Author: Yikiiiii.eth
封面：Photo by Oscar Ivan Esquivel Arteaga on Unsplash
Recently, Chinese and foreign media like to compare the liquidation of 3ac (Three Arrows Capital) to the "Lehman crisis in the currency circle", but there is no in-depth discussion on what sense and where the two are similar.
I reviewed the ins and outs of the 2008 financial crisis and compared it to the Three Arrows crisis, hoping to learn the historical lessons of traditional finance, so as to bring some reference significance to crypto's risk management and regulatory prediction.
It can be seen that the trigger points and diffusion logic of the two financial crises are very similar. However, due to the different locations of the financial ecosystem (banking & real estate vs hedge fund & digital currency), the level of impact is not the same, and the government's enthusiasm for bailouts and regulations is also very different.
Here's a brief review of the 2008 Lehman crisis and a breakdown of comparisons with 3ac:
The subprime mortgage crisis of 2008 arose when securitization banks packaged real estate mortgages into bonds for sale. These mortgages have different risk ratings, and we all know the story of the thunderstorm that follows, because many of these loan residents have no jobs and income, and are insolvent.
However, due to the package sale, the subprime loan as a whole has achieved theoretical risk diversification, which has a higher rating and a smooth sale. In this way, low-liquid mortgage bonds become mortgage-backed securities (MBS) that generate cash flow for banks.
The behavior of securitized banks selling bonds here is different from the behavior of simple deposits and loans of traditional banks, and high leverage risks arise from this. The reserve ratio of traditional banks is regulated by the central bank, the amount of mortgages and loans is strictly regulated, and the central bank will also act as the lender of last resort. However, when securities banks sell securities, the price of securities is determined by the market, which means that the mortgage rate of the bank is actually determined by the market, and there is no central bank as the final lender and the government.
But back to MBS, why would anyone be stupid enough to buy these "junk bonds" that lend money to unemployed vagrants?
The reason is the expectation of a rise in real estate. As long as house prices rise within a year or two, people who do not have the ability to repay their debts can also partially offset their debts with the appreciation of the house.
In the midst of a carnival of good economy, people often do not see the danger.
The fragility of MBS is that once house prices slow or even fall, and the consensus breaks, it will trigger a domino-like run and death spiral. When real estate mortgage defaults begin to appear, then the quality of MBS collateral declines, the PRICE of MBS based on market pricing will decrease, then real estate credit decreases, and the market will further worry about repayment ability. This expected self-realization and self-reinforcement leads to the emergence of a run, the bank is forced to sell MBS collateral assets, due to short-term liquidity, triggering a collapse in house prices, MBS prices will fall again, thus entering a downward cycle again.
Coincidentally, the explosion of Three Arrows Capital in 2022 also confirms a similar logic.
Three Arrows Capital is a hedge fund that invests in the primary and secondary crypto markets, with more than $10 billion in assets at its peak, and is one of the most active investment institutions in the cryptocurrency space. At the same time, it is also considered to be one of the largest borrowers, With Celsius, BlockFi, Genesis, etc. all associated with Three Arrows Capital. Similar to securitized banks, this sets the stage for its debt risk.
Based on public information, The Liquidity Crisis of Three Arrows began with a decline in the crypto market and was linked to luna zeroing, Celsius liquidation, and BTC's investment failures.
- Misjudgment of the market. It buys BTC through leverage, and BTC continues to fall, triggering a Margin call
- It was previously involved in investing in Luna (tens of billions of dollars have evaporated). In the Investment in the Luna (now Lunc) project, 3AC lost 99.9% in hundreds of millions of dollars.
- Celsius thunderstorms trigger liquidation, forcing Three Arrows to repay the debt as a borrower, constantly selling stETH (in exchange for ETH) to repay the debt, StETH off anchor, and market panic fell further.
The key factors of Lehman and Three Arrows risk are very similar: excessive debt, collateral insecurity and misjudgment of systemic risk are the reasons why they are so vulnerable to a downtrend.
First, the debt is too high and the collateral is not safe.
In liquidation and extreme cases, collateral such as Lehman's MBS and Three Arrows' stETH both show short-term liquidity deficiencies, leading to huge price volatility. In addition, unlike government bonds, these collaterals also depend on the repayment capacity of third parties and have the risk of third-party default.
Second, there is insufficient expectation of systemic risk.
For example, MBS's risk assessment rates the relevance of properties in different areas to a lower level, such as new York and Illinois house prices are not synchronized, so they are packaged together and considered the risk to be dispersed. But in fact, the act of packaging itself makes them relevant, and actually introduces systemic risk. From LUNA to Celsius to BTC, the correlation between cryptocurrencies and the systemic risk of plunging are even more pronounced.
However, due to the high financial systemic risks caused by the subprime mortgage crisis, the US government eventually came forward to become the final mediator and bottom-up. These include: promoting bankruptcy restructuring and acquisitions, nationalizing some bankrupt financial institutions, issuing loans and borrowing money from bankrupt banks, and lowering interest rates to stimulate the economy.
However, the currency circle does not have a government pocket.
In the traditional financial world, there are governments promoting acquisitions, but after the three-arrow thunderstorm, it is the mutual liquidation between large institutions. When Three Arrows borrows money from other institutions, it is also likely to be rejected because borrowing money from bankrupt institutions is far beyond the risk control range of the institution. Only more powerful exchanges such as FTX are trying to play the role of central bank rescue, but compared with the strong intervention of the US government in 2008, it can also be felt that its own strength is really weak.
History is always repeating, and the new regulations of the US government in 2008 may have some reference to the future of the crypto market.
After 2008, the U.S. government vigorously strengthened financial regulation. To reduce systemic financial risk, regulations have been introduced to limit the size of financial institutions and split commercial and investment banks, which is also the source of JP Morgan and Morgan Stanley.
In contrast, the volatility of the currency circle is far less than the risk of the 2008 financial crisis, although it will attract some attention from the regulator, but the government will not go down to the rescue. On June 22, Fed Chairman Jerome Powell said that cryptocurrencies need better regulation, but so far, the sharp decline in cryptocurrencies has not had a clear macro impact.
If the regulation of the crypto market becomes stricter in the future, regulating lending and leverage, then requiring CEFI to improve transparency and report the use of funds, requiring high market capitalization defi to explain the source of bond issuance and APY may be measures that can be imagined at present.
Finally, after 2008, the United States and even the world economy fell into a real recession, with credit declining and consumption, employment, and output falling sharply, with investment not returning to pre-crisis levels until 2013.
What awaits the crypto world?
"Disclaimer: This content is only for the majority of enthusiasts to learn and exchange, does not constitute investment opinions or suggestions, please look at it rationally, establish a correct concept, and improve risk awareness."