How Goldman’s Plan to Shore Up Silicon Valley Bank Crumbled The plan had a fatal flaw: It underestimated the danger that a deluge of bad news could spark a crisis of confidence PHOTO ILLUSTRATION BY ALEXANDRA CITRIN-SAFADI/THE WALL STREET JOURNAL SHARE By AnnaMaria Andriotis , Corrie Driebusch and Miriam GottfriedUpdated March 15, 2023 8:00 pm ET 115 Silicon Valley Bank executives went to Goldman Sachs Group Inc. GS -3.09%decrease; red down pointing triangle in late February looking for advice: They needed to raise money but weren’t exactly sure how to do it. Soaring interest rates had taken a heavy toll on the bank. Deposits and the value of the bank’s bond portfolio had fallen sharply. Moody’s Investors Service was preparing for a downgrade. The bank had to reset its finances to avoid a funding squeeze that would badly dent profits. The conversations—held over the course of about 10 days—culminated in a March 8 announcement of a nearly $2 billion loss and a planned stock sale that badly spooked investors. SVB Financial Group SIVB -60.41%decrease; red down pointing triangle shares tanked the next morning. Startup and venture-capital customers with big uninsured balances panicked, attempting to pull $42 billion out of the bank in a single day. NEWSLETTER SIGN-UP Markets A.M. A pre-markets primer packed with news, trends and ideas. Plus, up-to-the-minute market data. Subscribed While few could have predicted the market’s violent reaction to the SVB disclosures, Goldman’s plan for the bank had a fatal flaw. It underestimated the danger that a deluge of bad news could spark a crisis of confidence, a development that can quickly fell a bank. Goldman is the go-to adviser to the rich and the powerful. It arranges mergers, helps companies raise money and devises creative solutions to sticky situations of the financial variety—a talent that has made the firm billions. Yet, for SVB, Goldman’s gold-plated advice came at the steepest possible cost. SVB collapsed at warp speed in the second-largest bank failure in U.S. history, setting off a trans-Atlantic banking crisis that regulators are working furiously to contain. This account of SVB’s last days is based on interviews with bankers, lawyers and investors who almost participated in the doomed deal. SVB’s problem was mechanical: Banks make profits by earning more from putting money to work than they pay depositors to keep it with them. But SVB was paying up to stop depositors from leaving, and it was stuck earning a pittance on low-risk bonds bought in low-rate times. Selling a slug of those bonds would ease the pressure: SVB would have extra cash on hand, and it could use at least some of that cash to buy new bonds that paid more. Yet the transaction came with a big asterisk: SVB would have to realize a big loss. SVB executives came to Goldman with the rough outlines of a plan to raise capital. Two private-equity firms, General Atlantic and Warburg Pincus LLC, were on the bank’s list of possible investors. The executives wanted to do a private stock placement—a deal in which they would quietly line up investors to buy a set number of shares at a set price—and they wanted to do it fast. Moody’s was preparing to downgrade the bank, a move the executives feared would alarm investors. Bankers in Goldman’s equity-capital markets business, led by David Ludwig, and its financial-institutions group, run by Pete Lyon, began piecing together a share sale during the first week of March and approached the two private-equity firms. Goldman pitched a hybrid public-private share sale: The firm would find enough investors to fully fund a $2.25 billion deal but would also offer the public an opportunity to buy shares at the same price. SHARE YOUR THOUGHTS What should SVB have done differently? Join the conversation below. By March 5, Warburg had dropped out. It needed more time to evaluate the deal than SVB was willing to give, and it didn’t want to participate in an offering with a public component. On Goldman’s trading desk, another deal was coming together. SVB was seeking a buyer for its $21 billion portfolio of available-for-sale debt securities. The buyer would be Goldman. General Atlantic, meanwhile, agreed to pony up $500 million in the stock sale. But time was running out to line up more investors to supply the remaining $1.75 billion that SVB was looking to raise. SVB executives weren’t ready to give investors the information they needed to get everyone on board. Goldman decided the only option was a public share offering anchored by General Atlantic. SVB executives signed off on the plan. Mr. Ludwig and others at Goldman thought SVB had to move quickly. The Moody’s downgrade was coming, and then the bank would close for the weekend. Better to get all the bad news out of the way to avoid a Monday meltdown. On March 8, Goldman completed the purchase of the SVB securities portfolio at a discount to its market value. After the market closed, SVB announced that it had realized a $1.8 billion loss on the sale, without disclosing the buyer, and said it would sell shares to raise capital. By that point, SVB’s management team was already bracing for the bad news. Just before the bank launched its doomed share sale, it hired deal-advisory firm Centerview Partners to explore a plan B. Goldman bankers were still confident that the share sale would come together. SVB’s stock at first fell around 8% in aftermarket hours, not as steep a drop as feared, and Goldman’s bankers received many orders to buy shares. The mood shifted less than an hour later when another bank, Silvergate Capital Corp., announced it was shutting down following a run that drained its deposits. A one-notch Moody’s downgrade, less severe than SVB executives feared, landed at around 8 p.m. SVB shares tanked when the market opened on March 9, prompting customers to pull their deposits. It was the beginning of a downward spiral: As news of the deposit run spread, the shares fell further, prompting more customers to yank their money. The stock closed down more than 60%. Still, the deal wasn’t dead yet. Goldman had lined up a slate of investors at $95 a share, about $11 less than the day’s closing price. At around 5 p.m., Goldman bankers got a report on SVB’s deposit outflows. SVB’s lawyers at Sullivan & Cromwell LLP said the deal couldn’t go forward without a disclosure about the deposit losses. Goldman abandoned the deal. The Federal Deposit Insurance Corp. seized SVB before it could open the next morning. Write to AnnaMaria Andriotis at annamaria.andriotis@wsj.com, Corrie Driebusch at corrie.driebusch@dowjones.com and Miriam Gottfried at Miriam.Gottfried@wsj.com
Why am I not surprised? This is the same Goldman Sachs that sold worthless subprime CDOs to their gullible clients and then turned around and took out an insurance from AIG in the hopes that those CDOs would fail. And we all know what happened in 2008.
At what point does the failure to disclose these talks constitute a violation of securities law. The former SEC head said recent selling by top executives was automated selling and therefore not on the surface a violation of law. WE shall see. https://www.cnbc.com/2023/03/14/svb...of-the-banks-stock-over-the-past-2-years.html
First of all, what SVB should've done is stop paying to keep the depositors. I mean if the whole IT industry is slowing down, it's natural that its venture capital business would be slowing down too then why would it think it's worth it to pay more to make people keep their money with you when you can't invest it anyway? Yeah sure your business will be slowing down and you will be laying off people, but so what? The entire IT industry and all online businesses like Amazon are all laying off people, why can't SVB? So right off the bat, if the SVB hadn't been paying more to try to keep the depositors and instead just gradually wound down its venture capital business then it might have more money available to buy more short-term bills to hedge the interest rate risk. Second, it should've sold its existing bonds to rebalance the portfolio to buy new shorter-term securities to better position itself to deal with the high interest rates. Yes it would result in losses but that's spilt milk. Sooner or later, SVB would have to face the music and deal with the losses; there is no avoiding that. I mean like what us traders have to do, one has to cut the losses early before it becomes bigger losses and let the profit run. SVB should've cut the losses right there and then raised the funds to buy new securities instead of waiting. Third, it shouldn't have gone to Goldman Sachs to raise capital at all and instead should've just quietly raised money with private investors. Going to Goldman Sachs was the biggest mistake and its fatal mistake. If it had stayed private and just raised funds quietly, it might have survived. It had TWO private investors lined up ready to give it money to cover the losses, why go to Goldman Sachs? I mean it should know from Goldman Sachs' history that anybody that's ever involved Goldman Sachs has always ended up in disasters, Greece in joining EU, the Malaysian scandal and most famously how it dumped worthless MBS securities to its peers aka "willing buyers" being fully aware that they are worthless shit just so it can stay afloat at the expense of others. It has a long history of putting itself and making a killing first before the clients. Going public was a really bad idea, of course hindsight is always 20/20 but really letting Warburg go in favour of public offering was the worst move and was what really dealt SVB the fatal blow. I mean raising funds from public offerings to cover the losses with all the bad news of the company in tow is like trying to raise money from GoFundMe to cover your tremendous trading losses while at the same time also having to publish how shitty you have been managing money for the world to see. How much do you think you can raise from GoFundMe vs. just going to your parents and friends aka your private investors quietly to ask for money to cover your losses so you can continue trading? We have all seen those pleas for money on GoFundMe pages, we have all seen how well they fared and how much they raised. How much have we ourselves given to those people pleading for money to cover their trading losses on GoFundMe? Same thing here. I mean SVB had two private investors who were willing to give it money, why did it still want to involve Goldman Sachs?? And why did Goldman Sachs advise a public offering? Of course from the private investors' point of view, it doesn't want the public involved. I mean if it's going to fork over its hard-earned money to basically bail you out, of course it wants to have all the future returns to itself (like I said before SVB is not a badly run company; it had a sound business model that was working well; it just made bad investment decisions and that could happen to anybody but once it toughs through these temporary trading losses that were partly Biden's fault by handing out too much stimmies that caused all this inflation and rebalances its portfolios, it should still be able to make good money from its core business once it diversifies a little to ventures outside of the high-tech sector) and doesn't want to share with the public schmucks. It's understandable. So if we, a bunch of retail traders can see it WHY couldn't Goldman Sachs, such an experienced professional investment banker couldn't see that and still advised SVB to go public over the private investors' obvious resentment and objections? So it can earn more commission?? That's the only reason I think of. They know if it really needed to raise funds successfully from the public, it would be subject to more scrutiny and would need to do more disclosure because the general public is not that well-funded so if we are to part with our money, then we would need to know more information. It surely would know of the regulatory and disclosure requirements and that would make raising funds from public offerings much more difficult and with less chance of success why still advise SVB to raise funds publicly especially knowing the urgency of its capital needs? And then after SVB disclosed the deposit losses the bank run, Goldman did what Goldman does best, throwing people under the bus in order to save itself, abandoning the purchase deal for the loan portfolio and completely leaving SVB out to dry causing SVB to lose everything, no deal, no capital, no depositors, no nothing. A company that's run so well, funded so many startup companies, helped so many entrepreneurs realize their dreams at the end ended up with their own dreams crushed and left with nothing at all because they trusted the wrong person to help them. Like I said many times before, I feel really bad for this company. If I had $2 billion dollars, I would've really liked to help them. To help them rebuild their venture capital portfolio to branch out to non-high-tech sectors a bit and also help them buy the correct security investments to deal with the high-interest rate environments. I really would.
I doubt Goldman was eager to see SVB fail - it makes their equity capital markets look bad. But i'm sure they were eager to buy that bond portfolio and no doubt the ECM guys and the bond desk were talking.
Looks like you just skimmed the article instead of reading the whole (admitted long) text. SVB would gladly have paid the depositors pretty much whatever they wanted to not withdraw their funds, or deposit new money. That would have kept SVB in business. SVB did sell a good chunk of their long term bonds, and realized a $1.8B loss. When the SVB announced, badly, the loss, that's when depositors started getting nervous. Interesting that the buyer was Goldman Sachs; Jeez that has conflict of interest written all over it. The two private investors were introduced by Goldman Sachs. When one of the private investors heard about the bond sale losses, it backed out. That's when Goldman proposed a public offering.[/QUOTE] But I agree with the gist of your message. Goldman probably screwed SVB on the long term bond purchase, and charged SVB a $100M fee for the entire project, even though Goldman failed to deliver either buyer or investors.
%% MOST likely right; some should write a book this. I would pay $1.20 for that book =same price as SVB London Brach sold for. ''I think this is a colossal failure in risk- asset management liability, '' Mark Williams , former Fed bank examiner, told Fortune.com.[ Woke=broke pattern also.] I wonder if a cutting edge joke applies here?? Larry ''Mint'' Hite said one of his teachers was also a bank examiner; one time he finished the bank audit+ turned to the bank president ,as a joke + said ''got you'' The bank president had a heart attack , he did a redo + found the bank president had embezzled $75,000,.
Morale of the story: 1. Do NOT chase after people who do not want to be with you anymore. If SVB hadn't spent too much trying to convince depositors to stay, it might have been able to retain more cash on hand. And those depositors at first weren't withdrawing because of bank runs; they just simply needed money so SVB should've just let them go. 2. Cut losses early. Do what every single trader is told to do always. If SVB had cut its losses early before the bond price deteriorated further, it might not have had as large of losses to cover later on and made the raising of capital easier. 3. The most important of all, know thy investment banker and do more research on them. If it had done more research on Goldman Sachs, it would've known its "intriguing" investment banking history and behaviour especially during critical times and that might have made them to be more careful in following Goldman Sachs' advice and perhaps listen to themselves and others more. These are what I would've done. Of course all these are from hindsight with everything that happened and hindsight is always 20/20. Maybe with all these measures implemented, SVB might have still failed, one just never knows because while it was trying to raise capital with all the unfavourable news disseminated, there was another voluntary bank failure that happened as well that really set off people' panic. SVB's trouble just happened at couldn't possibly worse time.
No looks like you just skimmed my post. I read that long article over and over and over and over almost 10 times back and forth to try to figure out the timeline and how the whole thing went down before I wrote my piece. That's exactly what I said they shouldn't have done. SVB's failure was not in its venture capital business. It was its inability to raise enough capital to cover its investment loss. And the article said: So if it hadn't paid up too much to stop depositors from leaving maybe and just maybe they might have more money to invest in shorter term securities to adapt better to the higher-interest rate environments. No I thought that loss hadn't been realized yet and that was what they were trying to raise to cover according to what the article said: WOULD HAVE!!! So it means the loss hasn't happened yet and to me is projected to be $1.8B which was what SVB was trying to raise to cover. If the loss has already happened for $1.8 billion, why did the article say "would have" to realize a big loss? They were only trying to raise $2.2B to cover the investment losses from the bonds and $21B for their debt securities portfolio. So if there were more losses in addition to $1.8B, wouldn't they be trying to raise more than $2.2B cover it?? It was later after Goldman put together the deal and bought the debt security portfolio at a discount, that's when SVB announced the long-term bond sale loss was $1.8B and yes that's when it set off a real bank run and not just depositors gradually withdrawing their money. The article said: Which bank was that? SVB or Goldman Sachs? I thought this "bank" here meant SVB in that SVB already had private buyers in mind to bail them out since they already went to Goldman with a rough outline of a plan but somehow it thought the two private investors might not be enough and that's why they went to Goldman Sachs to see if Goldman Sachs would be able to find more private buyers. Otherwise this is why I was confused WHY did SVB go to Goldman if it already had private investors ready to help them. I thought it made sense also that Goldman Sachs was the buyer for their $21B debt securities. So they thought 2 birds-1 stone since Goldman is already their buyer for the debt securities, they might as well do the investment banking deal to try to find additional private buyers to help them out unbeknownst to SVB of course Goldman was in a major conflict of interest. And I thought Warburg backed out because it didn't like the impending public offering meaning that it would have to share its future returns with a whole bunch of joe schmuks where it felt that SVB went to them first and it was putting in their money first so it should earn all of the future returns once SVB survives. And then later on Goldman found more buyers after Warburg bailed. You were absolutely right about Goldman having a conflict of interest. Being the potential buyer of the debt security portfolio, Goldman was the principal, the dealer and by trying to find additional private investors for SVB, it was acting as the investment banker. As the principal, it obviously would want as much information as possible about SVB's condition but as the investment banker, it was trying to raise more money for SVB as quickly and quietly as possible but with its own money on the line, how was it going to achieve that investment banking role? It really should've declined the investment banking deal and referred SVB to a third-party investment banker but knowing it's Goldman it probably took on the investment banking deal because 1) it obviously wanted the commission and 2) it might have just might have wanted to get more information faster and earlier to protect its dealing desk deal, the $21B debt portfolio purchase especially with its recommendation for a public offering knowing public offering would need higher disclosure requirement and SVB needed the money fast and wasn't willing to disclose anything before it raised all the money. I mean it knew SVB wanted to raise money quietly so even though it was trying to find investors fast after Warburg bailed, it could've still done it quietly but fast to find buyers. Why go public? The commission comparing to the $21B purchase of the debt security portfolio is a drop in a bucket. It's the $21B purchase that's the bigger chunk. And sure enough it backed out promptly once it learned of the bank run which I am not sure if they were even allowed. According to the article: That to me says Goldman has already signed the contract on the dotted line that it's buying the debt security portfolio. So how is it able to back out still? How could they still do that? Wouldn't that be Breach of Contract? I mean if Elon Musk wasn't able to back out of his purchase of Twitter after discovering all those fake user accounts which to me was pretty material information, how could Goldman back out of this purchase after knowing the depositor run? I REALLY REALLY REALLY hope though that Goldman signed up for the investment banking gig just to earn commissions and is not to really find information for its dealing desk side for the $21B debt portfolio purchase because according to ethics, you are supposed to have a Chinese Wall between the two departments and no sharing of information is allowed. So even if the investment banking learned of the depositor run, it's not supposed to share with its dealing desk side. But knowing that's Goldman, that would be too much to ask. So like I said I still really hope Goldman signed up for the investment banking gig just for the commission without realizing the conflict of interest it was stepping into with the dealing desk purchase otherwise, it's putting itself for major negligence, failure of fiduciary of duties with the conflict of interest and breach of contract for backing out of the $21B debt security portfolio. My gosh that's one confusing article and a mess of how the deal went down. SVB was really unlucky with the Silvergate crap happening in the middle of their capital-raising effort but still.
This is a more detailed report that focuses more on the role that Goldman Sachs played in securing financing for SVB. It's not paywalled. https://www.reuters.com/business/fi...ched-stock-sale-had-silver-lining-2023-03-16/ According to this report, Goldman did NOT back down from its purchase of SVB's debt purchase which I didn't think Goldman Sachs could. So in the previous article where it says: It's the private equity purchase deal that Goldman abandoned then. The previous article is so confusing. It sounded like SVB went to Goldman first before the debt purchase deal but it was actually after the debt security sale to Goldman that SVB went to Goldman to try to raise capital to fill the hole, the hole that Goldman itself created by negotiating such a big discount. If Goldman had negotiated a smaller discount, SVB might not have that much of cash shortage to cover and might have had more success in securing private financing and might not have needed public offering which itself scared off one of the private investors who didn't want public offering. So the conflict of interest is very obvious. Goldman was both the principal in buying the debt security and then the agent in trying to find private investors aka "willing buyers" to dump the debt securities that it bought at a discount on and the success of one role directly impacts another. So now since Goldman was the sole buyer of the entire debt security portfolio, has it essentially become an owner of the company now? If it has, according to the report, the debt security that it bought has now gained value, so should Goldman be obligated to put the gain from the increase in value back to the company now and if the banker is now the owner?