01 August 2007

Ginko Doubles Down - Bigger Bust, or More Secure Future?

Well, with the recent upheavals that have been going around, it seems a bit obvious that depositors at SL Banks might feel the need to put more of their trust in real-life currency rather than Agnian L$. This has obviously caused a run at several banks.

Now any bank, in any world, will more often than not have very little of the finances it claims to own available for withdrawal. Money sitting in actual currency rather than sunk into investments is money that does not earn money. However, not having enough of this float to cover depositor's regular demands up front is dangerous: word gets around fast and eventually, the bank loses consumer confidence. There are also costs involved in cutting and running from investments prematurely. It's a balancing act on tightrope, perched above fiducial damnation.

One of the biggest victims of this run on SL Banks has been Nicholas Portocarrero's Ginko Financial. Eloise Pasteur writes in the Second Life Insider a summary of the matter as well as some good links to other websites that practically thrive on reporting this sort of thing. Nobody Fugazi has also attempted to tease more answers about his intentions out of Nicholas as well, and the results are in his KnowProSE blog.

It is not as if Ginko was a stranger to controversy. Since the moment it offered what was initially an effective interest rate of about 72% p.a. in its heyday, the company has been accused (fairly or otherwise) of being a Ponzi scheme by many residents on one hand, . On the other, you have Residents who have ridden the tiger and profitted significantly (encouraged in part by the explosive growth in signups in Second Life.), who urge that Ginko can be a valid investment like any other investment instrument that is native to Agni provided you do your homework before investing and never risk anything that you can't afford to risk.

So withdrawals per day from Ginko have been significantly capped, and its offered interest rate reduced significantly since then. To make matters worse, prudence has dictated that the Ginko Financial Lottery be shut down in case it falls foul of LL's recent ban on wagering inworld. While part of the rake from tickets was always going to seed the current draw and the next, there was also a portion being funnelled back into Ginko's fund.

While I was browsing over earlier today, I found that Ginko Financial has introduced two things:
  • It has cut interest on openly accessible funds to 0.1% per day from the 0.13% it offered in previous weeks due to a earlier run by residents to other banks perceived to have more financial stability...
  • and it has introduced term deposits.

What are Term Deposits anyway? Especially if you're a teen fresh off the TSL or someone who's not particulary keen on financial knowledge, this might sound newfangled.

Unlike a normal bank savings account, a term deposit is essentially a contract with a bank whereby you hand the bank an agreed amount of money for an agreed period to earn an agreed interest rate.

For the duration of this contract, you cannot take any of this money out for use on other matters. This is money that the bank does not have to budget for in its cash float till the day it matures at the end of the term, and can be sunk in to investments that require more stable funding but promise greater interest. Some banks in real life DO offer early term deposit cashouts, but impose onerous penalties to ensure that depositors do not do so unless they have absolutely no choice.

On the flip side however, the bank also pays a price of sorts for this stability in its investment funds: many term deposits are tied to a higher interest rate than the current interest rate set by the banks in order to compensate for the inability to access the funds involved, and this increases slightly with every extra month or dollar tied up in the deposit. This rate is also not renegotiable for the term of the contract - bad news for the bank if the interest rates fall.

And it still has to be repaid at the end of the term. It is still possible for a bank to default and fail to be able to make payment of depositors' demands in the end - only worse, because all that extra interest means more money owing.

Different banking jurisdictions will have different ideas about what to do in the event that a bank falls over from the weight of its obligations. For instance, the FDIC guarantees up to US$100,000 per investor per insured bank on any bank defaults in America (with extra insurance provided in certain cases), with anyone who has more than the insured limit basically plumb out of luck for the excess barring any successful legal action. Other countries may have more generous offers to cushion the blow, or totally fail to provide a safety net - check your local governmental body on finance for more details.

And there, for most of us, is the nub. In Second Life, regulation is not a cornerstone of most of our activities (excepting possibly the Terms of Service, The Big Six, and whatever covenants our landlords require us to agree to). Who watches the bank? Except for a few million depositors and a couple of more attentive, more inquisitive residents, most finance in Second Life is virtually bereft of oversight, not to mention guarantees or insurance. if a SL bank falls, you're going to be left picking up the pieces barring the appearance of some damn fool who doesn't mind spending money to pick up the tab (and possibly some other ulterior motives - banks don't get bailed for altruistic reasons)

It is a double-edged sword: it cuts out a lot of the costs many oversight bodies inflict on banks as a result, and allows them to take risks that a oversight body would disapprove of or even deny coverage for. But then, there's a reason why they were so prudent, these bodies. Having dozens of trained eyes to keep looking for possible problems in the system isn't cheap either.

So is taking out a term-deposit with Ginko, at what is effectively twice as much interest per day (and if you're taking a compounding interest deposit, considerably more than double the dividend due to the power of compounding) a good investment?

Yes. No. Maybe.

You have to ask if the future of Second Life is going to be bright enough that whatever portion of it Ginko can get hold of will be enough to service your deposit, especially if it's a compound interest deposit.

You have to ask if you can afford to let go of the money. You do NOT put your rental money into extremely highrisk investments. Let's be brutally frank - Ginko is inherently that with its lack of transparency and its insane interest rates (even if it HAS honored most withdrawals till recently). Money you don't mind losing is the best money to invest, especially with such risky instruments.

You have to ask if you can afford to let go of the money for long enough. whatever you put into term deposit is something you're not going to see for a long time. Possibly up to 360 days (just shy of a year) in this case. and especially more so if you're opting to keep the interest in play with a compounding deposit.

It's a personal choice. Best way to deal with them is to look at yourself and ask the questions you do want to hear... and the ones you DON'T want to hear (but really should).

Good luck out there.

(DISCLAIMER: The Author has sunk a modest amount she can afford to lose in a 30-day compounding deposit with Ginko. The author also recommends that the reader ideally seek more professional advice and opinion prior to committing to any financial investments, and will not be held responsible for any damages incurred due to failures in investment with Ginko or other banking companies.)


Nobody Fugazi said...

Good summary.

As far as insurance, you may want to take a look at this:


Patchouli Woollahra said...

Thank You, somebody named Nobody :D

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