Monday, March 27, 2023

Silvergate: Silvergate bet everything on crypto, then watched it evaporate – Usky News

New York: Silvergate Capital The corp spent its last days under siege.
Bombarded by shortsellers, abandoned by depositors and shunned by business partners, executives at the crypto-focused bank went face-to-face with US regulators at their La Jolla, California headquarters.
Federal Deposit Insurance Corp executives stormed the firm’s offices in a bid to avert the US banking system’s first crash from the crypto explosion. Among the options he discussed included seeking crypto-investors to help raise liquidity amid the bank’s mounting losses. But a desperate round of calls to potential investors failed, with no firm willing to shoulder the burden of being involved with a bank so deeply mired in industry turmoil.
Survival is looking increasingly improbable and there are no buyers in sight, silvergate said on Wednesday it was closing its doors, ending a decades-long crypto dream that once made it a central player as the industry boomed.
The decision to liquidate voluntarily, as described by people familiar with the matter who spoke on condition of anonymity, capped months of turmoil at the bank stemming from the Sam Bankman-Fried relationship. ftx, The crypto exchange’s bankruptcy in November, following allegations of fraud, placed a harsh spotlight on Silvergate, as well as igniting a regulatory crackdown on the industry’s banking relationship.
And as Silvergate mired in stress, posting a $1 billion loss in the fourth quarter and losing more capital this year, it was forced to delay its annual report and raised questions about whether it could stay in business. Could stay. Having hitched its wagon so tightly to the new world of crypto, the bank had exposed itself to an old-world banking risk: When the industry’s prospects turned sour, Silvergate had little business to lean on. Was.
Sheila Barr, who chaired the FDIC during the Global Financial Crisis, said, “Silvergate’s troubles are not so much about traditional banking risks — lack of diversification, maturity mismatches — as it is about its exposure to crypto.”
A representative for Silvergate declined to comment.
crypto chase
Silvergate was opened in 1988 to provide loans to industrial customers, operating in traditional services such as commercial and residential real estate lending. But in 2013, it began transforming itself from a niche community bank into one catering to the digital-assets industry. It started accepting deposits from institutional crypto players, something other traditional financial institutions were willing to do business with.
In 2018, it introduced a crypto-payments platform that enables customers to exchange fiat currency at the same speed they trade digital assets on systems outside the bank, such as FTX.
The bank’s move from traditional banking to a niche sector at the time reflected the broader dynamics in the financial industry. Smaller US banks struggling to compete with larger rivals doubled down on areas where traditional finance was far from in the hope it would give them a fighting chance, but with mixed success.
“Anytime you move away from having a substantial portion of your business on either side of the balance sheet, you’re going to be in trouble,” said Abbott Cooper, an activist-investor who focuses on the banking sector. “And you’re definitely going to be in trouble if you’re not fully focused on the risks that are created by this.”
Balance sheet
The unique composition of Silvergate’s balance sheet also played a significant role in its downfall. Silvergate didn’t pay interest on deposits it accepted from crypto customers, meaning it had a free pool of funding, which it was able to invest in, such as government debt and similar liquid assets. The mortgage-backed securities and bonds in its portfolio were sold by state and local governments.
This setup – although not unusual for any bank – proved problematic as the Federal Reserve raised interest rates, eroding the value of a portion of Silvergate’s securities. When the crypto industry faltered and customers rushed to withdraw money — the lender’s non-interest-bearing deposits plummeted from $12 billion at the end of September to just $3.9 billion at the end of last year — Silvergate had to sell securities to pay for those withdrawals. Fell But the bonds were worth less than the company paid for them, forcing them to sell at a loss and leaving a $1 billion hole on its earnings at the end of last year.
“They fail to see that rising interest rates are basically increasing the volatility of those deposits,” Todd Baker, a senior fellow at Columbia University’s Richman Center for Business, Law and Public Policy, said in a March 2 interview with Bloomberg Television. Will impress.” “They also failed to understand that the value of their securities portfolio would fall if rates rose.”
Meanwhile, US prosecutors in the Justice Department’s fraud unit are probing Silvergate’s transactions with FTX and its trading firm Alameda Research.
The criminal investigation is probing Silvergate accounts hosted for Bankman-Fried’s businesses. The investigation touches on an important question: What did the banks and intermediaries who worked with Bankman-Fried’s firms know about what US authorities have called a years-long scheme to defraud investors and customers?
The bank has not been accused of any wrongdoing, and the investigation may end without charges being filed.
Court papers filed in February allege Bankman-Fried was involved in a bank-fraud scheme that targeted a company identified in the court document as “Bank 1”, which the indictment has filed in California. describes as being located. Bank 1 is Silvergate, a person familiar with the matter told Bloomberg.
A more important question is how a financial institution pushed so deeply into crypto hasn’t seen action from its regulators.
“Where were the regulators on Silvergate?” asked Jerry Comizio, an assistant law professor at American University and a former US Treasury Department official. “In a real sense, they missed Silvergate.”


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