The American Banking Scandal of 2023?

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To investors,

The past week has seen three banks shut down, including the second and third largest bank failures in United States history. This appears to be created by a bad economic situation on the surface, but there is a controversy brewing behind the curtain that I think is worth taking a look at.

As most of you know, I have the good fortune of speaking with many of the top venture capitalists and hedge fund managers on a weekly basis. Some of those interactions happen because of my investing activities, but a lot of them are a product of various topics I write about in this letter. I’ve found that it is worth exploring something if numerous people reach out about it, so that is what we are going to do today.

I want to start with Signature Bank, which was “shut down” on Sunday afternoon by the New York State Department of Financial Services. The mainstream narrative is that the bank was insolvent due to a bank run. This all happened after the $100+ billion deposit bank took too much risk through service of crypto clients. These talking points were repeated over and over again from various news outlets. For example, The New York Times headline reads “Risky Bet on Crypto and a Run on Deposits Tank Signature Bank.”

Sounds straight forward, right? Not so fast.

More information has come out and it appears that the bank may have been a target of political games. A lot of this information is being publicized by Barney Frank, the former Congressman who is famous for his banking regulation work that culminated in the Dodd-Frank Act after the 2008 Financial Crisis. Frank was a board member at Signature Bank and it seems like he has a very different perspective of what happened.

First, to understand the disagreement, it helps to find some common ground between Frank’s perspective and the NYDFS. Frank is adamant that Signature Bank was not insolvent and it appears that the NYDFS has avoided claiming that the bank was insolvent too. In an interview with Jen Wieczner of NY Mag, Barney Frank said the following when asked about the closing of the bank:

I’m very disappointed to learn, apparently, the Department of Financial Services in New York, which did the closing, hasn’t said we were insolvent! They said, well, they had a problem, because they couldn’t get sufficient data. I mean, I was disappointed when they closed it, and sort of vindicated — they have not argued that we were insolvent. And I think it’s very clear if we had the benefit of those two announcements, we’d still be an ongoing bank.

Now, the question is, why did they react so harshly to what they said was our inability to give them the sufficient data? I believe it was probably to send the message that even though we were doing crypto stuff responsibly, they don’t want banks doing crypto. They denied that in their statement, but I don’t fully believe that. I think that they overreacted to what they saw was our problem with data, which may well have existed, but the data was improving. I think sloppy data is not a reason to close a bank that you have not decided was insolvent, and they’ve never said we were insolvent.

Think about what Frank is saying here — the New York regulator helped to nationalize a federally regulated bank that was not insolvent, simply because they didn’t like who some of the bank’s customers were?? If that is true, this is a national scandal that would require a federal investigation into who made the decision, what their logic was, and whether it was legal or not.

Wieczner didn’t stop there in her questioning of Frank though. She explicitly asked him “I mean, is that even legal? Can the government just seize any bank, even if it’s not insolvent?” And Frank’s answer did not disappoint:

Well, that’s worrisome. Let me say this. I don’t want to comment on that personally, because as a director, I could be conceivably involved in any kind of lawsuit that anybody brought, but I think that is a very good question you raise. And particularly, somebody ought to look and see, I wonder, are we the first bank to be closed, totally, without being insolvent? And if so, why? I think the DFS, the state of New York people should have to answer that.

That’s why I speculate that using us as a poster child to say “stay away from crypto” was the reason.

I was speechless when I read this. We have a former Congressman, who is one of the harshest bank regulation experts in the world, who is questioning the legality of what the New York regulators just did. This gives me COVID lab leak vibes…sounds like a conspiracy theory at first, but the more you think independently, the more you start to believe there could be a much, much bigger story here.

This brings me to the next data point in our dive down the Signature Bank rabbit hole. Nic Carter eloquently pointed out that the “conspiracy theory” would have a lot more substance if the government forced the new owner of Signature Bank to shut down the bank’s crypto activity.

Within hours, we received confirmation that this is exactly what is happening. David French wrote for Reuters that his sources confirmed “any buyer of Signature must agree to give up all the crypto business at the bank.”

I want to be careful not to make too many assumptions here, but this looks like the United States government nationalized a regulated financial institution with more than $100 billion in deposits in an effort to impose a political agenda on the market. Honestly, this is hard to fathom. Not something that you expect to happen in a country that claims to be the capital of democracy, capitalism, and rule of law.

Ok, let’s keep going further down this rabbit hole.

With the context of potentially questionable decisions around Signature Bank, we must now re-scrutinize the actions related to Silvergate Bank and Silicon Valley Bank. The consensus in these private conversations revolve around two big questions — why was Silvergate Bank pressured into fully paying off the $4.3 billion loan from the Federal Home Loan Bank of San Francisco and why was a potential acquisition of Silicon Valley Bank blocked by regulators?

On the first question, many are wondering why Silvergate Bank paid back this multi-billion dollar advance early, which caused the run on the bank and ultimate liquidation of the company. Since there is not a clear explanation for why the bank would pay back the loan early, it has left people to speculate on a potential political pressure campaign that was done “off the record.” No one knows for sure. It will likely be impossible to get an actual answer from Silvergate or their executives. And the Federal Home Loan Bank spokesperson continues to reiterate that they did not request the early repayment. Your guess is as good as mine on this one.

On the second question of a Silicon Valley Bank acquisition being blocked, it is unclear why the regulators would not want a larger financial organization to step in to support a struggling institution. This would be better for equity and bond holders, while also probably better for depositors as well. Instead, the bank was nationalized in the short-term through placement in receivership, so now the government run process will rule the day.

To be clear, I don’t have answers for these questions. I don’t think anyone does at the moment. What appeared initially to be a few banks succumbing to financial stress, now looks like a potentially explosive scandal. Hopefully that is not the case, but if we have learned anything over the last three years — we must think independently and we must think critically during these moments.

Jake Chervinsky, the Chief Policy Officer at the Blockchain Association, confirmed this morning that the organization has “sent FOIA requests to the Fed, FDIC, and OCC, demanding information about the unlawful debanking of crypto companies.” My guess is that these types of requests will help us learn a lot more in the coming weeks and months. Maybe there is a smoking gun, maybe not. But it feels important that the American public gets answers either way.

Hope you all have a great day. I’ll talk to you tomorrow.

-Pomp

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