Jelena McWilliams, chair of the Federal Deposit Insurance Corporation (FDIC), during a Senate Banking, Housing, and Urban Affairs Committee hearing in Washington, D.C., U.S., on Tuesday, Aug. 3, 2021.
Al Drago | Bloomberg | Getty Images
There may be an $85 million shortfall between what partner banks of fintech middleman Synapse are holding and what depositors are owed, in accordance with the court-appointed trustee within the Synapse bankruptcy.
Customers of fintech firms that used Synapse to link up with banks had $265 million in balances. However the banks themselves only had $180 million related to those accounts, trustee Jelena McWilliams said in a report filed late Thursday.
The missing funds explain what’s at the guts of the worst meltdown within the U.S. fintech sector since its emergence within the years after the 2008 financial crisis. Greater than 100,000 customers of a various set of fintech corporations have been locked out of their savings accounts for nearly a month after the failure of Synapse, an Andreessen Horowitz-backed startup, amid disagreements over user balances.
While Synapse and its partners, including Evolve Bank & Trust, have lobbed accusations of improperly moving balances or keeping incorrect ledgers at one another in court filings, McWilliams’ report is the primary outside try and determine the scope of missing funds on this mess.
Much unknown
Since being named trustee on May 24, McWilliams has worked with 4 banks — Evolve, American Bank, AMG National Trust and Lineage Bank — to reconcile their various ledgers so customers could regain access to their funds.
However the banks need way more information to finish the project, including understanding how a Synapse brokerage and lending business can have impacted fund flows, said McWilliams. She said Synapse apparently commingled funds amongst several institutions, using multiple banks to serve the identical corporations.
What’s worse, it’s still unclear what happened to the missing funds, she said.
“The source of the shortfall, including whether end-user funds and negative balance accounts were moved amongst Partner Banks in a way that increased or decreased the respective shortfalls which will have existed at each Partner Bank at an earlier time, shouldn’t be known at the moment,” McWilliams wrote.
McWilliams, former chair of the Federal Deposit Insurance Corporation and current partner on the law firm Cravath, didn’t reply to requests for comment.
Spreading the pain
McWilliams’ task has been made harder because there are not any funds to pay external forensics firms and even former Synapse employees to assist, she said in her report. Synapse fired the last of its employees on May 24.
Still, some customers whose funds were held at banks in what’s called demand deposit accounts have already begun gaining access to accounts, she said.
But users whose funds were pooled in a communal way often called for advantage of, or FBO, accounts, may have a harder time getting their money. A full reconciliation will take weeks more to finish, she said.
In her report, McWilliams presented several options for Judge Martin Barash to contemplate at a Friday hearing that can allow at the least some FBO customers to regain access to their funds.
The choices include paying some customers out fully, while delaying payments to others, depending on whether the person FBO accounts have been reconciled. An alternative choice could be spreading the shortfall evenly amongst all customers to make limited funds available sooner.
‘It is a crisis’
Initially of the general public hearing on Friday, McWilliams told Barash that her suggestion was that every one FBO customers receive partial payments, which “will partially alleviate the results to finish users who’re currently waiting locked out of access to their funds” while keeping a reserve for later payments.
But comments from Barash forged doubt on how that will move forward.
While profusely thanking McWilliams for her work, the judge said that he “struggled” with “what I can do, and the way I may also help.”
The case is “uncharted territory” and since the depositors’ funds weren’t the property of the Synapse estate, Barash said it wasn’t clear what the bankruptcy court could do.
“It is a crisis, and I would love to see a resolution, but I’m unsure if individuals are on the lookout for court orders, what I can provide when it comes to court orders,” Barash said.
