Silvergate, a Federally Insured Bank, Just Blew Up from Ties to Crypto

[Gunnar Larson]

https://wallstreetonparade.com/2023/03/silvergate-a-federally-insured-bank-just-blew-up-from-ties-to-crypto/


By Pam Martens and Russ Martens: March 2, 2023 ~

The one thing a depositor never wants to hear from a bank that is holding
his or her life savings is that it has doubts about its “ability to
continue as a going concern.” Unfortunately, those very words appeared in a
filing made yesterday by Silvergate Capital with the Securities and
Exchange Commission – which pretty much guarantees that the ongoing run on
deposits at Silvergate will continue with an added sense of urgency.

Silvergate Capital is the owner of the federally-insured and
taxpayer-backstopped bank, Silvergate Bank, which decided several years
back that it would be a cool idea to become the go-to depository bank for
crypto companies. One of those outfits was Sam Bankman-Fried’s now
collapsed house of fraud. Accounts at Silvergate Bank included
Bankman-Fried’s crypto exchange, FTX; his hedge fund, Alameda Research,
which prosecutors say looted his FTX crypto exchange customers; and North
Dimension, a fake company promoting itself as an online seller of mobile
phones, when it was actually laundering money for Sam Bankman-Fried’s
crypto enterprises, according to federal prosecutors.

Once the word got out about Silvergate’s ties to FTX and Bankman-Fried, a
bank run ensued. On November 11, when FTX announced it was filing for
Chapter 11 bankruptcy, Silvergate CEO, Alan Lane, released this statement:

“In light of recent developments, I want to provide an update on
Silvergate’s exposure to FTX. As of September 30, 2022, Silvergate’s total
deposits from all digital asset customers totaled $11.9 billion, of which
FTX represented less than 10%. Silvergate has no outstanding loans to nor
investments in FTX, and FTX is not a custodian for Silvergate’s
bitcoin-collateralized SEN Leverage loans. To be clear, our relationship
with FTX is limited to deposits.”

Apparently, having $1 billion exposure to FTX was not comforting to other
depositors. On January 5, Silvergate reported that its “total deposits from
digital asset customers declined to $3.8 billion” as of December 31, 2022
(down from the previously reported $11.9 billion on September 30, 2022.)
That’s a 68 percent drop in one quarter – an astonishing figure for a
federally-insured bank in the United States.

On the same date, the company announced that it was firing 40 percent of
its workforce and that it had met the demand for customer withdrawals
during the quarter as follows:

“Silvergate sold $5.2 billion of debt securities for cash proceeds during
the fourth quarter of 2022. The sale resulted in a loss on the sale of
securities and related derivatives of $718 million during the fourth
quarter of 2022.” That unaudited loss figure was updated in yesterday’s
statement to $948.7 million – and that may not be the last word on the
matter.

Another way that Silvergate apparently met the run on the bank was to
obtain $4.3 billion in advances from the Federal Home Loan Bank of San
Francisco – a program meant to support housing for the poor. (See Four
Crypto-Friendly Banks Are Being Bailed Out with Billions from a Federal
Housing Program.)

There were more troubling phrases in Silvergate’s revelations to the SEC
yesterday, such as the fact that Silvergate can’t file its annual report
for the full year of 2022 (Form 10-K) on time; it needs more time to
“record journal entries.” Equally troubling was the phrase that “its
independent registered public accounting firm” needs more time “to complete
certain audit procedures, including review of adjustments not yet recorded
and the evaluation of the effectiveness of the Company’s internal control
over financial reporting.”

You can read Silvergate’s full statement to the SEC at this link.

In after hours trading yesterday, following the news of Silvergate’s
statement to the SEC, its stock price fell by another 30 percent. Based on
its closing price at 4 p.m. yesterday, it has lost 90 percent of its market
value over the prior 12 months.

Silvergate has other troubles as well. It’s under investigation by the U.S.
Department of Justice; it’s being sued by multiple plaintiffs seeking class
action status; and Reuters reported in February that another crypto
exchange kingpin, Binance CEO Changpeng Zhao, had suspiciously moved $400
million at Silvergate Bank.

Eight months ago Wall Street On Parade warned our fellow Americans to Brace
Yourself for Federally-Insured Bank Failures Caused by Crypto. In that
article we explained how federal regulators were twiddling their thumbs as
more and more federally-insured banks in the U.S. moved into crypto. We
also explained that crypto is a completely discredited “innovation,”
writing that:

“…Warren Buffet has called the largest cryptocurrency, Bitcoin, ‘rat poison
squared’; global economist, Nouriel Roubini, told the Senate Banking
Committee in 2018 that ‘Crypto is the Mother of All Scams and (Now Busted)
Bubbles While Blockchain Is The Most Over-Hyped Technology Ever, No Better
than a Spreadsheet/Database.’ More recently, Bill Gates, co-founder of
Microsoft, one of the most valuable tech companies in the world, stated
that cryptocurrencies are ‘100% based on greater fool theory.’ And just
this past June 1, more than 1,600 scientists and software engineers wrote
to Committee chairs in Congress to warn that both crypto and blockchain are
shams.”

The only remaining question is how long Americans are going to tolerate
this madness within our financial system.
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