FDIC Investigators Are on the Premises of Collapsing Federally-Insured, Crypto Related Bank, Silvergate: It’s Not a Friendly Visit

[Gunnar Larson]

https://wallstreetonparade.com/2023/03/fdic-investigators-are-on-the-premises-of-collapsing-federally-insured-crypto-depositor-bank-silvergate-its-not-a-friendly-visit/


By Pam Martens and Russ Martens: March 8, 2023 ~

Alan Lane, CEO, Silvergate Bank
Alan Lane, CEO, Silvergate Bank

A very peculiar headline appeared at Bloomberg News yesterday concerning
the collapsing federally-insured bank, Silvergate Bank, which became the
go-to financial institution over the past few years for crypto exchanges
around the globe. The headline read: “Silvergate Is in Talks With FDIC
Officials on Ways to Salvage Bank.” That headline moved quickly to other
news outlets, which dutifully regurgitated that there was an effort
underfoot by the Federal Deposit Insurance Corporation to save Silvergate
Bank.

Bloomberg News then went further out on a shaky limb with this paragraph:

“Federal Deposit Insurance Corp. officials have been discussing with
management ways to avoid a shutdown, according to people familiar with the
matter. One possible option involves lining up crypto-industry investors to
help Silvergate shore up its liquidity, said one of the people. FDIC
examiners arrived at the firm’s La Jolla, California, offices last week,
the people said.”

For starters, “FDIC examiners” are not investment bankers from Goldman
Sachs or Perella Weinberg Partners. They don’t arrange mergers and
acquisitions. If bank examiners from the Federal Deposit Insurance
Corporation are on the premises of Silvergate Bank, it is because officials
of that bank put a big red target on their bank for the Feds on March 1
when it made a filing with the Securities and Exchange Commission that
stated that the bank had concerns about its “ability to continue as a going
concern.”

The SEC filing also indicated that record-keeping at the bank is so suspect
that it can’t even file its annual report for the full year of 2022 (Form
10-K) on time; and it needs more time to “record journal entries.” Equally
troubling was the phrase that “its independent registered public accounting
firm” will require 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.”

And if all that weren’t enough, it added for good measure that it was under
multiple investigations from regulators, Congress and – oops – those folks
with criminal prosecution powers – the U.S. Department of Justice.

So, to summarize, that devastating information was released seven days ago
and yet, yesterday, Bloomberg News’ reporters think that the Feds are on
the premises of Silvergate to “salvage” the bank.

Here’s an alternative theory: the FDIC bank examiners are on the premises
of Silvergate Bank to find out how big a hole there is between what the
bank owes to depositors, its cash on hand, and what its liquidated assets
might be worth.

Silvergate’s ability to find a white knight bidder to “salvage” the bank
ended when gutsy U.S. Senators Elizabeth Warren (D-MA), John Kennedy
(R-LA), and Roger Marshall (R-KS) released a letter on January 30 to the
bank’s CEO, Alan Lane. The letter revealed that the bank had been
stonewalling the Senators on their inquiries about the bank’s dealings with
Sam Bankman-Fried’s collapsed crypto exchange, FTX, and his hedge fund,
Alameda Research. Federal prosecutors have charged that Alameda and its
principals looted more than $8 billion from FTX customer accounts and the
money is missing.

The letter from the three Senators to Silvergate CEO Lane explained the
situation as follows:

“We are disappointed by your evasive and incomplete response to our
December 5, 2022 letter regarding Silvergate Bank’s role in the improper
transfer of FTX customer funds to cryptocurrency hedge fund Alameda
Research (Alameda). We wrote to you seeking information on what appeared to
be an egregious failure of your bank’s responsibilities to monitor and
report suspicious financial activity. Your response confirms the extent of
this failure – but then neglects to provide key information needed by
Congress to understand why and how these failures occurred. Moreover, in
the month since you provided your inadequate reply to our request for
information, new reports have emerged detailing the run Silvergate Bank
(Silvergate) faced in the wake of the FTX collapse, and the funding sources
the bank turned to as its coffers ran low, further underscoring the need
for full transparency from you and your bank.

“Most notably, new reports revealed that as it sank further into distress
in 2022, Silvergate turned to the Federal Home Loan Bank (FHLB) of San
Francisco for an injection of cash large enough to ‘stave off a further run
on deposits.’ Your bank ‘now holds roughly $4.6 billion in cash,’ the vast
majority – $4.3 billion – of which it secured as an advance from the FHLB.
By using the FHLB as its functional ‘lender of last resort,’ Silvergate has
further introduced crypto market risk into the traditional banking system.
If Silvergate were to fail – as have banks facing a fraction of the
withdrawal rates Silvergate has faced – FHLB could ‘assert statutory lien
priority on other assets – essentially putting the Home Loan bank ahead of
all other creditors,’ including the Federal Deposit Insurance Company’s
(FDIC) deposit insurance fund. Financial experts have noted that such a
scenario could leave the FDIC – and therefore the American taxpayer –
holding the bag.”

It turns out that the people running Silvergate Bank did not quite grasp
the concept of hot money. Hot money can pour in really fast to a bank and
boost its deposit base but it can also drain deposits in record time,
leaving the bank teetering. On January 5, Silvergate reported to the SEC
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.

A federally-insured bank is not some local mom and pop bakery that puts a
sign on its door that it’s closing due to its rent going up. A
federally-insured bank is part of a complex system of deposit insurance
that, ultimately, puts the U.S. taxpayer on the hook for unrecouped losses.

On an ongoing basis, the Deposit Insurance Fund (DIF) is funded primarily
through quarterly assessments on insured banks. A bank’s assessment is
calculated by multiplying its assessment rate by its assessment base. A
bank’s assessment base and assessment rate are determined and paid each
quarter.

According to the FDIC, the Deposit Insurance Fund (DIF) held $128.2 billion
as of December 31 while the total of domestic deposits tallied up to $17.7
trillion. But some of those deposits exceed the insurance limits. According
to the FDIC, as of December 31 the Deposit Insurance Fund’s balance was
just 1.27 percent of the insured deposits held at the nation’s banks. (See
chart above from the FDIC.)

That low reserve at the Deposit Insurance Fund has not been a problem
heretofore but if crypto fraudsters are allowed by Congress to continue to
invade federally-insured banking in the U.S., it could become a problem
very fast.

That problem would not only raise the cost of insurance premiums to the
ethical banks in the system but it could also do serious reputational
damage to the safety and soundness of the entire U.S. banking system.
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