Activision Lawsuits and Fractional Reserve Banking?

Well, Activision now officially has two class action lawsuits on their hands. The sum total of the suit(s) seems to allege that they knew Bungie intended to leave and take Destiny with them and continued to misleadingly present Destiny and their plans for it to investors. While I don’t know enough to draw many conclusions at the moment, it’s safe to say that it’s not a good look for Activision Blizzard, and even if it’s not true and/or they win, it will likely be a costly win for both their finances and investor confidence.

Marathal mentioned in the comments of the last post I wrote about it, that they may end up dropping the Blizzard part of the name, possibly even the studio, and reforming as just Activision. This could certainly push that forward and even if they keep Blizzard the studio they may have to reform after it’s said and done in order to get some of that investor confidence back.

Speaking of economics, there’s the continuing train of thought I’ve been following in the background. I talked about the tragedy of the commons, but I got kinda curious and started with the general question of where money comes from anyway. Y’know, if the government “created” the money, how was it then placed into the system for general use. So I look it up, and, well, I had the whole thing wrong right from the start. In fact, it’s still bothering me a little bit. A small existential crisis of sorts.

Now, the government does, in fact, create the physical cash currency, typically through a “Central Bank.” The problem is that in the grand scheme of things, commercial banks create most of the money we use. Most of the world uses what’s called “fractional reserve banking.” This is where banks are told they can only lend out a certain percentage of the deposits that they hold. It’s properly called a reserve ratio. I’ve seen 10% used in a lot of examples, and this is in fact the current ratio for US banks holding more than 122.3M USD of certain liabilities. Mostly checking accounts.

So a US bank, then, that holds, say, 200M USD can lend out up to 180M. In theory it’s actually 1B (10% of 1B is 200M) but that’s kinda weird and complicated and makes some assumptions. Because I find it funny and amusing, my example bank is called the “Damn Bank.” If the Damn Bank lends out 50M to start a new business. This business takes it’s money and buys a variety of things like real estate and equipment and hires some labor to make it move. Let’s say they spend 30M on capital and labor and keep 20M for operating expenses. In a really simple scenario it would be safe to assume that most of the 30M they spent is going to end up being deposited back into the bank by the locals. Now the bank has a total of 230M USD in deposits, which increases it’s lending ability. The new business might even use the bank to hold it’s 20M operating cash which brings it up to 250M.

In reality, they don’t so much give the debtor 50M as much as they create a new account at the bank with 50M in it, so it never really leaves the bank, per se, just moves around amongst different accounts. The part that hurts my head is when we start considering that the 50M they created was technically already in the bank. If there was a run on the bank, they would only have 150M “real” money to pay the 250M they have deposited. Now, it’s worth mentioning that in this system the central bank generally controls various things like the reserve ratio and the ability to create new new “real” money. It’s entire purpose is not only to regulate the whole system but also the network of safety nets that protect from bank runs, creating additional “real” money for the commercial banks, if need be.

This is also not representative of every first world country. UK, NZ, Australia, and some others don’t have a required reserve ratio but instead have a “capital requirement” that sounds kinda like the same thing but apparently isn’t. I’m assuming it’s measured differently and probably includes more than just deposit account risk.

That’s something to look up another day though. I’m still trying really hard to swallow just what I’ve presented here. It suggests rather strongly that most of the money in our system only exists because it is borrowed.

For a good portion of my life I’ve believed that being debt free, or at least doing as much as possible to limit debt, was the best practice and that if everyone did it a lot of problems could be solved. This line of thinking, however, appears to be in error. If everyone avoided debt, new money would not be created.

Now, all of this is obviously not exactly a perfect reflection of the real world. There are multiple banks, so the 50M created by the Damn Bank wouldn’t necessarily stay there, but in fact be transferred to other commercial banks, increasing their lending ability and decreasing that of the Damn Bank. The there was a run on the Damn Bank they could, of course, borrow additional funds from the other banks to make the system keep running, and this is actually what happens under most circumstances. If a the Damn Bank ends up with more issued credit than it’s reserve ratio would allow, it typically borrows that money from the other banks to balance the sheet out a little bit.

I don’t even know how this works in international banking either. I’m sure I’ll get there at some point, but it all feels like information overload.

At the end of the day though, I still get paid. The money I get paid, while likely not “real” in the strictest sense, can still be exchanged for goods and services. The whole system, crazy as it seems, is specifically designed to avoid immediate catastrophe.

With that in mind, I’m going to shut up and go about my business. I barely understand any of this and what I do understand is suspect at best. Y’all take care.

 

5 thoughts on “Activision Lawsuits and Fractional Reserve Banking?

  1. Oh you should try to wrap your head around say a company that is based In the US and has a subsidiary in China that does business in Britain, Germany, and Russia. Trying to resolve yearly financials between US GAAP rules, and IFRS, plus factoring in currency exchange rates.

    As for Blizzard, if this doesn’t raise a red flag with the SEC and result in an external audit, I think they may be ok. They have enough worries with shareholders looking at the bottom line and the losses in stock value.

    I will say that even what small amount of knowledge I have, I’ve looked at the financial statements, and it’s just a bunch of numbers to me.

    Liked by 1 person

  2. Heh, maybe some day I could catch up with that, but takes more than a few days of reading.

    Yeah, we’ll see how all this goes with Activision. It takes years for some of these things to play out. By the time I hear anything substantial about the lawsuits I’ll have probably forgot about it.

    Their stock, even after all this, is still worth a decent bit. We’re not quite talking about a GE level fall from grace. Not yet anyway.

    Liked by 1 person

    1. It is definitely a huge no no, to make statements in company financials that are misleading or false. If it was a good possibility, even highly likely Bungie was going and taking Destiny but not 100% official, that’s different. At the very least it’s a grey area. Maybe it’s for the best that Mike Morhaime left when he did. Makes me wonder too if the Chief Financial Officer looking for a new job was because he saw what they were doing and wanted to get out before heads rolled.

      Liked by 1 person

      1. If that was the case, is there not any sort of requirement to report? I realize it’s possible that the CFO(s) may have only suspected, and it’s a dick move to trash your former employer on the way out the door, especially over suspicions you can’t back up.

        Even if it’s not 💯% official it would be wise to mention it was on the table ahead of time. Things like that don’t typically happen overnight.

        Liked by 1 person

      2. The rules for reporting are in some respects very precise, but then there are areas that it’s fuzzy, and when you add in global reporting it’s a mess. It’s probably safest and the least chance of issues for a business to report only the facts that are true on the filing date. You don’t give potential investors or current stock holders “this might happen” statements. They could say they anticipate Warcraft to surge past 15 million subs and a 50% increase in profits. It’s a fine line they have to walk between wording things legally, but also allowing for someone skimming the reports to come away with a different positive view.

        Like

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