The Breakdown - Even Barney Frank Thinks Signature Was Shut Down to Send an Anti-Crypto Message

Episode Date: March 14, 2023

On Sunday, as government authorities announced that Silicon Valley Bank depositors would be protected, they added that the New York Department of Financial Services would be shuttering Signature Bank. Little explanation was given but some, including Signature board member and bank regulation architect Barney Frank, think it was a calculated move to send an anti-crypto message. Enjoying this content?   SUBSCRIBE to the Podcast Apple:  https://podcasts.apple.com/podcast/id1438693620?at=1000lSDb Spotify: https://open.spotify.com/show/538vuul1PuorUDwgkC8JWF?si=ddSvD-HST2e_E7wgxcjtfQ Google: https://podcasts.google.com/feed/aHR0cHM6Ly9ubHdjcnlwdG8ubGlic3luLmNvbS9yc3M=   Join the discussion: https://discord.gg/VrKRrfKCz8   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW  

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big-picture power shifts remaking our world. The breakdown is produced and distributed by CoinDest. What's going on, guys? It is Monday, March 13th, and today we are talking about the extremely suspect closure of Signature Bank. A quick note before we dive in, there are two ways to listen to the breakdown. You can hear us on the CoinDesk podcast network, which comes out every afternoon alongside other great CoinDesk shows, or you can listen on the Breakdown Only Feed, which comes out a little bit later in the evening. Wherever you listen, if you are enjoying the show, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord.

You can find a link of the show notes or go to bit.ly slash breakdown pod. All right, guys, happy Monday. We are in the thick of it. The last 48 hours have been some of the loudest, most contentious times we've seen since 2008. There have been fierce debates about whether or not to protect depositors at Silicon Valley Bank, after it was. was shut down by regulators on Friday, accusations that the venture capital class was fomenting a larger run on small and regional banks just to serve its own purposes. Genuine fear of larger contagion and intense pressure on the federal government to announce

action to give small businesses and other depositors confidence that they weren't going to be out of luck based on who they chose to bank with. And at the culmination of it last night, there was finally an announcement about what was to happen with Silicon Valley Bank. The TLDR was that the bank depositors would be made whole. The Fed would use a fund already paid into by banks to pay for it, i.e. no taxpayer money. Shareholders and management would be wiped out. And on top of all that, a new Fed funding facility was being established to try to address the underlying issues. Oh, and also, by the way,

Signature Bank was being shut down as well because of quote-unquote systemic risk. Wait, signature bank, you say? Wasn't that sort of the last remaining bank servicing crypto companies? The same one that had been under intense pressure for the last few months to stop servicing those customers? The one that crypto companies had switched over to after Silvergate announced a voluntary wind down last week? Yep, that's the one. And wait, you might also say, no other bank was preemptively placed in FDIC receivership before markets even opened? Even others, like First Republic that were facing even more scrutiny from investors? That's correct. It was just the bank servicing crypto customers that was unalived by the U.S. government. I asked last week

whether Silvergate was a political assassination. I pointed to the gloating of politics. politicians like Elizabeth Warren and Sherrod Brown in the aftermath, to the open letters from Warren, Senator Kennedy, and others that undermined confidence in Silvergate back in December, and I also asked questions about why Silvergate's FHLB $4.3 billion loan had been withdrawn so quickly after it was made. Even with all that, the preemptive shutdown of Signature Bank before there was a true bank run is even more egregious an attack on crypto by a group of regulators who hate it. Matthew Graham wrote this morning, I truly can't believe I'm saying this. I sound like some kind of conspiracy theorist, but I think at this point,

the preponderance of evidence is that signature bank was primarily an opportunistic anti-crypto hit job. More likely, more so than not. So let's talk about how we got here. First, a quick recap. Silvergate was, of course, the first bank that showed real signs of trouble. In December, it experienced an $8 billion outflow, which, given that it had about $12 billion in deposits, was a big deal. Now, this was a proxy bank run, not due to a lack of confidence in Silvergate, at least initially, but because so much money was flowing out of the crypto ecosystem in general, and so many of those crypto companies banked with Silvergate. However, it started to become a question of confidence

when Elizabeth Warren and three other senators released open letters accusing Silvergate of all manner of things relating to FTX and Alameda research. On top of that, there was a pretty aggressive short-seller campaign. Now, the biggest point of controversy outside of just their relationship with FTX was a federal home loan bank loan to Silvergate in the amount of $4.3 billion. When that was revealed by Silvergate, there were big questions about whether that was the actual purpose of the FHLB, even if Silvergate had been legally within their rights to get that loan. To me, the bigger question was why the loan was called

at the end of December. But whatever the reason, which has not been revealed, Silvergate having to pay that back in January and February was definitely the straw that broke the camel's back. Now, to pay this loan back, Silvergate had to sell assets on its books. In so doing, it exposed a much larger issue that wasn't just Silver Gates alone. The super simplified version of this, and I go, much more in-depth on previous episodes, is that banks had to take on longer duration assets, such as 10-year mortgage-backed securities and things like that, in order to get yield in a zero-interest rate environment. The problem is that as yields have risen, thanks to the Fed's fastest tightening cycle in 40 years, all of those securities are worth less than they were when they were purchased.

That wouldn't be a problem if banks were able to hold them to maturity, but when there's a bank run, they can't hold them to maturity and they have to sell those assets. When they sell those assets, it's at a loss. The problem is that the selling at a loss often reduces confidence even further, which leads to more people wanting to withdraw their money, which leads to more for selling, and so on and so forth. Anyways, last week, Silvergate announced early in the week that it would be voluntarily winding down. However, as this was happening, that same duration mismatch, the mismatch between the liabilities on a bank's books or its deposits, and the duration of the loans on its books was beginning to show up elsewhere. Silicon Valley Bank, one of the 20 biggest

banks in America had announced at the beginning of last week first that they had sold around $22 billion in securities at a $1.8 billion loss to cover deposit outflows, and second, that they were raising another $2.25 billion in equity in debt. The market did not expect Silvergate to have been in such a precarious position, and it responded by tanking the SIVB stock. This led to an emergency call with Silicon Valley Bank CEO Greg Becker, which was truly a monument to terrible communications. Becker told investors to stay calm to not panic and basically that it would only get bad if everyone acted like it was getting bad. Alas, it got bad. On Thursday, venture capital firms started advising their companies to get the hell out of SVB. Given how

densely networked the tech industry is, that's exactly what happened. We will be relitigating the role of VCs in this bank run forever, but the fact that the matter was some companies got their money out and a lot didn't. On Friday morning, regulator stepped in, shut SVB down, and the and placed it into FDIC receivership, and the big huge question, this left all of the thousands of companies that banked with Silicon Valley Bank was whether they would actually get anything beyond the $250,000 that was insured by the FDIC. And that was the debate all weekend. What should happen next?

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On the one hand were those who said, let them burn more or less. On the left, this was the perspective of liberals who believed that Silicon Valley was a group of value extracting middlemen and gamblers who deserved what was coming to them. For those of you who were interested in that point of view, I actually did kind of a long video about how that group came to be over the weekend on my YouTube. Then on the right, it was a group who argued that SVB failed because it had kowtowed to woke politics or something like that. Then on the other side were the super loud venture capitalists who were saying that Yellen and Biden needed to get on TV right then and there and assure that depositors would be taken care of. Now, there was a lot of blowback against these guys, particularly Jason Callicanus and David Sacks, with accusations that they were trying to foment bank runs on small and regional banks

just to force the authorities to do something to protect their interests. Again, there was a whole massive important discussion to be had about how the nature of social media and mobile communication changes the game for bank runs. Of course, another line of discourse was who dies next, and all eyes were focused on First Republic Bank. There were videos flying around of lines at First Republic, although a lot of them were just the same video being reposted a million times. Rumors were swirling about its demise throughout the weekend, given how much it had declined and stock price on Friday. And all in all, plenty of Twitter vultures were already to pick its carcass.

And I specifically point out First Republic here for reasons that I'll make clear later. Anyway, if these were the less useful parts of the conversation, it definitely wasn't the only discourse happening. There were a lot of folks who were, if not in the middle in some way, just coming at the thing from a more dispassionate perspective. And in this part of the world, the discussion was basically about the problems of sort of retroactively raising FDIC limits above 250,000, versus the problems associated with letting people and especially businesses in America believe that any money above 250,000 that they kept in smaller banks, just wasn't safe. This conversation got pretty fierce as well, but at least it was sort of the right one to be having as compared to some of the more extreme, politically entrenched debates happening at the same time. And this really was the gambit for the U.S. government. If the government stepped in and made a strong statement that it would protect and make whole all depositors, even above 250K, it might inspire confidence and keep more deposits from flowing out of regional and smaller banks, but at the cost of a new moral hazard. In other words, the evidence that banks could just get away with any amount of risk taking knowing the government was there to bail them out.

On the flip side, if the U.S. made a strong statement by not guaranteeing those deposits, it would send a message to banks that they needed to reform their behavior because there wasn't someone to save them if they got into trouble. Of course, the risk in that was that it would also send a message to depositors that smaller banks just weren't worth the risk, and they probably needed to get their money the hell out of there and into the big systemically important banks that the government has to backstop or risk losing the entire financial system. Unsurprisingly, the U.S. government chose the path that involved less immediate panic. On Sunday, after the anxiety-filled weekend, a joint statement from the Federal Reserve, the Treasury, and the FDIC confirmed that depositors would be protected. Now, in all of their communications, they were careful to note that banking management would be removed and that bank investors would not be protected by this action. Indeed, this is really what all of their messaging has been around.

One, satiating the anger and bloodlust a little bit by making sure it was clear that management and shareholders were being wiped out. And two, emphasizing that taxpayers wouldn't be footing the bill for this. Now, one, unexpected action was that depositors would have access to all their funds first thing on Monday morning, rather than having to wait for the FDIC to liquidate the bank's assets or facilitate a purchase of the bank. Additionally, in an attempt to deal with the issue at the heart of the crisis, the Fed also announced a new facility called the Bank Term Funding Program. As we've discussed, the issue that catalyzed the collapse of SVB and that other banks are facing was the duration mismatch between their reserves held in longer-term bonds and their deposits which are available to customers on demand. Due to the rapid increase in interest

rates over the last year, these bond portfolios are worth significantly less than they were a year ago. Put simply, older bonds with a 1% yield just aren't as valuable in the open market now that the Fed funds rate is above 4.5%. Now, importantly, these underwater bond portfolios were never intended to be sold off at market prices. They formed what's known as the hold-to-maturety portfolio, the bonds that intend to hold until they repay their principal in full. However, the major drawdown in deposits over the last year has caused some banks to need to liquidate some of their bonds prematurely at market prices, thus realizing their losses. To deal with this problem going forward of underwater bond portfolios sitting on bank balance sheets, the Fed's term funding program will provide access to

emergency liquidity. In short, instead of selling those bonds into the open market at a loss, banks will be able to take loans against them from the Fed. Importantly, the Fed will value the bonds at full face value and offer the entire value in loaned funds. The facility will be available to lend against Treasuries and agency mortgage-backed securities and limited to bonds held before Sunday. In other words, to limit the facility to only assisting with pre-existing problems. The U.S. Treasury will provide $25 billion to backstop the facility, but they say these funds are not anticipated to be needed. Now, already debates have begun on whether this is a surgical or a shotgun approach. On the one hand, you have folks like former BitMex CEO Arthur Hayes saying,

Game blouses, get ready for a face-ripping rally in risk assets. Money, printer, go burr. On the other hand, you have Terek Booker, an independent economics journalist saying, this is a surgical intervention, not a fire hose of liquidity, no matter how much the market wants it to be the latter. And if all goes well, it will be capped off by even higher rates next week. Indeed, some folks actually think that this facility gives the Fed tools to plausibly continue to hike rates.

Former by-side analysis FedSpeaks says, in all seriousness, the fact that bonds on bank balance sheets can be valued at par for this new loan facility means that the Fed can and will continue to go full speed ahead on rate hikes. Now, there's going to be a lot more to discuss and debate around this, but we need to get to the surprise part of the announcement, which was signature. In the same Sunday announcement where the Fed put forward the term funding program, they announced that signature bank had been shut down by the New York Department of Financial Services and placed into FDIC receivership. According to a press release from the NYFTS, the bank had approximately 110 billion in total assets held against 88 billion in deposits at the end of last year. Signature Bank held accounts for a large number of crypto firms. While they were more diversified than Silvergate, which had more than an 80% concentration in crypto, signature bank had around one quarter of its deposits from the crypto industry.

Banking regulators invoked a, quote, similar systemic risk exception for Signature Bank. And while just like the depositors of Silicon Valley Bank, all of their depositors will be made whole, this cuts out a major piece of crypto infrastructure in that signature operated a real-time settlement network for its crypto customers, which was called Signet. This means that now both signature's Signet system, as well as Silvergate's Send system, are out of action, and crypto companies will have to fall back on slower methods of moving funds between one another. Importantly, unlike the collapse of Silvergate, which was well telegraphed and came after a month's long drawdown of deposits, the shutdown of signature appears to be much more of a shock. Late on Sunday, Coinbase announced that it

still held 240 million with the bank, but that it didn't anticipate any delay in servicing customers. Paxos had earlier announced that it held 250 million in stablecoin reserves with signature, but had taken the step of privately insuring their deposits. And as part of larger communications on Saturday, Circle announced that it held no reserves with signature. Now, this move to shutdown signature had the industry pretty gobsmacked. First of all, extremely little information was given. In their announcement, the NYDFS was very, very brief in their explanation of why they seized the bank, only noting that it was done under Section 606 of New York banking law. Signature Bank board member Barney Frank,

whose name you may remember from the Dodd-Frank Act in 2010, had some interesting quotes for Bloomberg. He said, quote, I think that if we'd been allowed to open tomorrow that we could have continued. We have a solid loan book, where the biggest lender in New York City under the low-income housing tax credit, I think the bank could have been a going concern. Literally the only information that we have gotten

is Bloomberg and New York Times quoting an anonymous source that signature had seen a massive outflow of depotting, on Friday. That same anonymous source said that the situation had stabilized by Sunday. Barney Frank added, I understand the deposit outflow, but I think it was a classic case of being illiquid but not insolvent, and being illiquid for exogenous reasons that would have been corrected. Jay Austin Campbell, an adjunct professor at Columbia Business School, noted that the signature shutdown looks strange. He said, what happened at Silvergate and SVB was a very traditional bank failure. This, unless there was a bigger run on deposits than we know about, is less so.

If there's not some pretty gory details that come out after about the balance sheet, it's hard to figure out why they were singled out. Even reporters are left scratching their heads. Yuki Yang, a reporter at Bloomberg, writes, very curious about the decision-making process by regulators to close down crypto-friendly signature bank, which came as a surprise even to the bank's management and was seen as excessive by its board member. Armand Domelowski, an ecosystem's data analyst at Palo Alto Networks writes, It's kind of unnerving that the feds casually slipped in a, by the way, signature bank went under two in the middle of their We Save the Day announcement. So again, what we need to keep in mind here is that the lesson of Silvergate and Silicon Valley Bank was that this problematic mismatch between assets and liabilities was far from specific to crypto or tech banks, that banks carry more than $600 billion of unrealized losses right now. Indeed, it's a big enough problem that the Fed announced a new facility specifically for this.

So why was signature singled out? Jack Farley, host of the great forward guidance, bless his heart, tried to find a plausible reason for it. He writes, The deposit base of Signature Bank was delicate and concentrated. Vast majority of deposit balance nearly 90% were uninsured business accounts with balances over $250,000. Signature Bank had very different assets than Silicon Valley Bank. Supports the view that composition of deposit base, not asset quality, matters most. Either that or government used opportunity to take down a crypto bank.

Me, my friends, I think it's that second thing. and I am far from alone. Nick Carter writes, when I warned about Choke Point a month ago, I didn't think in a million years that they would go 100x further and actually take down the top three crypto-facing banks.

It's breathtaking, and this wasn't an accident. It was a demolition. A month ago, it was Choke Point, banks discouraged from touching crypto, but now it's decapitation. Every pro-bank has been shuttered. Suzuki Breaker writes, Why was Silvergate's FHLB loan withdrawn suddenly?

Why are they involuntary liquidation instead of being acquired or otherwise reintegrated as is typical. Why was signature shut down? Because we personally do not like their customers is not a valid answer to these questions. Barney Frank, as in Dodd-Frank, is on the board of signature and seems confused about why they were shut down as well.

Freedom of Information Act time. Chase Perkins, the founder at Impervious AI, writes, Signature bank didn't fail. Regulators capitalized on the opportunity to shutter a crypto-friendly bank, using the downfall of Silvergate and SVB as cover. Actions taken are nothing short of nefarious central planning per directive of Operation Chokepoint 2.0. If unchallenged, the precedent just set, would allow federal regulators to seize and close otherwise lawful and functioning institutions

under the guise of quote-unquote systemic risk. I cannot imagine a more subjective and arbitrary standard when inherently prone to abuse and exploitation. They actually closed a bank, told depositors you're welcome, and congratulated themselves. Honestly, Duneberg sums it up. The feds used the cover of SVB to crush the last crypto bank signature in one fell swoop with a bullish chaser for the broader markets. Tidy. One thing that's pretty clear is how much has been screwed up by the shift from zero interest rates to the fastest hiking cycle in four decades. As much as we crypto folks feel like we're the target of this,

what if it's even more reductive? What if it's just that we're the easy scapegoat because the Fed and the traditional finance establishment don't want to accept how badly they've messed up? Dystopia Breaker points out the risk for the Fed, saying, for months the OCC and others have been warning banks not to touch crypto as it represents systemic risks. Now people are saying,

don't keep your funds in one bank dummy, because the second largest bank failure in U.S. history occurred due to underwater mortgage-backed securities and bonds. End quote. How convenient, then, would it be if the narrative was that this was just all about crypto, that it wasn't really about the Fed at all, that it wasn't really about the structure of banking,

which makes it so susceptible to these sorts of problems? Masari founder Ryan Selkis pretty much thinks it's this. He writes, signature was healthy, and why DFS went rogue and shutting them down and surprised even the FTIC. It's targeted. The regime has picked their scapegoat and sent out talking points to its comms teams. Don't believe their lies. This has failed interest rate policy and regulatory oversight, nothing to do with crypto. For my part, I clearly find the shutdown of signature extraordinarily suspicious, especially when just about every bank of this size is currently

impaired. This was given further evidence this morning when literally dozens of small and regional bank stocks had to be halted for trading down so aggressively. But right or wrong, it doesn't matter, signature is gone and it's on to the next battle. Salkis again says much the same. He writes, Crypto's banking rails have been effectively shuttered in less than a week. Next up, USDC. The message from DC is clear. Crypto is not welcome here. The entire industry should be fighting like hell to protect and promote USDC from here on out. It's the last stand for crypto in the U.S. Now, USDC and Circle were one of the biggest subplots and points of discussion all weekend, but unfortunately we'll have to save that for another show. And if you're looking for good news,

obviously it's that Bitcoin is rallying. At the time of recording, Bitcoin is up above 24,000. Amanda Cassatt from Serotonin says, good morning. This may be the first time I've seen crypto go up because of its actual value proposition. And I think there's something to that. Anyways, guys, hell of a time we're living through. I appreciate you hanging out with me as it happens. Until tomorrow, be safe and take care of each other. Peace.