I described Tether in 2019 as “the internal accounting system for the largest fraud since Madoff.” This remains true. Earlier in 2022, in the wake of the Luna/USDT collapse and shockwaves hitting the industry, I wrote that their May 2022 attestation showed that, even if one believes the contents of the attestation, they again went insolvent and required recapitalization.

Tether is required to produce a quarterly attestation showing the state of their reserves because they settled with the NYAG in 2021. The NYAG confirmed most of the allegations us Tether skeptics had been making. They were further reinforced in Tether’s settlement with the CTFC, which found (based on their accounting records) that Tether was only solvent for 27.6% of the days in a multi-year examined period.

This week, in November 2022, crypto is dealing with another market-wide contagion. By coincidence, on November 10th, Tether released another attestation, based on data current as of September 30th (archived here).

Tether has again crowed that this proves their substantial success in risk management, for example in decreasing their reliance on commercial paper.

I actually read their accountant’s work product. It, again, demonstrates that if one believes their own numbers, it would have taken supernatural intervention to avoid them again becoming undercollateralized.

Tether was (again) undercollateralized in November 2022

Tether serially lies about the existence, composition, and security of their reserves.

They’re extremely probably doing it again, much like they did in May, much like they did for the past several years.

The Consolidated Reserves Report alleges assets of $68,061,618,458 and liabilities of $67,811,510,720. This implies approximately $250 million in equity, via standard balance sheet math. $250 million was their margin of safety between September 30th and today.

Even one assumes arguendo that Tether is being correct and honest about the existence and composition of their less risky reserves, such as e.g. short-term U.S. Treasuries, this is grossly insufficient equity to support Tether’s risk-on holdings in almost any market conditions, much less the ones we have seen this week.

Tether’s cryptocurrency and investment holdings declined in value

The Consolidated Reserves Report alleges that Tether’s reserves included, as of September, $2,617,267,750 of “Other Investments (including digital tokens)” and $6,135,946,415 of Secured Loans.

These assets must have been impaired in the last six weeks. If they are not, Tether would have a legitimate claim to being the best risk managers. Not in crypto, no, in the history of the human race.

The risk-on assets are 12.86% of the reserves, via simple division. Their equity is 0.36% of assets. (No, I did not forget to multiply by a hundred when converting to percent.)

If their risk-on assets were impaired by more than about 2.86%, Tether must have (by their own numbers) needed recapitalization. Again.

It is not credible that they suffered no serious impairment. Bitcoin, the blue chip cryptocurrency, is down by more than 10%. I challenge anyone to find a portfolio construction for digital token investments that possibly survived this environment with only a 2.86% impairment.

The only even remotely conceivable option would be “put it all in stablecoins” and that just makes no sense at all; their business model (as they describe it) is operating the stablecoin to earn assets from the reserves. Why hold non-yielding USD-denominated stablecoins in reserve when you could turn them into 3.75% yielding Treasury bills using the same process that one alleges one has used many more than 40 billion times.

The loans are an even worse story.

Tether’s accountants warned about their loans in today’s conditions

Tether’s accountants carefully avoid saying that Tether’s reserves are adequate, presumably because they like money but do not like the prospect of jail. This causes them to write very defensively about what they are and are not actually attesting to.

Here is one caveat from the accountants, reprinted verbatim:

The valuation of the assets of the Group have been based on normal trading conditions and does not reflect unexpected and extraordinary market conditions, or the case of key custodians or counterparties experiencing substantial illiquidity, which may result in delayed realizable values. No provision for expected credit losses was identified by management at the reporting date.

Got that? The accountants want to emphasize that all bets are off if the crypto markets are roiling. This is exactly what is happening this week.

I do not know whether Tether had anything in exchanges which folded this week, but it is an incontrovertible historical fact, in both slow databases and public reporting, that Alameda Research was historically their single largest counterparty. Alameda has been vaporized.

Tether says they dodged that bullet.

It does not take vaporization of the #1 current counterparty or custodian, whomever that is, to impair their loans sufficiently to eat through their equity. Their equity is already vapor. They are leveraged 35:1 against their risk-on assets alone. Their debt to equity ratio of about 270:1 would place them comfortably in the leagues of the firms that were at ground zero of the global financial crisis in 2008.

Even a tiny impairment, a slight worry of insolvency risk, to a relatively minor contra would push them into insolvency. The math is extremely straightforward.

This is not simply a liquidity risk; the problem is not merely that realization of the value of collateral might be delayed. It is solvency risk; if market conditions prevent Tether from demanding repayment or liquidating collateral, it is very possible for their contra to no longer exist and their collateral to be worth far less than the value of the debt.

Tether has historically been very tight lipped about their contras and custodians, because they are (sensibly!) worried that public disclosure of them would allow the government to freeze and seize all of their assets. See, for example, the UI screenshot captured by Larry Cermak, a journalist/researcher who (for some reason) believes they seem like people worthy of trust.

[Do not share these instructions] except with your financial institution. Divulging this information could damage not just yourself and Bitfinex, but the entire digital token ecosystem. Accordingly, you are cautioned that there may be severe negative effects associated with this information becoming public.

Who are their contras and what are their exposures? It probably matters, in an abstract sense. It matters much less in the concrete reality of contagion.

But the loans are secured, right?

Yes, both finance and crypto have substantial experience with the theory that loans being secured means that they won’t blow up. Recent experience with this theory is available at your news outlet of choice.

Does the interest environment help Tether?

Treasury bills are yielding in the neighborhood of 3.7% at present, which means Tether generates a substantial amount of interest income.

Where is it, though. How do they only have $250 million in equity if just their Treasuries are generating about $120 million in interest a month?

Regulators and financial journalists seem to not be very interested in answering this question. The answer is probably some variant of “We’re either dissipating it or using it to work out issues with our lower-quality assets, like the issues with the commercial paper that we claimed was lower than 120 days in average duration but for some reason took years to clear off our books.” But the answer is irrelevant. Wherever that money is, it isn’t in their equity.

Tether is a gigantic piggy bank, run by confessed liars. It has previously been looted to cover for the illiquidity of their affiliated exchange. Tether represents a bet that their consolidated group (headed by Bitfinex, which despite past lying about this fact is essentially co-extensive with them) will inject equity to cover losses in the future, as they have done in the past. Sophisticated Tether contras, such as their now-bankrupt bankers, understand this. They are cagey about saying it in as many words.

Tether has steadfastly claimed that no, no, they are really backed. They have always been backed. And since they seem now incapable of even lying competently to support that, the story is shifting.

Tether’s history of deceit and prevarication is very well documented, including in the NYAG and CFTC settlements. They have moved the goalposts many times regarding the composition and sufficiency of their reserves.

In an interview with CNBC, Tether bragged that they had more than 24 hours of liquidity. Another crypto actor recently underestimated daily liquidity needs during periods of duress. “Financial commenters understand this to be a risk” would win an award for understatement except it was already won by Matt Levine.

Tether’s March press release included this language: “This latest attestation further highlights that Tether is fully backed and that the composition of its reserves is strong, conservative, and liquid.”

They required recapitalization in May. They have not, to the best of my knowledge, admitted that.

The November press release includes this language: “Tether is a trustworthy organization that communicates that by providing facts and in its actions.”

Interestingly, neither their newest press release nor the attestation even try to claim it is fully backed anymore. (Ctrl-F if you don’t believe me.) Now they want us to focus on liquidity, and not solvency.

Could someone bail out Tether?

The secret sauce, which is not in their published reserves, is and has always been the community’s estimation that the Bitfinex combined group would inject equity if required to paper over a Tether insolvency.

They have done this before. Bitfinex’s equity offering of 2019 was used to bail out Tether. This came after Tether’s money launderer embezzled their reserves and then had some of them frozen due to governments not being a fan of laundering money. Tether, of course, had consistently represented that its reserves were “dollars in a bank account” and forgot to mention the money launderer thing. (They characterize him as a “payment processor.”)

I agree with clueful cryptocurrency watchers that there is likely some appetite to attempt to rescue Tether again if necessary, since it is systemically important infrastructure. This has always been the argument, that crypto will rally to the central bank of crypto to prevent a crisis there from taking down the rest of the sector.

I disagree that there is capacity. The larger Tether gets the more systemically important it becomes and the more risk the system is implicitly taking on. This is particularly acute in worlds where their contras are not merely risky but factually failing. In those worlds, the cryptocurrency ecosystem’s dry powder is either exploding, being used to bail out Tether’s contras, or running to greater safety.

It is possible that a prompt crisis in the rest of the sector might make it beyond the capabilities of any actor in crypto to step in to rescue their central bank.

How frauds come to light

Frauds being discovered after other extreme market events is a very, very old story. Consider Madoff, for example. He was, like Tether, skilled at releasing tiny amounts of liquidity, for more than a decade, as customers asked for it. He was financially savvy, though, and didn’t feel the need to brag about his ability to tie his shoe laces or meet redemption requests

[Even] in [our] darkest days, Tether has never once failed to honor a redemption request from any of [our] verified customers.

Then the global financial crisis hit. Madoff didn’t kick off the financial crisis. But it caused his clients and feeder funds to lose money, and that put them in liquidity stress, and they asked Madoff if he could please wire them the $7 billion their statements showed him as having.

Then, and only then, he had to admit that the statements were fabrications.

Do you believe Tether regarding the rest of the report?

I have no reason to believe Tether/Bitfinex wouldn’t lie about important things and many reasons to believe they would. Again, I believe them to have perpetuated what is now the largest fraud in history. They are a criminal enterprise and have been for years.

I am just saying that, even if we believe Tether’s reserves report for the sake of argument, and we grant them very favorable assumptions as to their asset mixes and sagacity as traders, we still arrive at their reserves having again become insufficient. Their own numbers indict them.

Why bother writing this?

I wrote this essay today with attached supporting documentation for the benefit of present journalists and future lawyers.

For reasons which are a little unclear to me, journalists and lawyers seem to think that math needs to be blessed. They need someone, and ideally someone on a surprisingly short list of professions, to speak that 4th grade math into the universe. After it is in the written record, then and only then can they take notice of it. It’s like a quixotic version of Wikipedia’s Citation Needed, except with higher stakes.

For better or worse, I apparently count as a professional financial columnist. The Guardian took notice of the May vintage of this math. They then contrasted it with a response from Tether. I will let you be the judge of which was more credible.

Speaking of judges: in other recent Tether news, they’re currently under investigation. The district that was recently re-assigned the investigation has the U.S.’s experts in prosecuting complex financial fraud, which is why I namechecked it in my 2019 post:

Bitfinex and its principals have not yet been indicted by the U.S. Attorney for the Southern District of New York, but crucially, not in the same sense that you have not been indicted by the U.S. Attorney for the Southern District of New York.

Madoff lasted more than 17 years. Tether won’t.