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Comment by rossdavidh | Hacker News Reader

The biggest news, buried near the bottom:

"After I returned to the U.S., I obtained a document showing a detailed account of Tether Holdings’ reserves. It said they include billions of dollars of short-term loans to large Chinese companies—something money-market funds avoid. And that was before one of the country’s largest property developers, China Evergrande Group, started to collapse. I also learned that Tether had lent billions of dollars more to other crypto companies, with Bitcoin as collateral. "

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Of note, Tether values their reserves at redemption value.

So if they have a loan to an insolvent company that trades at 25 cents to the dollar, Tether’s attestation values it at 100%.

See emphasis of matter, page 2 of their attestation

https://tether.to/wp-content/uploads/2021/08/tether_assuranc...

It's a little more complicated than that:

> Management’s accounting policy is to value assets and liabilities at historic cost plus any accrued interest and less any expected credit losses, or otherwise the redemption value where applicable. The realisable value of these assets and liabilities could be materially different if any key custodian or counterparty incurs credit losses or substantial illiquidity.

At least in principle they are supposed to mark down "expected credit losses". It would be nice if they spelled out what that means a little more, though.

No, there’s a key OR in there. Two options:

1. Cost + interest - credit losses, OR

2. Redemption value

Seemingly they are free to choose either

That’s such an insane, non-GAAP way to value fixed income securities. Almost boggles the mind

It really is. I wish more was made of it. No one has asked Tether to comment publicly, that I know of.

It’s a loophole you can drive a truck through.

wen mark-to-market?

One dollar of Evergrande's debt -- that is, a promise to pay one dollar -- is not worth anywhere near a dollar. So besides the sketchiness of having lots of Chinese company paper on their "asset" books, there's the whole question of how they are valuing said paper.

In other words, when they say they have $1 dollar of assets for every $1 of issuance, is the asset an Evergrande promise to pay $1? Or is it an amount of stuff they can liquidate easily to obtain $1?

It's the former, of course. And the "auditors" they used checked and said "yep, they have the right amount of promises to pay from distressed Chinese companies that, if those companies actually pay, it will be enough money."

Makes me wonder if there's a financial "weapon" a country could use in geopolitical conflict where they intentionally create an inscrutable bubble in another's economy, and then once it's grown big enough they suddenly pull off the veil and let the whole thing collapse

Not that this one sounds intentional, but it makes you think

They said the debt isn't with Evergrand. That being said, there's no way to verify that, and when Evergrande falls apart it's likely the entire chinese bond market will.

So they are doing banking, lending deposits at interest, without any regulation or oversight.

I think we know from history how that story ends.

Not uncommonly, what looks like a shortcoming of existing systems to an innovator, is actually an important feature that you will suffer from the absence of. Sometimes cryptocurrencies seem like they're recapitulating the history of money and banking, without having learned any of the lessons from it.

It's also very strange that he don't specify how many 'billions' - could be 2, or ... most probably 69 billions $.

Tic toc tic toc... Sounds like we'll found out very soon [0].

[0] https://www.bloomberg.com/news/articles/2021-10-07/holders-o...

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