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Comment by 0xy | Hacker News Reader

The most concerning thing to me about Tether is they appear to own Chinese corporate debt for some unknown reason. Isn't that an insane amount of risk?

In what universe is Chinese corporate debt even remotely liquid? It could be invested in Evergrande-adjacent companies for all we know. And you know when push comes to shove the Chinese government will throw foreign investors under the bus first.

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I have absolutely no way to substantiate this, but I feel like if you needed to be able to say that you technically had a few billion in reserves as cheaply as possible but didn't actually think you'd ever need to liquidate it, buying the riskiest debt you could might be a great way to do that.

I'm not following your logic. $1 worth of debt is worth $1 no matter how risky it is. The risk is built into how much it is worth. Risky debt is high risk high reward. Since these funds are backing a stablecoin it doesn't make sense to go for high risk plays with that much money.

Risky debt asks way fewer questions where the money is from you lend them.

I'm not very well versed in how selling debt works, but the way I assume it works is the following: Say someone still owes me $1M over the next 10 years, but I think that there's now only a 50% chance of the debt being repaid. It would make sense for me to try and sell that debt for at least $500k to get a guaranteed immediate return, right? And then that person could say that they hold $1M dollars, even though it's only worth half that much if they priced the risk into it. I may be misunderstanding things though.

Yes that's basically how it works. When a corporation holds a loan as an asset on their balance sheet, they're supposed to mark that asset to market reflecting the risk of default. But if marking to market isn't actually enforced by auditors or regulators then the company can pretend that the asset value is the same as face value. This can appear to work for years until there's a recession and a bunch of borrowers default.

Ah, that makes sense. I'm curious though, how would auditors ensure the asset is marked to reflect the risk? If one organization thinks the risk is substantually lower than another, what do they mark? Or is there generally enough arbitrage that this doesn't happen.

Well it depends on the asset. If it's regular corporate bonds that are being actively traded on an open market (liquid) then just use a recent market price. If there's no market then valuation becomes highly subjective. If the borrower has some kind of credit rating from a trusted rating agency then that can be used as proxy for default risk. Or if the borrower is publicly traded and releases audited financial statements then you can estimate based on those. But if you don't have any of that then pick a number and try to get the auditors to swallow it.

>And then that person could say that they hold $1M dollars

You don't own $1M dollars, you own debt which is an asset. Considering you just bought it for $500k it sounds like the market price for that debt is $500k.

Most likely the commercial paper was issued by crypto companies who all simultaneously seem to be incorporated in Hong Kong and the biggest borrowers of USDT.

Who's saying it's Chinese debt? It's more likely to be loans to crypto ventures. Until it's disclosed, it's anyone's guess, but anyone claiming anything with certaintity, is full of it.

It was a rumour but seeing as the biggest holders of USDT are incorporated in Hong Kong it is very believable.

https://protos.com/tether-papers-crypto-stablecoin-usdt-inve...

The “too big to fail” businesses ended up being the best investments in the US. Commercial debt in China is guaranteed by proxy of the whole Chinese economy, because the government has direct ownership. The Chinese economy is in turn stabilized by the fact everything from your toothbrush to your car tires are made in China or using raw materials they control.

China has the factories but they are hugely dependent on imports of materials and energy; technology from overseas companies; and overseas markets to export to. Throw in their demographics - which are less suited to manufacturing every year - and there could be serious problems for China on the horizon. I hope it leads to a more humane CCP.

> Commercial debt in China is guaranteed by proxy of the whole Chinese economy

There is zero chance China prioritises offshore creditors in a crisis, a cryptocurrency exchange no less. This has precedent [1].

[1] https://www.wsj.com/articles/evergrande-is-leaving-foreign-b...

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