Convert or Die!

A couple of weeks ago, the SL Capital Exchange enacted a controversial decision. They chose to convert all JT Financial balances (which were the same balances SL Capex used) into shares of SLWallet.com, JT Financial's successor. Occasionally looking into the forums on the website, I could see a lot of complaining taking place.

I think that a lot of the criticism that Arbitrage Wise and company have been receiving has been rather unfair. Simply put, the ban on bank interest caught them (among others) off-guard. Perhaps even more so for SL Capex as their claim is that if the ban had started a week or two earlier, they would have had the reserves in place sooner.

While having a securities exchange coupled with an investment firm (which is what JT Financial really is) has been proven to be dangerous, it is not abnormal. While most of us who deal in securities don't interact with the exchange itself, the brokerages that serve as the media do generally offer interest on deposits. This is the case with the three that I have had RL accounts with. I suspect that if an economic panic takes place and drastic withdrawals from brokerages occur, they might be in a similar situation as what SL Capex and other firms are experiencing.

What SL Capex has done with the conversion isn't all that ridiculous. The system set up by this conversion has made it possible for liquidity to take place. Basically, account holders now have the option of accepting a virtual IOU (which might have value in of itself eventually) or cash out at a fraction of their balances. This creates an option where one did not originally exist.

The only valid criticism in my mind is that a lot of JT Financial customers did not deposit with share-dealing in mind. They were simply interested in the, well, interest offered. Now they have to interact with a securities market with people that have been there for a while and have a better idea of the dynamics. However, my response is that things happen outside of our control. The US certainly didn't ask for Pearl Harbour to be attacked, which lead to the draft. (My father went into the US Navy that way in World War II.) Sometimes there are unexpected consequences involved.

I speculate that other options for restoring liquidity were considered. I note that L&L Bank has six options in their solution to their liquidity issues. While SLW conversion was the only explicit option, there was an implicit option: become fully invested before the conversion. I was thinking that JTIC was an ideal investment as it is the closest security to a bond that the exchange offers, and they should still be looking to divestment in May as previously stated.

In the larger scheme of things, what I believe is happening is a natural human impulse to blame the face of a problem, rather than dig beneath and find the root source. Sometimes one can dig too deeply. In my mind, Wise and company are as much victims of a number of forces outside of their direct influence, and yet regardless of what action they take or do not take, they bear the brunt of the vitriol unleashed. I suppose with that in mind, it was easier to do the conversion than it otherwise might have been.