Updated: Nov 11, 2022
November 10, 2022 | Watching the collapse of the FTX crypto fraud pyramid, we are reminded that most financial stocks trade on tangible book value (TBV). When there is nothing tangible, well, then there is probably little value. Occasionally value hides in plain sight, waiting for the accountants to fashion a new rule and recognize same for GAAP purposes. The gain-on-sale income from mortgage servicing assets, for example, is a case in point.
But in the instance of crypto fraud (or what our pal Nouriel Roubini wonderfully dubbed “shitcoins”), the value was only in the eye of the credulous in finance and the media. News reports suggest that FTX Chief Executive Sam Bankman-Fried misappropriated billions in investor funds, which he lent to his Alameda Research firm to the tune of about $10 billion. We have a couple of questions.
First, when are state and federal prosecutors going to start prosecuting the crypto shills in finance, politics and media for fraud?
Second, when will CNBC, Bloomberg and other financial media stop talking about and advertising for crypto schemes? At what point do the general counsels at media firms say enough and end the public promotion of crypto fraud?
Consider two examples: Silvergate Capital (SI) and Signature Bank (SBNY). We warned our readers that these two crypto banks would soon come to a bad end. Back in February of this year, we profiled the former mortgage bank from Costa Mesa, CA (“Profile: Silvergate Capital Corp (SI)”).
The fate of the remarkable but tiny SI is a matter of indifference to us compared with SBNY, a $118 billion asset regional bank with a proud legacy that stretches back decades to paramount private banker Edmond Safra and Republic National Bank. We wrote in July:
“While many readers of The Institutional Risk Analyst have been watching crypto fiascos like Silvergate Financial (SI) and Signature Bank (SBNY), the prospect of financial problems for the 23rd largest bank holding company (BHC) and a large ABS issuer is cause for concern. But have any of the US bank regulators noticed?”
A year ago this week, we warned our readers that the Fed’s “pivot” away from encouraging inflation would result in lower valuations for crypto tokens and stocks, especially the aspirational stocks that followed the crypto upsurge.
Crypto has gone from a sort-of juiced up equity strategy to a distressed credit story in just hours. But now that the collective idiocy of crypto and, yes, blockchain too are hopefully falling by the wayside, let’s take a look at how financials are navigating the world of rising interest rates.