Short seller Marc Cohodes said his early scepticism of bankrupt crypto exchange FTX and disgraced CEO Sam Bankman-Fried led him to short the company’s main bank, Silvergate.
As fears surrounding Silvergate’s finances clobber the stock price, the short seller has turned his sights – and bearish bets – to two companies that he claims are analogous: crypto exchange Binance and Signature Bank.
‘This is not rocket science’
Cohodes is an outspoken independent trader known for his brash comments and unusual background – he has a side hustle as a free-range chicken farmer. His bearish bets against finance firms have included subprime mortgage lender NovaStar Financial, which was delisted from the New York Stock Exchange at the dawn of the financial crisis, and Germany’s Wirecard, a short that paid off when the payment processor filed for bankruptcy in 2020.
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He colourfully explained his thinking about Signature to DL News: “They have major problems, and they have very similar issues to Silvergate. It’s not as exposed to crypto as Silvergate, but their loan book is terrible. And they have huge KYC and AML liability.”
”This is not rocket science,” Cohodes said. “Signature is next, Binance is next.”
Know-your-customer and anti-money-laundering laws are particularly difficult for companies in the crypto industry, where anonymity is a feature, not a bug. And DL News has not been able to establish Signature’s current or previous exposure to Binance – Signature declined to comment on its client relationships.
But at the end of last year, 20%, or about $18 billion, of the bank’s deposits came from the crypto space. It dealt a blow to Binance when it announced that it will only accept trades from clients with US dollar bank accounts over $100,000.
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As it tries to reduce the proportion of deposits it gets from the crypto sphere, investors are dumping the stock, which is down about 21% in the last month. Signature has faced other headwinds since FTX’s collapse last year: It was sued by a trading firm that said the bank knowingly transferred funds meant for FTX to accounts run by Bankman-Fried’s hedge fund, Alameda Research.
The bank told DL News that it is vigorously defending the suit and it does “not believe the allegations have merit.”
“Signature Bank adheres to strict Bank Secrecy Act/Anti Money Laundering regulations,” and has “robust know-your-client processes and procedures,” a spokeswoman told DL News. “Our portfolio’s largest segment is comprised of capital call loans, where nearly 90% of the credits are backed by a diverse base of large institutional investors.”
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Cohodes said: ”I’ve never been involved in crypto – I’ve never been long $1 of it, I’ve never been short $1 of it. So I have nothing to do with crypto. I have to do, and deal with, financial structures.”
Signature may generate returns for Cohodes – at least four Wall Street analysts have lowered their annual stock price targets on Signature since last week as the Silvergate crash drags peers lower.
Signature said in a mid-quarter update last week that spot deposit balances fell by about $826 million, while spot loan balances dropped by about $1.7 billion. The CEO said in its fourth-quarter earnings statement that the crypto crash, combined with interest rate rises contributed to “the most difficult deposit environment we have seen in our 22-year history.”
‘The short-selling thing is a dangerous game. Everyone wants to put you into the ground’
The bank emphasised that it “does not trade, does not custody, and does not lend against or make loans collateralised by digital assets.”
A short seller borrows a company’s shares and sells them in the hope that they’ll go down, then buys them back at the lower price to return them, pocketing the difference. One might assume that Cohodes has racked up big gains from his short position in Silvergate.
Unfortunately not, Cohodes says.
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“My return has been better,” he said, declining to reveal his performance or the size of his position. “The stock’s down plenty but,” the share price soared in February before its plunge last week, he said, which was “horrifically bad. The short-selling thing is a dangerous game. Everyone wants to put you into the ground.”
Binance also faces hurdles. Among them: the US Department of Justice is investigating possible money laundering and criminal sanctions violations; its auditor dropped all its crypto clients; and customers have been amping up their withdrawals.
Binance did not respond to a request for comment from DL News, but has told Bloomberg: “We take our legal obligations very seriously and engage with regulators and law enforcement in a collaborative fashion. We have worked hard to build a robust compliance programme that incorporates anti-money laundering principles and tools used by financial institutions to detect and address suspicious activity.”
Cohodes said offshore crypto exchanges like Binance run the risk of being used as a “money laundering wrapper.”
”I told everyone… to get their money out of any offshore exchange, and they should. And hopefully people figure it out.”
