Headline: What happened to Signature Bank in NY?

Body:  OK, so if you have your scorecard handy, Silicon  Valley Bank and Silvergate Bank both were forced to close due to bank runs pursuant to a softening in the tech startup environment.  It would appear that we have a #3 on the podium now.   Signature Bank, situated in New York, is now shut down, due to many of the same issues.  Now, the most attentive amongst you (likely the left-handers in the group) might notice that Signature Bank rings a bell from a previous entry.  They are the traditional bank that agreed to partner with Binance to help them gain access to the international SWIFT network.  Now, they too have been shut down by state banking authorities.

What happened?

Scott Shay, Joseph DePaolo and John Tamberlane founded Signature in 1999 with backing from Israel’s biggest lender, Bank Hapoalim. On a personal bio page, Mr. Shay described himself as a “thought leader, and author of several widely read books on profound issues facing the Jewish community.”   One of Signature’s specialties was financing the purchase of taxi medallions, which authorize holders to operate cabs. It was known in New York for providing banking services to law firms and real estate companies, and for catering to wealthy families in the area.  The bank went public in 2004.

Things seemed to be going so well.  In September, almost 25% of its deposits came from cryptocurrency firms.   But, as the small-business market softened, the bank tried to decrease this amount by more than a third.   The bank also said its digital asset-related client deposits stood at $16.52 billion. Signature was one of the few financial institutions that had opened its doors to taking deposits of crypto assets, a business it entered into in 2018.   Then came February 2023, and the Bank announced that the CEO would become a senior adviser, and the COO would be promoted to the CEO role.    (This progression of events makes me have to ask if the outgoing CEO felt a disturbance in the Force.)

State regulators closed the bank down, and transferred control of $90 Billion of customer deposits to the FDIC.  Just like in the SVB default, US authorities claim that all customers will recover 100% of their deposits, and the taxpayers will not be charged.  Per the articles, this is possible, only because Signature Bank has been found to be under the systemic risk exception.”   Once again, I think this was done to encourage  belief in the US banking system.   Without this announcement, a much larger panic might have occurred.   In the meantime, the FDIC has established a “bridge” successor bank, with the objective of making their customers whole.    The designated bridge bank is led by the former CEO of Fifth Third Bancorp.    Sadly, shareholders appear to be out of luck, as the FDIC approximates the cost of receivership at $2.5 Billion.  Customers can call a hotline or find information on the corporate website.

The transfer of all the deposits was completed under the systemic risk exception approved earlier today. All depositors of the institution will be made whole. No losses will be borne by the taxpayers. Shareholders and certain unsecured debt holders will not be protected. Senior management has also been removed. Any losses to the Deposit Insurance Fund (DIF) to support uninsured depositors will be recovered by a special assessment on banks, as required by law.

This story has more to do with crypto, huge error in judgment by veteran bankers,” said Christopher Whalen of Whalen Global Advisors, which specializes in analyzing and consulting on financial institutions. “Result was the same in a deposit run.”

The Verdict

Many depositors at these banks are small businesses, including those driving the innovation economy, and their success is key to New York’s robust economy,”  said the governor of New York.  This is interesting because it summarizes the conundrum facing so many municipalities and banking entities.    On one hand, they desperately want to help support and profit from the firms using cryptocurrencies, but, they are quite fearful of it, as the price variability is so great.  The outcome is something truly unprecedented.   Even though we have gone through transitions from coinage to checks to EFTs, there has always been a central authority of a bank, a government, or both.  Cryptocurrency ( and decentralized finance more broadly) will force us to all become experimenters and be a little patient for results.  New York certainly seems to be trying to foster a home for cryptocurrencies and digital assets, and London has invested billions into a similar exercise.  As unaccepting of delays as we are, we must develop within ourselves the patience and maturity to wait and see on this one.  Rest assured, if one is patient and logical, there will be a fabulous opportunity to make a few bucks.   But, as my father often told me, “If it’s a good investment now, it will be a good investment down the road, too.”  Perhaps the best use of the intervening time might be to become more educated about cryptocurrencies, and how we might approach the opportunity, while mitigating the risks.   Kind of like any other investment, huh?   Interesting.





Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

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