Liquidity and Bankruptcy

As investors have learned, like any other investment, cryptocurrency is subject to volatility. The recent bankruptcy filing of crypto exchange FTX shows, this volatility can be extreme. For example, the Ontario Teachers' Pension plan wrote down $95 million due to the collapse. As you probably know, bankruptcy occurs when liabilities are greater than assets. However, bankruptcy can result from a finer distinction between liabilities and assets, namely liquidity. In the case of FTX, the company had $8.9 billion in liabilities and $9.6 billion in assets. So was the company forced to declare bankruptcy? Liquidity. When you look at the balance sheet, FTX had $900 million in liquid assets, $5.5 billion in less-liquid assets, and $3.2 billion in illiquid assets. Think about it like way: You owe $10,000 at the end of the week but your only asset is a $100,000 house. Yes, your assets are greater than liabilities, but you likely won't be able to sell the house and receive the cash for the sale by the end of the week, so you could be forced into bankruptcy. But FTX had other problems as well. John Ray, who was appointed to oversee the FTX bankruptcy and has overseen other large bankruptcies such as Enron, stated "Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here."

It's Bobby Bonilla (Edwin Diaz) Day!

The New York Mets famously deferred $5.9 million in salary payable to Bobby Bonilla in 2000, instead paying the former $1.2 million per year from 2011 through 2035. Now, the Amazing Mets are at it again. The team just signed a deal with relief pitcher Edwin Diaz that was announced as a five-year, $102 million contract. Under the terms of the contract, the team will defer $5.5 million per year in 2023, 2024, and 2025, then $5 million per year in 2026 and 2027. In exchange, the team will make annual payments to Diaz through 2042. To complicate matters, there is an option year for 2028 and if the team picks up the option, none of the salary is deferred. It appears that the Mets like really long-term payments!

Furniture Hedging

Although many people may not consider sports gambling as a hedge, a Houston furniture store owner successfully did just that. Jim McIngvale offered purchasers of more than $3,000 in furniture double their money back if the Houston Astros won the World Series. McIngvale has offered similar promotions on other sporting events in the past, but to date, none have worked out for customers. However, when the Astros won the World Series on Saturday, McIngvale was obligated to pay customers back. To hedge his risk, his first bet on the Astros was a $3 million bet in May at 10-to-1 odds. He added about $7 million more in bets over the summer at average odds of +750. Because the Astros won the World Series, he received $75 million from various sports books to offset the refunds payable to customers.