The collapse of Silicon Valley Bank was swift. In just a few days the 16th largest bank in the country suffered the second-worst banking collapse in US history.
But the seeds of the bank’s demise were sown in its pandemic boom when Joe Biden‘s $4 trillion COVID stimulus package flooded Silicon Valley with easy money.
In January 2020, SVB had $55 billion in customer deposits on its books – and by the end of 2022 that had more than trebled to $186 billion.
SVB invested heavily in long-term government bonds and 10-year mortgage-backed securities, attracted by higher 1.5 percent yields compared to the short-term Treasury bonds paying 0.25 percent.
Yet when interest rates rose, the bond prices fell.
A fund owned by SVB CEO Gregory Becker (pictured at a conference in Beverley Hills last week) sold $3.6 million of shares in SVB on February 27, days before SVB disclosed the $1.8 billion loss that triggered the fatal run on the bank. The trades were scheduled on January 26 through an SEC rule that allows company bosses to schedule automated sell-offs to allay suspicions of insider trading
Joe Biden spoke before the markets opened on Monday morning, stating: ‘Our actions should give Americans confidence that the US banking system is safe’. It comes after White House yesterday guaranteed it would make SVB customers ‘whole’ and that ‘no losses will be borne by the taxpayer’
The bank failed to diversify its portfolio to hedge against the rate, and was left exposed when interest rates rose.
The effect was by the end of the year, SVB was sitting on $16 billion in unrealized losses, meaning its assets barely covered its liabilities.
How SVB began
SVB was not a normal bank.
It was founded in 1981 and headquartered in Santa Clara, California – it’s primary clients were those in technology, life science and premium wine industries.
It also enticed entrepreneurs and small business owners.
The first office was opened in San Jose, and the second in Palo Alto – making its target market clear.
At its peak it held more than $200 billion in assets with fewer than 38,000 corporate accounts, and a small number of individual customers. Many of them were tech firms backed by venture capital funds.
The accounting firm KPMG gave SVB a clean bill of health just 11 days before it sank.
KPMG signed the audit on the bank’s books for 2022 on February 24.
Although the velocity of withdrawals increased considerably in recent weeks, the bank’s deposits had fallen by $25 billion in the last nine months of 2022.
Auditors like KPMG are supposed to warn investors if companies are in hot water. They analyze ‘whether there is substantial doubt about the entity’s ability to continue as a going concern’ for the year after the financial statements are issued.
Even if the bank was not struggling last year, the auditors are still required to take into account developments that occurred after the balance-sheet date to give an accurate reflection for investors.
‘Common sense tells you that an auditor issuing a clean report, a clean bill of health, on the 16th-largest bank in the United States that within two weeks fails without any warning, is trouble for the auditor,’ Lynn Turner, the former chief accountant of the Securities and Exchange Commission told The Wall Street Journal.
The troubles begin
On March 6, Martin Gruenberg, the chair of the Federal Deposit Insurance Corporation (FDIC), spoke to the Institute of International Bankers.
He revealed that there were $620 billion in ‘unrealized losses’ in U.S. financial institutions – banks and pension funds. An unrealized loss is when an asset has decreased in value, but has not been yet sold.
Gruenberg told the assembled financiers, in a section on interest rates: ‘Unrealized losses on securities have meaningfully reduced the reported equity capital of the banking industry.’
He said there was no need to panic, as ‘banks are generally in a strong financial condition’.
It was not the first time that there had been warnings about ‘unrealized losses’.
In November 2022, JPMorgan warned that Silicon Valley Bank’s $16 billion unrealized losses were a risk, according to documents obtained by The New York Post.
Bank CEO sells $3.6 million worth of company stock
Greg Becker, the CEO of Silicon Valley Bank, on February 23 sold $3.6 million worth of company stock in an automated trade.
The trades were scheduled on January 26 through an SEC rule that allows insiders to schedule sales ahead of time, to allay suspicions of trading on insider information, The Wall Street Journal reported.
However, the timing – just two weeks before the collapse of the bank – has raised eyebrows.
Representative Ro Khanna, a Democrat for California, told The Washington Post that he wanted to see the money ‘clawed back’, unless it was scheduled ‘many months before’.
Customers line up outside a Silicon Valley Bank branch on Monday as they rushed to withdraw their funds after the government promised their cash would be safe
Moody’s move to downgrade
In the week beginning Monday February 27, SVB executives heard that Moody’s, the credit rating agency, was considering downgrading SVB.
The SVB bosses turned to Goldman Sachs for advice, Insider reported, in a bid to stave off Moody’s.
But they didn’t have much time to come up with a plan, as they knew Moody’s was close to acting.
March 8: the fatal blow
On Wednesday March 8, the plan was announced.
Goldman had put together a deal to have SVB raise $2.25 billion of common and preferred equity, including a $500 million anchor investment from private-equity firm General Atlantic, Insider reported.
The news was released in a press release after the close of trading.
But the press release was terribly worded and full of jargon: customers were spooked.
Buried at the end of the press release was the disclosure that the company had sold a $21 billion portfolio of bonds at a $1.8 billion loss to restructure its balance sheet and give it more flexibility to meet deposit withdrawals.
The revelation panicked depositors.
This spelt disaster for SVB whose tech-savvy clientele quickly spread the word through social media of an imminent demise.
In addition, many of the start-ups that banked with SVB were backed by venture capital funds which are able to exert huge influence over their companies.
March 9: Panic begins
Peter Thiel’s Founder Fund told firms in its portfolio to pull money from the bank on Thursday, and a string of other venture funds soon made the same recommendation.
By the end of the day, customers had triggered withdrawals north of $40 billion.
Becker, the CEO, implored customers not to panic.
He begged one group of venture capitalists: ‘I would ask everyone to support us just like we supported you.’
The FDIC takes over
SVB may have been able to save itself from its failure to hedge interest rates and prepare for customer withdrawals had it sold equity to cover its losses.
They appeared to be lining up a deal with JP Morgan but the Federal Deposit Insurance Corporation swooped in on Friday March 10, having already seen enough damage.
Those with less than $250,000 in their accounts knew they would be fine – that much is guaranteed by the FDIC.
But for the 90 percent of customers who had more, they faced a deeply troubling weekend – with nothing to do but wait and hope the government and financial authorities found a solution.
Panic over – for now
On Sunday March 12 the Biden administration confirmed that all customers’ cash will be guaranteed with funds taken from the the Deposit Insurance Fund, which banks have been required to pay into since the 2008 financial crash.
Joe Biden on Monday blamed the irresponsibility of SVB’s executives and the loosening of regulations under Donald Trump.
However, analysts say that the brutal rate hikes which the Fed has implemented to cool the economy were the result of Biden’s $4 trillion Covid stimulus package.
Former Trump White House adviser Steve Moore warned that SVB ‘may just be the tip of the iceberg’, exposing a broader weakness amid soaring inflation.
Moore told Fox News: ‘I think it’s important for people to understand how this potential banking crisis happened. It’s not because there aren’t enough bank regulators, as Biden is trying to say.
‘It’s because of the massive inflation and the trillions and trillions of dollars of borrowing that the federal government has done that has put our financial system in great jeopardy and great peril.’