Silicon Valley Bank’s collapse 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 heyday 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 tripled to $186 billion.
SVB invested heavily in long-term government bonds and 10-year mortgage-backed securities, attracted by higher yields of 1.5 percent compared with short-term Treasuries that paid 0.25 percent.
However, when interest rates rose, bond prices fell.
A fund owned by SVB CEO Gregory Becker (pictured at a conference in Beverley Hills last week) sold $3.6 million worth of SVB shares on February 27, days before SVB disclosed the $1 loss. .8 billion 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 automatic liquidations to allay suspicions of insider trading.
Joe Biden spoke before the markets opened Monday morning, stating: “Our actions should give Americans confidence that the American banking system is safe.” It comes after the White House guaranteed yesterday that it would make SVB’s clients ‘complete’ and that ‘the taxpayer will take no loss’
The bank failed to diversify its portfolio to hedge against the rate and became exposed when interest rates rose.
The effect was that, at the end of the year, SVB had $16 billion in unrealized losses, meaning that its assets barely covered its liabilities.
How BLS started
SVB was not a normal bank.
It was founded in 1981 and headquartered in Santa Clara, California; its main clients were those in the technology, life sciences and premium wine industries.
It also attracted entrepreneurs and small business owners.
The first office was opened in San José and the second in Palo Alto, making their target market clear.
At its peak, it had more than $200 billion in assets with fewer than 38,000 corporate accounts and a small number of individual clients. Many of them were technology companies backed by venture capital funds.
Accounting firm KPMG gave SVB a clean bill of health just 11 days before it went under.
KPMG signed the audit on the bank’s books for 2022 on February 24.
Although the speed of withdrawals increased sharply in recent weeks, the bank’s deposits had fallen $25 billion in the last nine months of 2022.
Auditors like KPMG are supposed to warn investors if companies are in trouble. They analyze ‘whether there is substantial doubt about the entity’s ability to continue as a going concern’ for the year following the issuance of the financial statements.
Even if the bank did not run into trouble last year, auditors still need to take into account developments that occurred after the balance sheet date to give an accurate reflection to investors.
“Common sense tells you that an auditor who issues a clean report, a clean bill of health, at the 16th largest bank in the United States that within two weeks goes bankrupt without warning, is a problem for the auditor,” Lynn Turner, the former chief accountant for the Securities and Exchange Commission said The Wall Street Journal.
the problems begin
On March 6, Martin Gruenberg, president of the Federal Deposit Insurance Corporation (FDIC), spoke with the Institute of International Bankers.
It revealed that there was $620 billion in ‘unrealized losses’ in America’s financial institutions: banks and pension funds. An unrealized loss is when an asset has lost value, but has not yet been sold.
Gruenberg told the assembled financiers, in a section on interest rates: “Unrealized losses on securities have significantly reduced the reported equity capital of the banking industry.”
He said there was no need to panic as “banks are generally in strong financial shape.”
It was not the first time 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 office.
The CEO of the bank sells shares of the company worth 3.6 million dollars
Greg Becker, CEO of Silicon Valley Bank, sold $3.6 million worth of company shares on February 23 in an automated transaction.
The transactions were scheduled on January 26 through an SEC rule that allows insiders to schedule sales in advance, to allay suspicions of insider trading. The Wall Street Journal informed.
Yet the timing, just two weeks before the bank’s collapse, has drawn attention.
Rep. Ro Khanna, D-Calif., said the washington post that he wanted to see the money ‘recovered’, unless it was scheduled ‘many months in advance’.
Customers lined 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’s rating.
SVB bosses turned to Goldman Sachs for advice, Well-informed person reported, in an attempt to avoid 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 reached an agreement for SVB to raise $2.25 billion in common and preferred shares, including a $500 million anchor investment from private equity firm General Atlantic, Insider reported.
The news was disclosed in a press release after the close of trading.
But the press release was terribly worded and full of jargon: customers were scared.
Buried at the end of the press release was the revelation that the company had sold a $21 billion bond portfolio at a loss of $1.8 billion to restructure its balance sheet and give it more flexibility to meet deposit withdrawals.
The revelation scared depositors.
This spelled disaster for SVB, whose tech-savvy clientele quickly spread the word via social media of an impending demise.
In addition, many of the start-ups that banked with SVB were backed by venture capital funds that can exert great influence over their companies.
March 9: The Panic Begins
Peter Thiel’s Founder Fund told companies in its portfolio to withdraw money from the bank on Thursday, and a host of other venture funds soon made the same recommendation.
By the end of the day, clients had triggered withdrawals in excess of $40 billion.
Becker, the CEO, implored customers not to panic.
He pleaded with a group of venture capitalists: “I would ask everyone to support us as we support you.”
The FDIC takes over
SVB could have saved itself from its inability to cover interest rates and prepare for customer withdrawals if it had sold shares to cover its losses.
They seemed to be doing a deal with JP Morgan, but the Federal Deposit Insurance Corporation pounced on it on Friday, March 10, having seen enough damage.
Those with less than $250,000 in their accounts knew they would be fine, that’s guaranteed by the FDIC.
But for the 90 per cent of customers who had more, they were faced with a deeply troubling weekend, with nothing to do but wait and hope that the government and financial authorities would come up with a solution.
Panic over, for now
On Sunday, March 12, the Biden administration confirmed that all clients’ cash will be guaranteed with funds taken from the Deposit Insurance Fund, which banks have been required to pay out since the 2008 financial crisis.
Joe Biden on Monday blamed the irresponsibility of SVB executives and the relaxation of regulations under Donald Trump.
However, analysts say the brutal rate hikes the Fed implemented to cool the economy were the result of Biden’s $4 trillion Covid stimulus package.
Former Trump White House adviser Steve Moore has warned that SVB ‘may just be the tip of the iceberg’, exposing broader weakness amid skyrocketing inflation.
Moore told Fox News: ‘I think it’s important that people understand how this potential banking crisis happened. It is not because there are not enough bank regulators, as Biden tries to say.
“It’s because of 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.”