No. The people who loaned Patrick money made the mistake of trusting Patrick.
And Patrick made the mistake of trusting the people he loaned money to. Same mistake.
And Patrick made the mistake of trusting whoever it was claimed to be a PTT.
Right.
The people who loaned Patrick money did NOT have a choice of where it was invested.
That's not true. They could have imposed any restrictions they wanted to on how the funds were invested. And they chose to invest with Patrick.
Because Patrick chose how to invest it, and because he offered a risk-free contract (i.e., a set payback amount and period, not a payback based on whether his investments panned out or not), Patrick is liable to his investors for the FULL amount that he promised he would pay.
He didn't offer a risk-free contract. He stated that he believed he had sufficient diversity in his loans to cover a Pirate default.
Patrick could have said "if the investments I am investing this money in default, then you will not be repaid", but he made no such specification in his contract. All he did was promise a certain payback over a certain period of time. And that's exactly what he should be held liable to.
Right, but in this case that was after both parties agreed that he had sufficient diversity to cover a Pirate default. If two people agree on X and then agree "therefore Y", if X turns out to be false, they didn't actually agree on Y. Read the transcript:
Aug 10 08:06:54 hey. your deposits still bs&t free ?
Aug 10 08:07:21 I run a slightly complicated business, but most of the deposit accounts I run are BS&T free
Aug 10 08:07:39 that's what the market wanted
Aug 10 08:07:58 you deem yourself able to repay your depositors in the event bs&t goes bankrupt, and nothing is recovered ?
Aug 10 08:08:00 back in a couple of minutes - grabbing a glass of wine - friday evening here
Aug 10 08:09:57 back
Aug 10 08:10:17 in the event BS&T goes bust, I have more than enough assets to cover that
Aug 10 08:10:41 mainly because the 15,500 coins I hold on deposit are not invest in BS&T
Aug 10 08:10:56 well that works. i'd like to put 500 bitcoins with you
Aug 10 08:11:02 do you mind id'ing with gribble ?
Both parties agreed that Patrick's loan portfolio was significantly free from correlated risk. Patrick concluded, based on that agreed fact, that he would have enough equity in his portfolio to cover a Pirate default. However, Patrick's loan portfolio was not significantly free from correlated risk, and thus he didn't have enough equity in his portfolio to cover a Pirate default. The parties never discussed what would happen if the portfolio had significant correlated risk -- it was something neither party considered.
For example:
A: My house is 1,200 square feet.
B: I'll paint it for $2,500.
A: Deal.
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If the house isn't 1,200 square feet, A is responsible.
B: I measured your house, it's 1,200 square feet. I can paint it for $2,500.
A: Deal.
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If the house isn't 1,200 square feet, B is responsible.
A: My house is 1,200 square feet.
B: I know, I measured it. I can paint it for $2,500.
A: Agreed.
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Common mistake. If the house isn't 1,200 square feet, A and B are jointly responsible.
This is like the last case. Both parties, with sufficient information to realize otherwise, concluded that the loan portfolio was free from correlated risk. Patrick's agreement was based on that shared mistaken conclusion.