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By Guardian Market, SLR CFO I cannot predict the future. All that I can do is look at the past, and attempt to draw lessons from what has happened before, and hope that others can do the same. That being said, the current situation with JT Financial and SL Wallet (SLW) is reminiscent of what happened with Ginko Financial a few months ago. Let’s review the facts similarities. With both institutions: - Linden Labs took a new policy action that caused a large run on deposits.
- The institutions became at best illiquid and at worst insolvent.
- The institutions decided to convert their existing deposits to equity compulsorily.
- Depositors have been promised that their new equity will be purchased back at cost over time.
For those of you who have been reading SL Reports for awhile, you know that I was not a fan of Luke Connell’s decision to prohibit Nicholas Portocarrero from purchasing Ginko Perpetual Bonds (GPB) at less than L$1 per share if investors were offering them at such prices. I wrote about it in an article called “Salt in the Wound: WSE Price Regulation of GPB. ” However, this time around I highly doubt that Arbitrage Wise will prohibit himself from buying back SLW shares at less than L$1 per share. Thus we have a rare gift in the financial markets, the opportunity to see how nearly the same event is handled with a minute difference in the rules of engagement.
This is also time for a hands-on lesson in investor expectations. While Wise himself will be doing a lot of buying up SLW shares, I suspect other investors will also be willing to purchase at less than L$1 per share in order to make a profit when Wise fulfills his promise of buybacks. The question is, how much do investors believe Wise will actually make his buybacks. If memory serves (since the records have been removed), before Portocarrero was prohibited from buying back GPB, the price fluctuated between L$0.30 and L$0.60. When Connell made his decision, GPB dropped down to the L$0.20 area, before being delisted at less than L$0.10. The question is, do investors trust Wise more than they trust Portocarrero? If so, observers would expect to see prices above those of GPB, or above L$0.60. If not, they will be lower. There will be some large depositors who panic and throw the price in downward spikes, I suspect, but most investors will probably be willing to take small or medium discounts on their deposits in exchange for liquidity. Where the eventual price rests will be the telltale sign, though. Wise is placing a bet on his own credibility with the market. So, to the depositors of JTF/SLW, I now ask you: At what price do you sell? Time will tell if those who panic are the stupid investors, or the smart ones.
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