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.