Federal Deposit Insurance Corporation officials were told in mid-January that Signature Bank, a New York City-based lender with about $90bn in deposits, was in trouble.
A letter from a short seller, who stood to make money if Signature’s share price fell, warned that the bank lacked basic controls. One example: Signature in April 2020 made a $370,000 pandemic assistance loan to Alameda Research, the hedge fund affiliate of the crypto exchange FTX that last year filed for bankruptcy protection and was alleged to be part of a fraud.
“SBNY has played a central role as a facilitator, even if unwitting, for countless illegal crypto transactions,” Marc Cohodes wrote in the letter, which has been seen by the Financial Times.
Cohodes made a profit on his bet as Signature’s share price plummeted before New York state financial regulators shut it down this month. Signature’s sudden collapse was an early casualty of the turmoil now sweeping across the banking sector. On Sunday, a week after its closure, most of the bank’s remaining deposits and about a third of its assets were agreed to be acquired by a unit of New York Community Bancorp in a deal arranged by the FDIC.
The lender’s demise has put a spotlight on a bank with a reputation for promoting entrepreneurial bankers, a willingness to get into new businesses and a blind spot for risk. It also raised questions about regulatory oversight.
Cohodes, a veteran short seller who also raised early questions about FTX and Silvergate, another crypto-focused bank that closed down this month, called on the FDIC to investigate his concerns. He said he received an acknowledgment from FDIC staffers but no follow-up.
The FDIC declined to comment.
Signature was founded in 2001 by Scott Shay and Joseph DePaolo, protégés of the legendary banker and billionaire Edmond Safra. A go-to institution for New York’s tight-knit real estate community, it specialised in serving developers of apartment buildings and large landlords. Those loans made up about a third of its overall lending, compared with less than 5 per cent for similarly sized banks.
In 2011, Signature added a then 29-year-old Ivanka Trump to its board of directors, despite doing substantial business with both her father, Donald Trump, and her husband, Jared Kushner. Shay later told the New York Times that was a move he “almost regretted”.
When in 2017 Letitia James, then New York City’s public advocate, released a list of banks that had lent to most of the city’s worst landlords, Signature ranked first. In 2018, Signature wrote off $129mn in loans tied to taxi medallions, years after Uber and other ride-hailing services had undercut the value of New York City’s taxi licences.
Then came cryptocurrencies. Signature launched Signet, a payment processing system tailored to the bank’s growing stock of crypto clients, in 2019. Signet helped to nearly triple the bank’s deposits to a peak of about $110bn in early 2022.
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In February, Signature was hit with a class-action lawsuit that claims the bank “substantially facilitated” FTX’s alleged fraud. In particular, the suit says the bank knowingly transferred FTX customer deposits that were made through Signet into accounts controlled by Alameda, FTX’s money-losing hedge fund affiliate.
“I couldn’t be happier that Signature failed,” said Cohodes, who believes the bank facilitated the financing of a number of crypto companies that were involved in fraud. “The legal liabilities here are existential.”
Signature declined to comment.
Barney Frank, the former congressman who was a member of Signature’s board, told the FT he thinks the bank did not need to be closed, and was punished for its foray into crypto.
However, New York State Department of Financial Services (DFS) superintendent Adrienne Harris said the bank was not closed because of its exposure to crypto markets, but because depositors were fleeing. Signature’s deposits had sunk by nearly 60 per cent, or $50bn, since the beginning of 2023, according to figures released on Monday morning from New York Community Bancorp.
In addition, Harris said, DFS’s examiners were uncomfortable with what the bank was telling them last weekend. “Signature failed to provide reliable information,” she told the FT.
Harris’s agency appointed the FDIC as Signature’s receiver. An NYCB unit known as Flagstar Bank agreed to buy “substantially all” Signature’s deposits and about of third of its assets, including $13bn worth of loans, which the FDIC sold at a discount. Signature’s 40 branches will also continue to operate, rebranded as Flagstar branches.
The FDIC had sought to sell Signature in one piece, but a bidder for all of the bank’s assets did not materialise as the sale process progressed. In the end, the agency decided a partial sale was better than none.
That allowed NYCB’s management to cherry-pick what it thought were the best parts of Signature, as well as saddle the FDIC with any losses. In all, the FDIC has estimated that resolving the Signature failure will cost its insurance fund $2.5bn.
Excluded from the sale was the Signet crypto payment processing business, which once had nearly $30bn in assets. On Monday, on a call with analysts, NYCB executives stressed that none of the assets, and the potential legal liabilities, associated with Signature’s crypto business was part of its deal.
Shares of NYCB jumped 32 per cent on Monday. “Flagstar has gotten a very fair deal,” said Christopher Whalen, a veteran bank analyst. “It was a fire sale because the business was worth a lot more as a going concern than if you looked at the pieces.”
The first job of Signature’s new owners will be to try to regain the confidence of its once-loyal customers. One was Ken Fisher, a real estate lawyer at Cozen O’Connor who moved his money to Signature when it opened in 2001. Many of his clients followed.
Fisher started pulling his money from the bank more than a week ago. He said Signature’s crypto business was one of the main reasons he and others in the real estate business became nervous about having their money at the bank.
“Most of my clients are moving their money elsewhere because they are being cautious,” said Fisher. “I don’t like uncertainty.”