Mar 15, 2023

The collapse of Silvergate, Signature, and Silicon Valley Bank has prompted crypto advocates to question whether regulators in the country are using a banking crisis to unfairly target the crypto industry, inspiring the hashtag #OperationChokePoint2.

Video transcript

The state of crypto is presented by Tron connecting the world to the power of Cryptocurrency. The original operation Choke Point was an Obama era program carried out by the OCC and FT IC uh before your tenure to apply pressure and choke out disagreeable businesses like firearms dealers and payday lenders from the banking system. So operation choke 0.2 0.0 is an alleged crackdown on crypto friendly banks. You said at the Milken Conference, this is the biggest story for the next six months. So are you thinking it's no coincidence? Yeah. Well, I mean, I mean, look, there's, there's a question of whether any of this is connected to Silicon Valley Bank, but I think it's pretty clear there has been a decision across the bank, regulatory agencies in this administration that crypto is inherently risky. It needs to be extricated from the banking system. My personal view is, you know, if you treated crypto as a normal yet high risk legal activity, you would have crypto distributed across a large number of banks, no one bank would be the central failure node for the economy. You know, this would all be managed much like other risky things are managed like derivatives, like, um, you know, high volatility assets and other kinds of things. But because this was seen as a niche business and a super, you know, anathema business, it was concentrated in two or three banks and those two or three banks have now largely been taken out it. I, I just, uh, if you could back up a bit though, I mean, it does sound a, a, at least just from some of the public comments that people have been making here and I guess you'd be one of them is that this was sort of a, I, I don't wanna say a coordinated effort but what was it, a coordinated effort to do this? I mean, to, to knock it out, it doesn't the government, I know the US government, I know isn't quite, isn't competent at anything, uh, let alone something like that. Um, and you've run the OCC, do you think that they actually have the, uh, the mental capacity to do that? Well, uh, uh, 100 100%. I, I hate to burst your bubble but yes, the, the way the bank regulators work is that they are highly coordinated. I mean, when I was running the OCC, I had a weekly call with the FDIC chairman and with the vice chairman of the Fed for bank supervision, we talked every week for an hour and talked about what our priorities were for the coming week. How we could support each other, how our actions would affect the system. So these things are not accidents at all. I'm, I'm highly confident of that. And honestly, if you look at the SVB situation or the post SVB situation, it's interesting because it is a coordination between the FED and the FDIC. The FED has created this new liquidity facility which is broadly available to a number of banks. And then the FDIC is running this process uh to save the SVB depositors as an example of how these agencies work together. But nonetheless, I mean, didn't these banks sort of invite this problem? I if that is the case because they, they just didn't do risk management properly. They, they, they had these long dated, they, they had these uh high duration uh parts of their, their uh assets and that, of course, you know, it, it's great when, when interest rates are about flat or, or declining, but it's not so great when it's rising. So I, I mean, didn't, wasn't it just these kids who had no experience in a rising interest rate environment sort of opening the door for, for chaos? Well, II, I guess what I would say is we, we have to separate the crypto situation from the SVB situation. I mean, SVB was not particularly exposed to crypto as like a fiat on and off ramp. I mean, yes, they supported some startups that happened to touch crypto, but I, I see silver gate and signature is totally different from, from Silicon Valley Bank. So you're right, of course, there was a failure of risk management at Silicon Valley Bank. They, for example, had an ESG committee but they didn't have a Chief risk officer for nine months. But the other thing you have to remember is the reason that we have bank supervision is to be an early warning sign of those kinds of failures. So who supervised SBB? Well, the answer is the Federal Reserve and who was raising interest rates again? The answer is the Federal Reserve. So you would think of, I'm sorry, in all fairness, the, the, the regulatory side of the fed isn't exactly sitting at, at the FO MC and, and making those decisions to, to buy and sell bonds. I mean, it's, it's some, some poor schlub who has to sit there and go through a bunch of, uh, a bunch of uh balance sheets all day. It's, it's sort of like a different, the same. I mean, I mean, Lawrence, I, I guess I would disagree with you a little bit there. I mean, one of the Dodd Frank reforms was to create a fed governor whose title was head of supervision across the system, right. So that person sits on the FO MC and is in charge of bank regulation nationally. That chain of command absolutely is aware of interest rate risk and the interest rate risk created on a balance sheet that has long dated, low interest rate assets. So there's no question SVB should have picked this up. I mean, they should have had a Chief risk officer the entire time but the backstop for failures like that is supposed to be bank supervision. If it isn't, then you have to ask yourself, why do we bother having bank supervision? What are they supposed to be doing? They're supposed to be picking up where they, where the bank left off? But no, the, you know, again, II I guess my question, well, that, that's SVB but Signature Bank and, and also at Silver Gate, really Silver Gate was one where I, you know, we had heard for a while and short sellers had been discussing this for a while that they had a problem with risk management. That that was actually the real, the real underlying issue. It wasn't so much as their ties to crypto, but the fact that they did have these, this high duration on their, on their portfolio. That's something that, that has been discussed for a while. I mean, that, that's not something that was a surprise. So in many ways, the Silver Gate issue is, is the same as, as uh as Silicon Valley Bank a lot of S banks here. Um because I, I guess they're all in the S word now. Um But this is, I mean, it just seems to be a recurring theme that these were all banks that had poor risk management and, and maybe the issue really is if you're gonna blame the fed is that somebody's, a lot of people are asleep at the wheel now. Yeah. Well, so, so, so there's a lot of what you said to unpack. I mean, I mean, the first thing I would say is Silver Gate Bank, uh, didn't actually go through a failure in a Receivership. Right. I mean, Silver is deciding to voluntarily return assets to its customers and its shareholders, which does indicate they didn't actually fail. I mean, my, my, my personal view of Silver Gate and I haven't studied its balance sheet as closely as I've studied SVV. I've looked at that super carefully. But at Silver Gate, you know, the issue you have there more than anything is concentration risk. I mean, they were heavily heavily exposed to a single sector which really made Silver Gate look more like the subprime mortgage crisis, right? You had some banks that were so heavily invested in a single pro cyclical asset that when the cycle turned, there was no alternative source of income on the asset side of their balance sheet. Whereas at Silver Gate, it's really more uh I I would argue the kind of risk management thing that you're talking about, which is asset liability, mismatch silver, you know, Silver Gate wound up voluntarily. SVB failed spectacularly in a matter of days. Those are a little bit different. Hm What about with us? So there is this narrative that there was political pressure and that was why uh Federal Home loan banks uh line was withdrawn from Silver Gate, uh perhaps why a sale was blocked for S CV B and why Signature Bank was shut down for crypto related reasons? According to uh Barney Frank, who was a board member of Signature bank. Do you, do you agree with this line of thinking? Well, I mean, I mean, again, there's, there's a lot going on uh to unpack here. I mean, signature, let let's just go through these individually, right? So the Federal home loan bank issue is something that I think a lot of your viewers probably uh you know, is a new issue for them. Most of us don't think of Silver Gate or Silicon Valley Bank as major mortgage lenders. You know, Silicon Valley Bank had a portfolio of mortgages that it made to its wealthy founders, you know, that was sort of a service business but not the core business and yet, um because both of those banks had bought stock of the Federal Home Loan Bank of San Francisco. They had a right to lines of liquidity which the FFHLB pulled. That's unusual and makes one wonder if there was a decision in Washington to do something about that. And my guess having been in the housing sector earlier in my career is, yes, somebody at the top of the Federal Housing Finance Agency said, wait a minute, we're not spending our capital on these, on these tech banks. You know, we're supposed to be in the fair housing business. Signature, different story. I mean, I can't find anyone in my relationship network that's ever heard of a bank being closed down in the middle of the weekend. Um Obviously, nothing happened on Saturday that made signature insolvent on a Sunday. And if Barney Frank is to be believed, signature wasn't even insolvent. So that II, I just can't speak to the, the very idea that it needed a line of liquidity is something nobody, nobody believed on the close of business Friday. That looks much more like an anti crypto move based on everything that's publicly available. Why do you think there is this political pressure? Where is it coming from? And what's the agenda? II, I mean, if you think about the way that bank policy gets made, it generally starts either in the White House or at the Senate Banking Committee. Ok. And so the senior most Democrats on the Senate banking committee, Senator Brown of Ohio and Senator Warren of Massachusetts have been very, very publicly anti crypto for a bunch of reasons that I've talked about extensively elsewhere. One of them is crypto is user controlled finance and this is a crowd that believes in government controlled finance. They've talked extensively about fed accounts about postal banking and a whole series of other things that would imply a much greater degree of government control that crypto is consistent with. Now, they mask that under the under sort of the guise of consumer protection. You know, we're very worried about all of these, you know, unsophisticated rubs who are buying Bitcoin. But in a world where 50 million Americans own Bitcoin, I don't think that argument washes anymore. It's too widely held of an asset and it's, it's, it's too important of an asset in people's portfolios. So the only answer I can come up with is they have a view of government controlled finance and others have a view of user controlled finance. One of those sides has to win and they're not compatible with each other. Brian just want to turn to another topic for a moment which is B US, which you headed briefly and not going to go back to the past. But I'm just asking you your opinion sort of in your individual capacity. What do you think is the future of finance us? Finance is clearly on the radar of us regulators, finance us would be their way in? Do you think finance us is going to make it? Do you think they're going to be able to um acquire Voyager? I'm just curious, what, what do you see as the prospects for? Finance us? Well, good, good, good try. I, I never talk about Binance us, what I would say in this current environment, given their market share and bins market share generally is I, I hope that they find a good way forward because the market kind of depends on them for liquidity. But I don't have any special knowledge of those things that I wouldn't comment if I did nonetheless. Do you think that the, the, uh, the S ECs opposition to Biden us acquiring Voyager? Do you think, first of all, do you think it will be successful in the end? And second of all, do you think any of it is warranted? Yeah, I, I have no idea. Uh, you know, what will, what will happen there? I mean, we know that the bankruptcy court went ahead and approved the plan, notwithstanding the sec objection. And you know, that was a detailed and well reasoned kind of bankruptcy court opinion on that. I can't say what will happen on appeal. It's anybody's guess. But, but listen, I think we all know that the SEC under chairman Gez has taken a generically hostile crypto stance and I think if it was a different crypto acquirer, they would probably lodge the same objection. I don't think that's specific to this particular bidder. All right. Do you think anything will uh further happen with the, the bank situation with the crypto friendly bank situation in the United States? Do you think everyone eventually will just leave the US or what, what of the situation of on and off ramps in the United States for banks and crypto institutions? Yeah, I mean, look my, my guess is that there's when you have demand that is as strong as it is, there will always be smaller banks that are willing to step up and try to risk manage this. So, you know, you get rid of signature bank and you have customers bank and you get rid of customers bank and then you have coastal com I mean, there's always somebody who's going to serve this because there's a demand and crypto is not unlawful. Um The question then becomes, you know, how quickly and how, how committed is the, is the administration going to go after every single last one of those? And how will they answer the 50 million customers who are looking for fiat on and off ramps? Um My belief is that they're trying to send a signal that will eventually choke this off. That's again what operation choke point was. But you can't, you know, you can't kill all of the uh all of the animals in the zoo at some point. So my belief is there will always be somebody serving it. It would be better if larger banks with better risk management were serving the sector. But if they don't, there will be somebody doing that. And uh hopefully over time as the asset class matures, you know, people will get comfortable with that. All right, Brian, thank you so much for your insights.

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