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In early March, 40 chief financial officers from various technology groups gathered in a Utah ski resort for the annual “Snow Summit” held by Silicon Valley Bank, a critical financial institution for startups.
A week later, on Thursday morning, several financial executives were exchanging angry messages about not having to keep their money in the bank.
SVB’s $20 billion bond sale to offset the decline in deposits focused investors’ attention on the vulnerabilities in its balance sheet. The stock has dropped to less than $7 billion, wiping $10 billion off the bank’s market value of $44 billion 18 months ago.
“It was basically a prisoner’s dilemma: I’m fine if they don’t draw their money, and they’re fine if I don’t draw mine,” said one CFO, whose company bankrolled about $200 million in SVB.
But later some started moving. I got a text message from another friend – he was definitely moving the money to JPMorgan. It was happening,” said the finance chief. “The social contract we had together was too weak. I called our CEO and we sent 97 percent of the deposit to HSBC by noon on Thursday.
On Friday morning, the bank broke. Customers began withdrawing $42 billion in one day – a quarter of the bank’s total deposits – and it was unable to meet the demands. The Federal Deposit Insurance Corp. — the U.S. bank regulator that insures deposits of up to $250,000 — moved to the bank’s Santa Clara, Calif., headquarters, declaring it insolvent and taking over. The run was so rapid that the coffers were completely drained and carried a “negative cash balance” of nearly $1 billion.
SVB’s rapid collapse shocked the venture capital and startup community, many of whom now face uncertainty about the fate of their bank accounts and businesses. SVB has bankrolled nearly half of the venture-backed technology and life sciences companies in the U.S. and has played a major role in the lives of entrepreneurs and their backers, leading personal finance, investing as a limited partner in venture funds and underwriting company listings.
“One of the biggest threats to our business model was dealing with investors who exhibited a very strict herd mentality,” said a senior executive at the bank. “I mean, doesn’t it look like a bank run until this happens?”
SVB was remarkably unscathed by that bank run, but its fate was sealed two years ago.
In the year In 2021, at the height of investment growth in private technology companies, SVB received a flood of funds. Larger investing companies than venture funds plowed money into the bank, which saw deposits rise from $102 billion to $189 billion, putting it into “excess liquidity.”
Seeking yield in an era of ultra-low interest rates, it boosted investment in a $120bn portfolio of top-rated government-backed securities, including $91bn of fixed-rate mortgage bonds, bearing an average interest rate of just 1.64 per cent. . While the minimum income from short-term government debt is slightly higher, the investments lock up the money for more than a decade and expose it to losses if interest rates rise quickly.
While the value increased significantly last year, the value of the portfolio decreased by USD 15 billion, an amount equal to SVB’s total capital. If forced to sell the bond, it may incur a technical loss.
The investments mark a major shift in strategy for SVB, which until 2018 saw its largest surplus in mortgage bonds maturing in one year, according to securities filings.
A person directly involved in the bank’s finances. In 2017, the policy led to a change in leadership in SVB’s key financial functions, when its assets were pushed to $50 billion. .
The new financial leadership began moving ever more surplus cash into long-term fixed-rate bonds, a strategy that would keep public shareholders happy by bolstering overall profits somewhat.
But he appeared oblivious to concerns that the money inflows are a sign of low interest rates that could reverse if they rise. Central banks raise rates to curb excessive nervousness among investors, decisions that generally reduce investment in speculative companies such as tech startups. SVB’s bond portfolio is exposed to price increases and so are its deposits.
“We had enough risk in the business model. You don’t need risk in the asset/liability management profile,” said the former executive, referring to the ability to sell assets to meet the bank’s cash needs. “They completely missed that.”
As the venture capital investment bubble began to inflate in early 2021, Nate Kopikar, a partner at hedge fund Orso Partners, began studying SVB as a way to bet against the industry at large.
“The problem with the business model is that when the capital dries up, the depositors run away,” Kopikar said. It was one of the best ways to short the tech bubble. This bank failure shows that the bubble has burst.
When SVB Banks entertained finance executives on the slopes of Utah in early March, the pressure on SVB’s executive team, led by CEO Greg Baker, was quickly mounting.
SVB deposits fell more than expected in February and March, even as tech valuations fell from their pre-pandemic highs and fell for four consecutive quarters. Baker and his financial team decided to liquidate nearly all of the bank’s “available-for-sale” securities portfolio and invest the proceeds in short-term, high-interest-rate conditions to ameliorate the pressure on its profitability.
The sale would mean taking a $1.8 billion hit, as the value of the securities had fallen due to rising interest rates since SVB bought them. To make up for this, Baker arranged to offer the bank’s shares to the public, led by General Atlantic and brokered by Goldman Sachs, which pledged to buy them for $500 million.
The deal was announced late Wednesday night but appears to have been finalized by Thursday morning. SVB’s decision to sell securities surprised some investors and suggested it had exhausted other avenues to raise money. By lunchtime, Silicon Valley financiers were getting a final call from Goldman, which had briefly tried to rally more investors alongside General Atlantic because SVB’s stock price was on the hook.
At the same time, some big investors, including Peter Thiel’s Founders Fund, advised companies to withdraw their money from SVB. In a series of calls with SVB clients and investors, Baker told them not to panic. “If everyone is being told that SVB is in trouble, this will be a challenge,” he said.
Suddenly, the disaster that had been building on SVB’s scale for more than a year became a reality. If deposits fall further, SVB will be forced to sell its held-to-maturity bond portfolio, realizing a $15 billion loss and approaching bankruptcy.
Rival banks have argued that the plan was flawed from the start – while reporting losses of $1.8 billion while raising $500 million of $2.25 billion in capital from an anchor investor. “You can’t build a book while the market is open and you’re telling people there’s a $2 billion hole,” said one senior banker.
There was also external pressure. Goldman’s bankers in the capital knew the deal was taking place against a backdrop of unfavorable market conditions. But the company faces a timing problem after it was downgraded to Baa1 from A3 by Moody’s on Wednesday. “Their hand was forced by the rating agency,” said one person involved in the capital increase. Goldman Sachs declined to comment.
The scale and speed of the collapse had a major impact on the technology industry globally.
As regulators try to salvage SVB’s assets and restore customers’ money, possibly by selling some or all of the bank’s operations this weekend, the collapse has prompted scrutiny of its approach to risk management.
Finally, he committed a cardinal sin in finance. To maximize short-term profits, he took high risks with only modest paychecks.
Last year, one hedge fund short-seller who listed the bank’s concerns warned that SVB had unwittingly laid the groundwork for “the first major US bank failure in 15 years.”
“They went for more [0.4 percentage points] said the man who bet the money on SVB. “It’s really sad.”
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