyers for Treasury debt which forces the central bank to act as the buyer of last resort. In effect, the left hand (Treasury) issues bonds and the right hand (Fed) is forced to buy as no one else will. History is full of illustrations of outright monetization, in each instance the currency ended up becoming worthless. I would ask, how is liquidity a problem after global central banks created $ trillions of debt/money supply during Covid? The answer is simple, we are now in a place where the global debt outstanding is unpayable because the money supply outstanding falls far short of what is needed to pay principal and interest. As for derivatives, this is over a $2 quadrillion market which dwarfs ALL central banks combined ability to come to the rescue once they break.
What is your impression of the role that margin plays in the derivatives market and are we starting to see the possibility of something akin to cascading collateralized derivatives defaults? How fast can it happen and how big can the problem get?
As I mentioned, derivatives are many multiples larger than central banks combined. With inflation front and center, central banks have been forced to aggressively raise rates ...on to a system that is grossly over leveraged ...a deadly combination. Worse, all derivatives are originally created with an interest rate assumption, the much higher current rates have surely created margin calls. To this point the margin calls have been hidden-once they become public, the realization will hit hard that the entire system is being margin called. The collapse can (and I believe will) happen overnight. Most likely from a Friday close to a Monday where markets cannot open.
Because of the FTX debacle, is there an unfolding situation with margin calls with investors who either used leverage with traditional securities to buy FTX who borrowed money directly from a traditional bank or perhaps from a crypto lender (like Genesis Trading (who received $140 million equity infusion from their parent Digital Currency Group the day after the FTX bankruptcy filing) (https://genesistrading.com/)?
We now know this situation was a fraud from day one. I believe FTX is only the tip of the iceberg and will spread through the crypto exchanges and ultimately the cryptos themselves like the Black Plague. What was touted as a way to avoid fiat currencies, will ultimately end up being a roach motel.
How much leverage and how much danger is involved with the activity of crypto lenders/hedgers who have been engaged in things like using margin/debt/crypto/derivatives to engage customers in risky yield strategies (such as https://genesistrading.com/yield-services) among other risky things they might be doing?
I do not know the total size of lending, but we already see it was too much in relation to the now much lower values of the crypto currencies themselves. Margin is a double-edged sword, it speeds the movement upwards which feels good, margin also accelerates the downside and exposes fraud. Ironically, the failure of lending in the crypto arena will very likely expose the system as a whole. There is more debt outstanding (not to mention derivatives) than can ever be repaid, a ‘global margin call’ will expose this mathematical certainty. As always, margin calls will expose the fact that collectively the world is swimming naked. Margin calls (ultimately created by higher interest rates) will act like the tide viciously going out!
Bill, what should people be doing right now?
Do the best you can to become as self sufficient as possible. No one knows how bad things will get, nor which ‘services’ will no longer be available. The powers that be have already told you their plans, it will be best in the future if you do not need to rely on these powers as they do not have your best interests at heart!
Bill, thank you so much for being so generous with your time and the wisdom of your insights. It is appreciated.
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Stan Szymanski (or Encouraging Angels) is not a medical doctor. This is not medical advice. In all matters pertaining to the health and care of a human being consult a medical doctor. This is not legal, financial or personal advice. Consult appropriate professionals in those fields for that type of advice.