By Andy Kessler March 12, 2023 3:04 pm ET 165 Silicon Valley Bank’s headquarters in Santa Clara, Calif., March 10.PHOTO: NATHAN FRANDINO/REUTERS That giant slurping sound on Friday was Silicon Valley Bank imploding. America’s 16th-largest bank had some $175 billion in deposits and disappeared by breakfast. It wouldn’t have happened if not for management mistakes. This was a 21st-century bank run—customers tried to withdraw about $42 billion, a quarter of all deposits. But what triggered the collapse? Let’s go back. In January 2020, SVB had $55 billion in customer deposits on its balance sheet. By the end of 2022, that number exploded to $186 billion. Yes, SVB was a victim of its own success. These deposits were often from initial public offerings and SPAC deals—SVB banked almost half of all IPO proceeds in the last two years. Most startups had relationships with the bank. That’s a lot of money to put to work. Some was lent out, but with soaring stock prices and near-zero interest rates, no one needed to take on excessive debt. There was no way SVB was going to initiate $131 billion in new loans. So the bank put some of this new capital into higher-yielding long-term government bonds and $80 billion into 10-year mortgage-backed securities paying 1.5% instead of short-term Treasurys paying 0.25%. This was mistake No. 1. SVB reached for yield, just as Bear Stearns and Lehman Brothers did in the 2000s. With few loans, these investments were the bank’s profit center. SVB got caught with its pants down as interest rates went up. NEWSLETTER SIGN-UP Morning Editorial Report All the day's Opinion headlines. Subscribe Everyone, except SVB management it seems, knew interest rates were heading up. Federal Reserve Chairman Jerome Powell has been shouting this from the mountain tops. Yet SVB froze and kept business as usual, borrowing short-term from depositors and lending long-term, without any interest-rate hedging. READ MORE INSIDE VIEW The Rise of Kickback CapitalismMarch 5, 2023 How ChatGPT’s AI Will Become UsefulFebruary 26, 2023 This Is One Puzzling Job MarketFebruary 12, 2023 The bear market started in January 2022, 14 months ago. Surely it shouldn’t have taken more than a year for management at SVB to figure out that credit would tighten and the IPO market would dry up. Or that companies would need to spend money on salaries and cloud services. Nope, and that was mistake No. 2. SVB misread its customers’ cash needs. Risk management seemed to be an afterthought. The bank didn’t even have a chief risk officer for eight months last year. CEO Greg Becker sat on the risk committee. As customers asked for their money, SVB had to sell $21 billion in underwater longer-term assets, with an average interest rate around 1.8%. The bank lost $1.8 billion on the sale and tried to raise more than $2 billion to fill the hole. The loss flagged that something was wrong. Venture capitalists, including Peter Thiel, suggested that companies in their portfolios should withdraw their money and put it somewhere safer. On Thursday the dam broke and there was no way to cover billions in withdrawal requests. Mistake No. 3 was not quickly selling equity to cover losses. The first rule of survival is to keep selling equity until investors or depositors no longer fear bankruptcy. Private-equity firm General Atlantic apparently made an offer to buy $500 million of the bank’s common stock. Friday morning, I’d have offered $3 billion for half the company. Where was Warren Buffett? Or JPMorgan? Before they could get a deal together, the Federal Deposit Insurance Corp. took over to protect up to $250,000 for each depositor. Larger, uninsured deposits are frozen. Since the bank took a 9% haircut on the $21 billion in bond sales, that could mean uninsured depositors might get 90 cents on the dollar, but it could take months or years. So venture capitalists are getting emergency funding requests. Why did so many startups bank with SVB in the first place? Here’s a hint. Apparently, more than half of SVB’s loans went to venture and private-equity firms backed by the borrower’s limited-partner commitments, a legal but slippery way to goose venture funds’ all-important internal rate of return metric, IRR, by investing three to six months before calling investors for cash. VCs are very persuasive with startups. Here’s an important lesson for companies in trouble: On Thursday, Mr. Becker told everyone to “stay calm.” That never works, ever since Kevin Bacon’s character in “Animal House” told everyone, “Remain calm. All is well,” as chaos ensued. Was there regulatory failure? Perhaps. SVB was regulated like a bank but looked more like a money-market fund. Then there’s this: In its proxy statement, SVB notes that besides 91% of their board being independent and 45% women, they also have “1 Black,” “1 LGBTQ+” and “2 Veterans.” I’m not saying 12 white men would have avoided this mess, but the company may have been distracted by diversity demands. Management screwed up interest rates, underestimated customer withdrawals, hired the wrong people, and failed to sell equity. You’re really only allowed one mistake; more proved fatal. Was management hubristic, delusional or incompetent? Sometimes there’s no difference. Write to kessler@wsj.com.
There was really only one big mistake which was for the bank to invest its deposits into long term bonds which sharply sold off during the rapid rate hikes. The the bank essentially gambled with customer deposits and took bets on interest rates. I hope the Fed and treasury keep their promises not to make whole a single investor. Their one and only focus should be on protecting depositors.
This was in another thread - To The Bears whining About Crypto "Joseph Gentile is the Chief Administrative Officer at SVB Securities. Prior to joining the firm in 2007, Mr. Gentile served as the CFO for Lehman Brothers’ Global Investment Bank where he directed the accounting and financial needs within the Fixed Income division." You would think that after being the CFO at Lehman, Gentile, would be banned from banking for life?? Amazing!!
Why? Insurance limits on customer deposit are in place to encourage depositors to do due diligence before placing their deposits. Additional deposit insurance could have been bought from private insurance companies. These large depositors should bear the consequence for laziness and/or cheapness .
Interesting. How would a large depositor do due diligence? What would be the things to look at to protect oneself?
If you had, say, 5 billion and you wanted them in banks, could you deposit 250K in separate banks so you are fully covered? It would take 20,000 banks to do it. Are there 20,000 FDIC-protected banks/financial institutions in the US? Does the insurance protect the account, or just the invidivial? Like, If I have 250K in SVB, and 250K in Signature, am I protected in both, or just 250K total as an entity?
Haha, I edited my post, as you caught my error and I did not notice it. Bastud. You knew what I was getting at.