Insights into the Rise and Fall of Signature
The failure of Signature Bank shocked the financial sector, as it occurred on the heels of the plummet of SVB just days before. Nathan Brittles details the history and circumstances of Signature’s demise.
On March 11, 2023, Signature Bank signed off. The U. S. government closed Signature down in the wake of the failure of Silicon Valley Bank a few days earlier. Signature Bank is an interesting story of survival, success, and ultimately, failure. Signature was founded in 2001 by 3 key men: Joseph DePaolo, Scott Shay and John Tamberlane.
These three had previously worked at Republic National Bank of New York. Republic has its own interesting story, and in order to understand Signature, you need to know about Republic. Republic National Bank was founded in 1966 by Edmond Safra. Safra grew up a Lebanese Jew from Beirut, whose family had been in banking for many years, mostly in Switzerland and Lebanon. After immigrating to the United States, he founded Republic and he grew it to be the third largest bank in the New York City area behind only Citibank and Chase. Republic carved out a niche catering to affluent individuals (many of whom were Russian) fellow bankers, and the diamond district of 47th St. in Manhattan. Legend has it that most of the diamonds in New York slept each night in Republic’s vaults at their 452 5th Avenue headquarters. Republic was hit hard in 1998 by the Russian bond default. 45% of its net income was lost when the ruble defaulted in 1998. Many of the top accounts at Republic were Ukrainian and Russian nationals. In 1999, Safra sold Republic to HSBC for over $10 billion. Safra then immigrated to Monaco where he established citizenship. He was only there a few months when he died in a fire in December 1999. The fire was allegedly set by his male nurse Ted Maher who staged the fire so that he could appear to rescue Safra and be the hero. It unfortunately didn’t work out as planned.
Depaolo, Tamberlane, and Shay had been with Republic in senior positions for years and knew the affluent client base of Republic extremely well. They knew the loyal clients of Republic would welcome a new bank run by familiar faces. With $60 million in capital from Bank Hapoalim of Israel, Signature Bank launched on May 1, 2001. Signature was built on a very simple model; pure relationship banking with a single point of contact. This was refreshing common sense. Many large banks overcomplicate the banking relationship, making clients deal with separate people for separate issues. Signature was smart knowing that one single banker could handle multiple issues and bring in experts as needed. With their extensive knowledge of the client base, they were able to attract successful bankers and banking teams and grow their deposit base very quickly. Rather than focus only on personal assets, they also diversified into commercial banking with small, medium, and larger companies. CEO DePaolo had said he wanted to cater to the guy who started his business in Brooklyn but is now worth $20 million. They were so successful they did not even need to advertise, and most of their branches had no signs out front. DePaolo famously refused to even have pens with the Signature name on them, finding them tacky.
Soon, Signature branched out into construction loans and became one of the Trump organization’s go-to banks in New York for building projects and loans. DePaolo bragged that over half of the theater production houses on Broadway banked with Signature. In what was to become a telling blind spot, Signature also was willing to extend the benefit of the doubt to clients like Irv Gotti, whose Murder Inc. rap record label had been accused of money laundering. DePaolo kept his accounts open until he was cleared. Slow and steady New York City based business proved profitable throughout the next 15 years.
In 2018 however, things begin to change. John Tamberlane‘s son, Greg, was an outspoken advocate for blockchain based technology and cryptocurrency. Greg encouraged Signature to adopt a platform known as Signet. Signet was a Blockchain based asset transfer system, where instantaneous transfers of millions of dollars could be transacted without having to use the traditional bank wire transfer (ACH) system, where transfers could take hours. Think of Venmo on steroids. Transfers could now be accomplished within 30 seconds. With this cutting edge technology as a selling point, Signature expanded for the first time to the west coast, opening an office in the San Francisco area. They quickly attracted large banking teams. These teams gathered millions of dollars in Silicon Valley tech money, and Signature’s deposit base and stock price skyrocketed from $60 to over $350.
Herein lay their undoing.
First a bit of banking background. Why do banks fail? Banks are intermediaries. People deposit their money, then the banks take these deposits, and lend them to other borrowers. The rest they invest in fixed income guaranteed securities, like government bonds and treasuries. Banks are vulnerable, however, because deposits are redeemable upon request. Anyone can walk into a bank and take all their money out at any time. The problem with the loans and bonds is they are not liquid. There isn’t a pile of cash in a vault for the bank to draw from when depositors come to take their money out. Additionally, the Federal Deposit Insurance Corporation (FDIC) guarantees deposits up to $250,000. If you had a $2 million savings account, and the bank went under, you’d only be insured for $250,000. The balance of $1,750,000 is “uninsured” and would be lost. Banks like Silicon Valley Bank and Signature Bank had a very large percentage of deposit relationships that were far higher than $250,000. Silicon Valley Bank had over 93% of its deposits uninsured (meaning larger than $250,000) and 94% of their deposits were held in loans and “Hold to Maturity” (HTM) securities. Signature Bank had just under 90% uninsured deposits over $250,000 and 93% of those assets in loans and HTM. So SVB and Signature Bank sailed themselves into a perfect storm. 90% of their deposits were larger than $250,000 and 90% of those deposits were invested in loans and HTM securities, which were not liquid. As the Federal Reserve continued to raise rates, more and more people came to withdraw their money in search of higher returns elsewhere. SVB and Signature soon ran out of capital to make people whole on these withdrawals.
Next, we need to understand some basics about those HTM bonds. “Bonds” are nothing more than loans. Promises, as in “your word is your bond.” Investors loan their money to a government entity, the federal government in the case of treasuries. In exchange for the loan, the buyer also gets interest. The safer the bond, the lower the interest rate. “Safe” can mean shorter time to maturity, and it also can mean the quality of the entity to which you loan the money. Treasuries are the safest because they’re backed by the full faith and credit of the United States Government. When interest rates go down, the value of the bond that you hold goes up. Say you own a bond paying 3%, a new bond is only going to get 1%. Therefore, if you wanted to sell your 3% bond, people would line up to pay more to get it because it’s paying more than a new bond. It’s inherently more valuable than a new one. Conversely, when rates go up, your bond that you’ve already got goes down in value. If you have a 3% bond when somebody can walk off the street and get a new one for 5%, no one wants your 3%. Now multiply this by billions of dollars. In order to get any kind of decent interest percentage on a treasury bond, banks had to take very long term treasuries, 10, 20, or 30 years maturities. If they hold the bond to maturity, they’re going to get all their principal back. The problem now is that rates are rising, so these low rate bonds are worth less than face value. Silicon Valley and Signature Bank were forced to sell their bonds immediately to raise enough capital to cover the wave of withdrawals. Signature saw $10 billion of withdrawals in the week following SVB’s failure. Signature had no way to raise the $10 billion quickly or easily. It is then an exponential fall of the dominoes. As more people rush to take their money out before it’s too late, the bank runs out of cash on hand, and the assets it holds are now not worth full value. It also raises the antenna of the FDIC, so the US government comes in and preemptively closes Signature Bank.
Signature Bank and its board had what one might charitably call a shady background, going all the way back to the Russian ruble failure and how it undermined Republic National Bank. Apparently, the federal government was also investigating Signature’s signet platform, which was making it allegedly very easy for Russian and Ukrainian arms dealers to exchange large sums of cash instantaneously, with little oversight. Internally, stories abound about the odd way in which DePaolo and company ran the bank. The banking teams were essentially treated as independent contractors. There was no middle management. The bankers reported directly to DePaolo and had very infrequent contact with him. In 2019, for instance, DePaolo held an “all hands” meeting with all his bankers. It was the first such meeting in over 7 years. Also, senior managers at Signature Bank had a well-earned reputation for treating their employees heartlessly. Some banking teams were laid off a week before Christmas, hours before they were to attend the annual Holiday Party.
Signature seemed to do many things right. They were clever in placing former Congressman Barney Frank on their Board of Directors. They made a tremendous amount of money bankrolling many New York real estate ventures, they earned the trust of most of Broadway. Ultimately, however, the siren song of exponential crypto based growth proved too strong, and they ran upon the rocks. As the lying Sirens called to Odysseus:
Odysseus, bravest of heroes,
Draw near to us, on our green island,
Odysseus, we’ll teach you wisdom,
We’ll give you love, sweeter than honey.
The songs we sing, soothe away sorrow,
And in our arms, you will be happy.
Odysseus, bravest of heroes,
The songs we sing, will bring you peace.