Signature Bank was flying high when co-founder Scott Shay mused about success on a podcast early last year.
The best decision he ever made, he told the host, was sticking close to the company as it grew ever larger. His advice: Always learn from your failures.
“They become part of you,” he said. “And if you go in the wrong direction, you can become incapacitated by them.”
Signature’s collapse on Sunday, when New York regulators swooped in after a surge of panicked withdrawals, was not what he’d had in mind. It was the third-largest bank failure in the US ever, behind Washington Mutual in 2008 and Silicon Valley Bank’s cataclysmic drop days ago. But Shay’s lender wasn’t a national giant or a new-fangled tech star, it was old school.
Former executives and investors describe an outer-borough, scrappy, blue-collar group of New York bankers. It was a place with ambition but not prestige, where branding was an afterthought and the CEO thought art on the walls was a sign of complacency. The firm had overcome setbacks including questions over dealings with Donald Trump’s inner circle, rampant lending to cab owners and even accusations of funding slumlords. It could even point to a US banking reformer on its board: Barney Frank, co-author of the Dodd-Frank Act and one of the architects of the radical overhaul of the financial system after the 2008 crisis.
Then a big pivot to crypto helped change the lender’s focus — and its fate.
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On Tuesday, state regulators said they intervened after losing faith in the firm’s management, as the bank failed to provide reliable and consistent data as the industry came under pressure.
Signature was the third bank in the country to topple in a week, as depositors fled lenders tethered too closely to the digital world’s slump. But Signature was something different, treating crypto as a side gig to its longtime role in New York’s overlooked neighbourhoods and businesses. For most of its life, it had gotten on just fine as a bank — quietly well-connected, sometimes controversial and mostly traditional.
“They did business the old-fashioned way,” said John Catsimatidis, the Republican donor, oil investor and supermarket owner. He had been an admirer, buying shares after its initial public offering in 2004, but thought the bank made mistakes by loaning against taxi medallions just before the market for them collapsed and then getting into crypto. “They tried to ride the heights.”
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Shay wouldn’t comment for this story. Messages to Chief Executive Officer Joseph DePaolo and the bank weren’t immediately returned.
Office Sharks
Peter Su, a banker who spent more than a decade there, referred to his colleagues as sharks, meaning it as a compliment.
The corporate hierarchy was so flat, he said, that bankers sometimes reported directly to DePaolo. The boss, who shot hoops and still carried a Bronx accent, reminded him of Al Pacino: “If necessary, Joe will get loud.”
On Wall Street, executives still quietly obsess over the hierarchy of Ivy League pedigrees and the exact location of Hamptons summer homes. Inside Signature, Shay’s bachelor’s and business degrees from Northwestern University were a source of jokes because they were so fancy, according to a person who observed the light ribbing. DePaolo studied accounting at Iona in Westchester County.
“I grew up in the Bronx, but both my parents grew up in Harlem,” DePaolo said in a rare TV interview in 2007. “I remember being 10 years old and being on First Avenue near Jefferson Park over there on 114th Street.”
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What jumps out isn’t that Signature’s boss didn’t grow up on the Upper East Side — after all, former Goldman Sachs Group Inc. boss Lloyd Blankfein hails from Brooklyn’s Brownsville — it’s that DePaolo stopped to address Staten Island viewers. “For your guests watching the show, if there’s a great banker out there who can bring business,” he said, “we would love to open up an office.”
Signature now lists two offices for private clients in that borough, nine in Manhattan, four each in Brooklyn and Queens, one in the Bronx’s Hunts Point neighbourhood and seven in Long Island. The few elsewhere, including southern California, are mostly by appointment only.
Alyson Stone, who was the senior vice president for strategy and marketing before she left in 2018, said several of her colleagues at the office started as tellers. DePaolo “ate at his desk from a deli,” she said, and eschewed art so he wouldn’t get too comfortable. “He always wanted a reminder that he has to keep earning his job.” Stone left in 2018 and started adviser Attion Consulting.
Trump’s Accounts
Signature’s headquarters are a short stroll down Fifth Avenue from Trump’s corporate headquarters. The bank has connections to the former president’s inner circle, doing business with his family, including son-in-law Jared Kushner, and Michael Cohen, his one-time personal lawyer and fixer.
In 2018, New York’s banking regulator asked Signature and two others to give information about their relationships with Kushner, his family and the Kushner Cos., a person said at the time. The broad request covered relationships with Kushner and his business properties, and documents about certain applications. Three years later, in the wake of the Capitol attack, Signature announced it was closing Trump accounts with about US$5.3 million ($7.1 million).
“To lose Signature would cause a ripple effect far greater than what the general public is aware of,” said Cohen, who pleaded guilty in 2018 to campaign-finance violations and other charges. He said it has a “vital role” across multiple industries.
Trump wasn’t Signature’s only source of tension in those years. In 2017, when New York City Public Advocate Letitia James put out the City’s Worst Landlord Watchlist, the bank was at the top of her roster of lenders backing them. “Banks must use their economic leverage to get bad landlords to take responsibility for maintaining basic living conditions in their buildings,” James, now the state’s attorney general, said at the time.
By then, Signature had also become a major lender to cab owners. It was just before online ride-sharing services eroded the value of medallions, eventually sparking billions of dollars of write-offs. Bhairavi Desai, the president of the National Taxi Workers Alliance Board and Officers, said the bank was more willing than others to strike deals with medallion owners.
“If I had questions, I was able to get the president on the phone,” she said. “I remember one time he was out of the country, and the next thing I knew the general counsel called me.” Signature ended up selling loans representing hundreds of medallions to a money manager.
Crypto Deposits
It was also getting into crypto. On Wall Street, views on virtual riches vacillate between scorn, suspicion and envy. Inside Signature, it was seen as an opportunity.
“Banks essentially gave the back of the hand to the cryptocurrency world. And they were all thinking alike: ‘This is just a little fad, it’s some teenagers in a basement,’” Shay told an executive coach on the podcast. “Not to mention names, but some famous banking CEOs really said the whole thing was a joke.”
His colleagues felt otherwise. In October 2015, Cameron and Tyler Winklevoss’s Gemini Trust won one of New York’s first state licenses to operate a virtual currency exchange, which they promised would be run with more professionalism than most of the chaotic crypto world. Underscoring the point, they announced they had found a bank to take their cash deposits: Signature.
In a loose way, it made sense for a bank that had a reputation for working in niches largely overlooked by Wall Street. By 2018, analysts noticed the firm was hiring crypto veterans and wondered how far Signature planned to go. That year, DePaolo was comfortable enough to test out bravado.
“The opportunity is significant, if you’re dealing with the right clients,” he said on a conference call. The bank was beefing up its compliance department to monitor risks from crypto and would be careful in managing its balance sheet. He said the real danger would be failing to embrace crypto. “Blockchain technology is the future,” he said. “You don’t want to be caught short, because in five years a number of banks will not be around because of blockchain technology.”
Coinbase Global Inc., the giant US crypto exchange, and Circle Internet Financial Ltd., the issuer of the USDC stablecoin, became clients. Signature soaked up tens of billions of dollars in cash deposits from the industry.
At some point, the Justice Department grew concerned about all the money flooding in from ventures across the crypto landscape. Federal investigators quietly started examining the firm’s efforts to detect any money laundering — such as its scrutiny of account holders and the transactions they made, people with knowledge of the situation said, asking not to be named describing confidential inquiries. The bank and its staff haven’t been accused of wrongdoing, and the investigation could end without further action.
Things unravelled as crypto prices slumped last year and Sam Bankman-Fried’s FTX blew up. The bank’s digital-asset clients represented more than a fifth of its deposit base, and Signature’s executives said in December it would work to shrink that without leaving the space entirely. Earlier this month, the company reported it had pushed out US$1.5 billion in funds from crypto platforms in the year’s first two months, while taking in US$682 million in regular deposits. By then it was touting all the ways it wasn’t handling crypto in a presentation.
“Their downfall came when they got into this crypto business,” said Al D’Amato, the former senator for New York, who was a director from 2005 to 2021. “They took their eyes off of that small entrepreneur.”
Earlier, he said, the bank had specialized in working with “hardworking people who had come up the hard way, with tough businesses.”
Jump to JPMorgan
That’s the rub for New York City. Across the US, depositors have been pulling away from banks that cosied up too closely with ambitious and unproven tech platforms, toppling crypto-centric Silvergate Capital Corp. and SVB Financial Group’s Silicon Valley Bank. But in Signature’s case, its downfall sent the owners of more staid businesses scrambling.
Ran Eliasaf was one of them. He’s the managing partner of Northwind Group, a New York commercial real estate private equity firm that provides short-term and construction financing for multifamily, condos, senior housing and nursing homes.
On Friday morning, at about 10.30 am, he was watching the fallout from SVB’s collapse when he sent a message to his team: “It’s better to be safe than sorry.” He told them to pull “tens of millions of dollars” of deposits out of Signature, moving money to JPMorgan Chase & Co., Bank of America Corp., and a few smaller banks.
Signature, which ended 2022 with a US$33 billion book of commercial real estate loans, mostly to apartment landlords, had been the second-biggest lender to that group in New York, according to Real Capital Analytics. It had roughly US$4 billion extended to office owners, executives said on a recent earnings call.
Meanwhile, Silvergate was running into trouble. In a regulatory filing this month, the California bank said it questioned its future viability after weakened crypto ventures withdrew cash en masse in December, setting in motion a US$1 billion loss at the end of last year and further losses in January and February. Silvergate tried shutting down its crypto payments network. Last week, the bank announced it was winding down entirely — prompting customers to withdraw money from firms with similar exposures.
Still, the decision by state regulators to close Signature and sweep it into receivership over the weekend surprised its managers.
The bank faced a torrent of outflows on Friday that totaled about 20% of the company’s deposits, according to a person familiar with the matter. Frank said it was his understanding that the outflows had stabilized as of Sunday morning. But a spokesperson for the state’s Department of Financial Services described “significant withdrawal requests still pending and mounting” through the weekend.
In Shay’s interview with the podcast, the Signature veteran described an earlier career mishap. The problem with a long-ago investment at another company, he explained, came down to hubris.
“I pray,” he said, “it remains my biggest financial mistake.” He smiled.
