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Crypto-Bank Silvergate Details its Own Implosion, Much of its Equity Capital Wiped Out. I’m Waiting for the FDIC to Show Up

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Publié le 05 janvier 2023
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Wait a minute… It still “believes in” crypto? Is crypto now a religion that a bank “believes in?” FDIC, did you read this?

By Wolf Richter for WOLF STREET.

Silvergate Capital, which owns Silvergate Bank, is a tiny bank holding company that had gone public via IPO in November 2019, and got into crypto to become a big crypto bank, serving crypto companies, such as FTX, which started to implode as part of the crypto implosion. Today, it reported on a preliminary basis some details of its crypto-disaster in Q4, including huge losses on the sale of securities that it had to sell to deal with a massive run on the bank. It will report actual results later this month.

The FDIC, which insures dollar-deposit accounts at Silvergate Bank, is likely getting very antsy because today, Silvergate reported a laundry list of Q4 losses and write-downs that could wipe out most of its equity capital. Typically, when the FDIC takes over a bank, shareholders get bailed in first.

And the shares [SI], a hero in my pantheon of Imploded Stocks since last year, kathoomphed another 43% at the moment, and are down 95% from their high in November 2021 (price data via YCharts):

This was just a tiny bank: On its early published financial statements for the years 2017 through 2019, Silvergate’s total assets were in the $2 billion range. But then, as it got into crypto, they ballooned by a factor of 8, to $16 billion at the end of 2021, after which it began to fall apart.

Losses and write-downs to wipe out much of its equity capital.

Silvergate reported a loss of $718 million on the sale of securities in Q4, a huge loss for a tiny bank like this.

It said it will incur more losses on the sale of securities. And it may have to mark to market the securities it doesn’t sell, for a loss possibly as high as another $300 million. It will book an impairment charge in Q4 to reflect some or all of this.

It took a $196 million loss in Q4 to write off the crypto technology it had bought from Facebook back when Facebook skuttled its own efforts to build the Diem stablecoin.

And it disclosed other write-offs and charges today that we’ll get to in a moment.

So, let’s see… Silvergate started out Q4 with $1.33 billion in equity capital:

  • Minus $718 million due to the loss on the sale of securities;
  • Minus a portion or all of $300 million on the loss from securities that it will sell, or that it may have to mark to market;
  • Minus $196 million on the write-off of the crypto technology it bought from Facebook;
  • Minus the other losses and write-downs we’ll get to in a moment.

Combined, this could wipe out much of Silvergate’s $1.33 billion in equity capital.

The magnitude of the crypto-run it experienced:

Silvergate experienced a massive run on the bank as crypto companies, including its customer FTX, collapsed: Total deposits from “digital asset customers” plunged by 68% in the quarter, or by $8.1 billion, from $11.9 billion at the end of Q3 to $3.8 billion at the end of Q4.

This disclosure comes just two days after the three US bank regulators, the Fed, the FDIC, & the OCC, Warned Banks about Contagion from Cryptos, with Laundry List of Sordid Stuff Inherent in the Crypto Scene.

So it had to raise lots of cash fast.

At first through wholesale funding. “As customers began to withdraw deposits during the fourth quarter of 2022, Silvergate utilized wholesale funding to satisfy outflows,” it said today.

  1. It sold short-term CDs through brokerage firms to the public (“brokered CDs”). By December 31, it held $2.4 billion of these CDs. If buyers stay within FDIC rules, their CDs are FDIC insured.
  2. It borrowed $4.3 billion in short-term advances from Federal Home Loan Banks.

When that wasn’t enough, it sold securities, at a huge loss. “Subsequently,” when wholesale funding wasn’t enough, Silvergate sold $5.2 billion of debt securities, such as Treasury securities, “for cash proceeds.” And it booked a loss of $718 million on the sale of those securities “and related derivatives.”

It has to sell more securities to pay down the wholesale funding, for another big loss: Silvergate still holds $5.6 billion in Treasury securities and agency-backed securities, with unrealized losses of $300 million due to the yields that have risen. It expects to sell “a portion” of those securities in 2023, to pay down its $6.7 billion wholesale funding ($2.4 billion brokered CDs and $4.3 billion FHL Bank advances). And so it will recognize the anticipated losses as an “impairment charge” in Q4.

Since these securities are now held “for sale” instead of “hold till maturity,” it may have to mark to market even the securities that it doesn’t immediately sell, bringing the total write-down possibly to as much as $300 million.

Cash not enough to pay off short-term wholesale funding.

Silvergate said it held total cash and cash equivalents of $4.6 billion, which exceeds the $3.8 billion in “deposits from digital asset customers,” it said. Meaning, if the run continues, it could meet that cash outflow.

But it also has $6.7 billion in short-term funding (the brokered CDs of $2.4 billion and the FHL Bank advances of $4.3 billion) coming due, likely later this year.

That’s why it wants to keep selling securities to be able to pay off the short-term wholesale funding when it comes due.

Sheds 40% of remaining employees: Cost $8 million.

It said today that it will lay off another 40% of its remaining staff, another 200 employees, “in order to account for the economic realities facing the business and industry today.” The to-be-laid off people got their notice yesterday. It estimates that the costs of the severance packages and benefits will amount to $8 million, to be incurred mostly in Q1 2023.

Exited “warehouse” lending to non-bank mortgage lenders: Cost $4 million.

Silvergate said it got out of mortgage “warehouse” funding in Q4, at a cost of $4 million, which it will book as a restructuring charge in Q4.

Non-bank mortgage lenders temporarily fund the mortgages they write until they get enough mortgages together to package into mortgage-backed securities or sell them to Fannie Mae et al. This type of “warehouse” funding is provided by banks. But the mortgage business collapsed [see Mortgage Lender Woes]. So Silvergate got out of it.

But hey, it’ll stick to crypto until the bitter end?

Big mess, no problem: “Its mission has not changed,” it said: “Silvergate believes in the digital asset industry and remains focused on providing value-added services for its core institutional customers” – namely crypto companies that are now toppling.

Wait a minute… “believes in” crypto? Is crypto a religion that a bank “believes in?” FDIC, are you reading this?

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