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How a Silicon Valley bank sparked a global financial panic

by SuperiorInvest

Silicon Valley Bank CEO Gregory Becker leaned back in his chair and delivered a bullish report last week at a tech conference at San Francisco’s posh Palace Hotel.

In his signature confident, almost bombastic style, Mr. Becker told an audience of investors, Wall Street analysts and technology executives Tuesday afternoon that the future of the technology industry was bright — and so was Silicon Valley Bank’s place in it. .

But he did not say that about a week ago Moody’s called Mr. Becker to say that his bank’s financial health was in jeopardy and that its shares were in danger of being downgraded to junk. Realizing that the bank needed to raise cash, Mr. Becker has been trying to fix things ever since.

That phone call set off a frantic scramble inside Silicon Valley Bank. Just one day after Mr. Becker expressed confidence at the conference, the bank announced a $1.8 billion loss and a hastily assembled plan to raise $2.25 billion in new capital. The news spooked the bank’s depositors and investors so much that its shares fell about 60 percent on Thursday and clients pulled about $40 billion from their money.

On Friday, the Silicon Valley bank was dead.

The bank collapse sent shares of more than a dozen small and medium-sized banks tumbling on Monday, but they rebounded on Tuesday. However, the rebound remains small compared to the scale of the losses incurred in recent days.

The Federal Deposit Insurance Corporation, which took over the bank, has since been trying to auction off all or parts of it. By Sunday evening, the federal government said all customers would be safe.

The story of Silicon Valley Bank is one of ambition and leadership failure, of a CEO who talked so much about innovation and the future that he and his lieutenants failed to pay enough attention to the mundane but critically important work of managing risk and ensuring financial prudence. Caught in a rapidly changing economic environment, the bank waited until the last moment to try to reverse its fate.

“It’s not necessarily greed at the bank level,” said Danny Moses, an investor at Moses Ventures known for his role in predicting the 2008 financial crisis in the book and movie “The Big Short.”

“It’s just poor risk management,” Mr Moses added. “It was a complete and utter mismanagement of risk by SVB.”

Mr. Becker could not be reached for comment. Former Silicon Valley Bank representatives referred questions to the FDIC, which declined to comment.

Silicon Valley Bank began in 1983 as a small community bank serving technology startups. During the 1980s and 1990s, its wealth and size grew along with the technology sector.

After an ill-fated foray into real estate lending in the early 1990s, the bank returned to its roots, offering its services to fast-growing but typically unprofitable companies during the Internet boom. The bank also bet on California wineries.

Mr. Becker, who grew up on a farm in Indiana, joined the company in 1993 shortly after graduating from Indiana University. He worked at another California bank for one year in the early 1990s, but otherwise spent his career at Silicon Valley Bank.

By 2011, when Mr. Becker was named CEO, the bank had expanded to dozens of cities in America and around the world. He saw an opportunity to lure start-ups and venture capital investors with new offerings.

“When Greg took over as CEO, he had a definitive vision of what he wanted Silicon Valley Bank to be,” said Timothy Coffey, banking analyst at Janney Montgomery Scott. “He wanted to be the heart and soul of what we ended up calling the innovation economy.”

In that, Mr. Coffey said, he succeeded: “There was nothing that happened inside the Valley that didn’t involve Silicon Valley Bank.”

Company founders could keep cash in the bank or obtain a line of credit, invest their personal assets, borrow against their private equity, and even take out a mortgage on their first home there. Silicon Valley has often partnered with start-ups that later became tech giants, earning the loyalty of many founders and venture capitalists.

SVB bankers were ubiquitous at tech happy hours and conferences, often hosting networking events and dinners where clients could mingle. They learned about various tech ventures, from artificial intelligence to climate, and even helped the founders with recruiting.

The Santa Clara, Calif.-based bank had at least five Valley offices with an aesthetic that one person described as “part stainless steel tech vibe, part VC resort vibe.” Wine fridges littered the offices. Visitors to the office on Sand Hill Road in Menlo Park, the heart of the Silicon Valley ecosystem, often pointed out a display of wines from vineyards the bank financed.

From his earliest days as CEO, Mr. Becker had a firm grip on the firm, said Adam Dean, the former president of SVB Asset Management, who left more than a decade ago. “It was Greg’s church.

Mr. Becker positioned himself as a champion of innovation. In his official biography, he described himself as a “supporter of entrepreneurs, their investors and corporations in the international innovation sector”. He cultivated friendships with venture capitalists.

“Greg always looked five to 10 years out,” said Janney Montgomery Scott’s Mr. Coffey. “He was more of a VC than a banker.

For thousands of founders and their venture capital backers, SVB has become a bank. That was reflected in its swelling deposits: The bank held $189.2 billion in deposits by the end of 2021, up from $102 billion in 2020 and $49 billion in 2018. Its stock price roughly tripled from 2018 to 2021.

Flush with investment money, Mr. Becker began building an investment banking business to advise companies on mergers and initial public offerings, deals that bring big fees. The bank was offering big pay packages to bankers from bigger rivals. It bought a Boston bank for $900 million to manage money for wealthy clients on the East Coast.

Despite the growth in deposits, the bank struggled to find ways to make money from them. Banks typically invest customer deposits in a variety of assets from which they can earn a return, including a mix of long-term and short-term government-issued bonds—a largely safe bet.

But the SVB decided that government debt, which matured in 10 to 30 years — and offered higher interest rates at the time — was a better bet than shorter-maturity bonds that paid less interest, according to analysts. So it made a big bet on long-term bonds, a lack of diversity that increased its risk.

As of December 31, SVB classified the majority of its debt portfolio, roughly $95 billion, as “held to maturity.” Due to a quirk in banking regulation, the bank did not have to take into account fluctuations in the value of these bonds in its balance sheet.

On average, banks with at least $1 billion in assets classified only 6 percent of their debt in this category at the end of 2022. But the Silicon Valley bank put 75 percent of its debt as held-to-maturity, according to a Janney Montgomery Scott research report. .

By classifying most of its debt this way, SVB was able to mask its brewing problems longer than it otherwise would have. But as interest rates rose, investors recalculated where to put their money. Venture capital investment has slowed. Start-ups started withdrawing more money from their accounts.

The bank’s conundrum: If it continued to return clients’ money, SVB would be stretched for cash. But if she were to sell the long-term bonds, she would have to do it at a loss. Because newer bonds paid higher interest, buyers were buying long-term debt at a discount to their value when SVB bought them.

The problems were not immediately visible to analysts because losses on debt portfolios are considered paper losses – until they are actually sold at a loss.

It didn’t help that the bank’s chief risk officer, Laura Izurieta, began discussing her retirement in early 2022. She officially left in April, but stayed to focus on “certain transition responsibilities” until October 1. . On December 27, the bank named Kim Olson as its new chief risk officer.

Even as risk management seemed to take a backseat, Mr. Becker continued to express his enthusiasm for the innovation economy. “The market is still so strong,” he told analysts on a conference call earlier last year. “There is so much potential. There is so much dry powder that we remain very optimistic.” He dismissed fears of a decline.

In the summer, the mood of the economy worsened. Companies were shelving plans to go public or save their money. As Silicon Valley Bank welcomed its class of 2022 interns to New York, a planned multimillion-dollar renovation of its midtown Manhattan office was put on hold, a former employee said, due to faulty air conditioning. The paint was cracking. And there were mice running across the floor.

In late February, Mr. Becker sat on stage in the dark theater of the Academy Museum of Motion Pictures in Los Angeles, where SVB co-sponsored the conference. Asked by a reporter about the bank’s refueling bond portfolio, Mr. Becker said thatzero intention” by selling their fraudulent securities.

That plan is about to change.

Shortly after Moody’s warned Mr Becker of a possible sharp downgrade early in the week of February 27, the bank turned to Goldman Sachs, desperate for a run on the bank if it did not shore up its finances. said a person with knowledge of the deal. It needed to sell some of its debts and raise new money from investors on the stock market.

Days after Moody’s call, the bank said in a March 3 filing that it would be able to “maintain a healthy level of client funds overall, despite pressures on the balance sheet from declining deposits, increased client cash flow and overall market environment challenges.”

Last Wednesday, the bank issued a press release after the market closed, saying it had sold its $21 billion in debt at a loss of $1.8 billion and intended to raise $2.25 billion in new capital. Investment firm General Atlantic said it would buy the bank’s shares for $500 million.

That afternoon and on Thursday, Goldman bankers began enticing investors to buy SVB shares. The announcement spooked investors who feared the bank was in deeper trouble than it was letting on. The bank’s shares fell sharply when markets opened on Thursday.

Silicon Valley awoke to a flurry of text messages, phone calls and Twitter posts about the bank’s growing woes. The bank’s clients rushed to withdraw their deposits. They raised $42 billion on Thursday alone.

Late in the morning Pacific time, Mr. Becker participated in a webinar with hundreds of investors and lawyers. The bank had plenty of liquidity, he said, but he ended the call with one caveat: If people started telling each other that SVB was in trouble, it would present a challenge, according to people briefed on the call.

When David Selinger, chief executive of the security firm Deep Sentinel, who has been a customer of Silicon Valley Bank for two decades, saw this line in the transcript sent to him by his lawyer, he immediately told his board members that they needed to get all their money out of the bank.

“It’s like he’s creating a prison dilemma for us with those words,” Mr. Selinger said. “As soon as we have love and desire for SVB, fear was at the forefront. But on Thursday afternoon, banking regulators including the FDIC warned SVB that the bank may not survive, two people briefed on the negotiations said. The bank’s financial advisers raced to find a potential buyer, but none came forward.

Trading in its shares was halted on Friday morning. That afternoon, the regulator seized the bank. Mr. Becker’s nearly 30-year tenure at Silicon Valley Bank has come to an end.

Erin Griffith contributed reporting.

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