The Full Story of SVB- interview with Greg, the failed CEO!

Do you want to understand the whole boom-to-bust story behind the SVB failure and the spillover it may cause? Read this long but interesting and important interview with Greg Becker, the CEO of SVB Bank.

H: Dear Mr. Greg Becker, CEO of SVB, very nice meeting you. My name is Hamed Behairy. Can you introduce yourself please?

G: Hi Hamed, I am the CEO of SVB since 2011. And yes, you can call me a failure.

H: We all did.. Let’s start with some fire questions please.

H: Could the SVB failure be predicted?

G: ?No, or at least difficult.

H: Could the SVB failure be avoided?

G: Yes

H: Is it as severe as the financial crisis back in 2008?

G: No

H: Is there a systemic risk of more bank failures in the US and other countries?

G: Yes

H: Will the US Congress propose new regulations to avoid similar failures?

G: Yes

H: Were you involved in insider trading by selling your shares days before the collapse?

G: No

H: OK, can you tell us a bit about the SVB?

G: Sure,

-SVB is almost 40 years old. As of March 2023, the total value of assets was over USD200 billion, ranked the 16th biggest bank in the USA. It is the second biggest bank failure in the history, globally. The biggest bank failure was Washington Mutual (WaMu), which sank in 2008 with a total asset?value of USD300 billion. Big money ?? ♂?. Note: Lehman Brothers was a bigger failure (USD600 billion) but it is not a bank, but rather an Investment Bank.

-SVB focused on serving the venture capital firms and their investee companies. Great idea in the heart of the Silicon Valley. It was labeled the “Bank for Startups”. Bigger banks typically provide little help to the venture capital companies. Nearly 50% of the venture-backed tech companies parked their cash at SVB.

- KPMG gave SVB Bank a “clean” bill of health just 14 days before its collapse

-On February 16, Forbes issued its list of the best banks in the USA. It takes into consideration the following factors: growth, profitability, and credit quality. Interestingly, SVB was ranked the 20th best bank in the USA. Thanks to the growth and the exceptionally low non-performing assets ratio at 0.05% (the lowest in all top 30 banks in the USA).

H: Oh, looks like SVB is a good bank, why did it fail then ???

G: Keep asking and I will let you know.

H: Are your accounts covered by the Federal Deposit Insurance Corporation (FDIC)?

G: The FDIC insures deposits up to USD250,000 per account. However, only about 3% of the deposit amounts are insured in this scheme.

H: Reason?

G: The client base is Venture Capital firms and their investee companies. When a company raises capital, it wants to park it straight in a bank, of course. It is not weird for one of our clients to have a cash balance of USD200 million. This is in comparison to, for example, Bank of America in which 38% of deposits are covered because of the larger portion of retail clients. Important note: the division of the client base is not the exact main reason behind the bank failure as some commented. It was a bank in the right location serving a niche market. No harm here.

H: So, where is the problem??

G: Told you.. Keep asking and I will tell you!

H: Take it easy habibi.. Can you please quickly explain the concept of Asset-Liability Management? Was it the reason behind the bank failure?

G: It is not the main reason behind the bank failure. All banks face the same issue. Banks receive deposits which are recorded as liabilities (payables) on their balance sheet. They use this money to give loans which are recorded as assets (receivables) on their balance sheet. Any amount that cannot be lent is invested in supposedly good quality investments like the US Treasuries (Government Bonds) and mortgage-backed securities (MBS) for example. The deposits can be withdrawn at any time; however, loans and assets cannot be cashed easily at good market values every time. Borrowing short to lend long is what banks are for. It is not something new or novel to the SVB like tons of commentators are saying in the aftermath. All banks do the same.

H: With the capital you had (deposits and equity), did you lend more or invest more?

G: We had one of the lowest loan-to-asset ratio of all banks in the US. It means we didn’t lend as much as we invested. The last Balance Sheet showed:

Net Loans about USD70 billion

Total Investment about USD 120 billion

Cash about USD13 billion

SVB deposits increased sharply in the past couple of years; thanks to the huge cash flows injected in the venture capital companies and their investees. Deposits in June 2020 were USD70 billion, peaked in February 2022 but declined afterwards by about USD20 billion because of the higher interest rate and the faster burning of cash by the bank’s clients, venture capital companies. In March 2023, the deposits reached USD198 billion.

H: Where did you invest your cash?

G: We invested in good quality investments that have almost no credit risk like US Treasuries (government bonds).

H: Mainly short term or long term US treasuries?

G: Mainly long term.. Previously, we kept most of our investments in one-year MBS and US treasuries. Then we started to drift more and more towards long term bonds.

H: Why?

G: They provided a slightly higher yield than the short-term treasuries. We wanted to get a higher yield to improve our return on equity that went down from 21.5% in 2019 to 14% in 2020.

H: Wait a second, but the long-term government bonds drop in value sharply if the interest rate increases compared to short-term bonds?

G: Yes, I know but the interest rate was around zero for nearly a decade. We were OK.

H: What the HELL are you saying?

G: Please behave Hamed..

H: OK, will try ?? .. How did you classify them in your Balance Sheet?

G: We have divided the treasuries and MBS that we bought into 2 categories: available-for-sale securities (USD26 billion) and held-to-maturity securities (USD91 billion). Both were experiencing losses since the start of raising interest rates. However, we should record the available-for-sale securities at FMV which is dropping. So, the income statement showed losses from the mark-to-market of the available-for-sale securities. The held-to-maturity securities remain recorded at cost even if their values goes up or down in the market. When the held to maturity is kept until they mature, no losses will be there. However, if we are forced to sell them currently, we will have to record material losses.

So, the drop in value for held-to-maturity securities are not recorded in our income statements if we keep them. It is true that both categories are dropping in value, but we are showing in the accounting books only the gains and losses from the available-for-sale securities.

H: What happened after that?

G: The Fed Interest rate increased sharply from 0% exactly a year ago in March 2022 to 4.7% in March 2023. ??. Looks like the Fed is still hawkish and they sent signs that the rates will continue rising. So, I decided to sell all our available-for-sale securities worth USD 21 billion to cut our losses short. The loss from this sale came to about USD1.8 billion. We also needed some cash as our clients started to burn cash faster due to the higher interest rate and market conditions.

H: Did you sell any of your held-to-maturity securities?

G: Initially no, we don’t want to realize these losses in our income statement. We just sold the available for sale. However, the unrealized losses by marking these held-to-maturity securities to the new interest rate is around USD15 billion. If we have realized this loss in our income statement, it would have wiped our entire equity causing us to be insolvent immediately. So, we didn’t sell the held-to-maturity securities.

H: So, what “triggered” the whole drama?

G: To be honest, there is one very harsh article that someone called Byrne Hobart wrote on 23 February. It triggered everything. @ByrneHobart

H: Seriously?

G: Oh yeah.

H: Is he famous?

G: He has a blog writing about the tech and financial sector. He is from Texas. Everyone in the venture capital read his articles. He has about 50,000 paid subscribers.

H: What did he say?

G: He said if we mark to market our available-for-sale securities, we are technically insolvent. However, he said it clearly that we are liquid and we have cash to cover withdrawals. Then he said this exact statement: “No one wants to look paranoid by being the first to move their money out, but no one wants to deal with the consequences being last. And if money does flow out, they eventually have to start selling assets, which turns an “unrealized losses” footnote into a headline loss number”

He mentioned the word “BANK RUN” which is a taboo word in banking. It means that everyone would run to take their deposits off the bank. ANY bank in the world who experiences a bank run would eventually fail. It is sssccccaaarrryyyy!!

H: God!! You said that everyone in the venture capital read it?

G: Basically, yes.. He even tweeted a section of his article on Feb 23. It seems like the first social media bank run in history.

H: What happened next?

G: After we sold the available-for-sale securities, we realized a loss of USD1.8 billion. We announced this loss on Wednesday, March 8. To counter the loss, we have arranged equity injection of around USD2.25 billion to counter this loss from selling a mix of preferred and common equity including a deal from General Atlantic to buy USD500 million of our shares.

H: Then?

G: Remember the article that Hobart wrote?

H: Yes

G: It was still in the mind of the venture capitalists, but they didn’t want to believe it. However, when we had the loss, it became clear in front of their eyes that is a reality. One famous venture capital investor named Peter Thiel withdrew millions of dollars from the account of his company, Founders Fund. Not only that, he sent an email to ALL his investee companies to withdraw their deposits immediately. AND THEY DID..

Then the CFOs of the these investee companies started to talk to their "friends" in other companies to do the same. I tried to calm the market by telling them the reason behind the sale of the available-for-sale securities. My exact words were: "We are taking these actions because we expect continued higher interest rates, pressured public and private markets, and elevated cash burn levels from our clients". However, the panic started already. The herd mentality resulted in our clients withdrew $42 billion in one day, THURSDAY, 9 March.

H: ??

G: Yes my dear, bank runs are baaaaad. The bank basically failed with the hands of those we served for 40 years.

H: When did the regulators intervene?

G: the very next day, Friday 10 March. The California Department of Financial Protection and Innovation closed the bank and appointed the FDIC as receiver.

H: What does it mean?

G: The full bank with all accounts now are under the control of the FDIC.

H: Does it mean that the depositors lost their money?

G: Of course not. They want to protect these accounts. Every account is insured up to the limit of USD250,000, remamber?

H: Yes dude, I do... what about all the money above USD250,000 per account?

G: These balances are not insured. So, the venture capital was in turmoil during the weekend thinking that they lost all their uninsured deposits. They need to pay expenses and salaries. They cannot sustain losing this money. It would be a disaster washing out at least 25% of the venture capital ecosystem in the US. Some opportunistic companies offered between 60-90% to buy the accounts of these clients. Some did sell prematurely. On paper, there is no protection for these amounts.

H: God!! But, this would affect the trust of clients in other banks

G: Exactly. On Friday 10th March, there was another bank run.

H: wait a second, REALLY??? ?? Where?

G: A regional bank in New Yor called Signature Bank which suports real estate investors with big balances as well. Somehow similar concentration risk to certain sector like SVB. Because clients are irritable that they may also lose their money, they have requested USD10 billion on Friday, 10 March, out of total deposits of USD88 billion. Interestingly, this marked the third biggest bank failure in history.

H: Oh, this can spread quite fast ??

G: Exactly. That is why the Federal Government announced on Sunday that the full value of the deposits of the SVB will be covered. And the money will be available to the clients of the SVB from the F...

H: Oh, that is nice.

G: Let me finish..

H: Ah, sorry, go ahead..

G: And the money will be available to the clients of the SVB from the FDIC...

H: Will they use the taxpayers’ money?

G: No. They will use funds from the FDIC which are typically paid by all the banks as insurance premium. Even though in terms of regulation, they cover only USD250,000 in any account, it was a measure to restore confidence in the banking sector in the US.

H: Can this spread globally?

G: Of course. Let me say it outright: “NO BANK CAN SUSTAIN A BANK RUN”. So, the moment rumors start to spread based on facts or not, the risk is there.

Just a note for you Hamed, do you remember when I told you that our unrealized losses related to our held-to-maturity securities is USD15billion.

H: Yes, I remember.

G: Do you know how much is the total unrealized losses that the US banks are setting on?

H: No, I don’t. Please don’t freak me out.

G: Unfortunately, I will freak you out. It is USD620 billion ??. If these banks have runs, they will NOT sustain it, period. Banking is based on confidence. Lost? You are nowhere.

H: That is why hundreds of billions dropping in the market value of banks around the world?.

G: Yes, regulators and investors have to be careful and very alert in the coming?6 months. After the involvement of the US Federal Government, the banking sector started to regain some of their losses but eyes are still open. Remember, the US is not going to bail out the shareholders of the SVB, only the depositors. So, the shareholders of SVB lost ALL their money. “Welcome to capitalism”, these are the words of Joe Biden a few days ago.

H: Are we heading to another financial crisis like the one in 2008?

G: No no nooooo.. 2008 was awful. At SVB we were holding good quality assets that have minimal credit risk. It means that we would get our money back. However, obviously we were subject to the huge interest rate risk because of the rise in interest rate. If depositors didn’t initiate the run, we would be surviving, of course. And the held-to-maturity securities that killed us would mature sooner or later with no single dollar of loss at maturity. It is the mark to market Hamed that Hobart talked about. In 2008, banks were holding poor quality assets. Quite a big difference here.

H: A bit tough question Greg please, did you sell SVB shares worth USD3.6 million exactly 11 days before the collapse of SVB? Was it a case of insider trading?

G: Let me answer this clearly. I have a compensation scheme called stock options. It means that I have the right to buy a certain number of shares of SVB at an agreed price on a certain date. Then I can take these shares and resell them in the market to pocket the difference. The agreed upon option price value is USD105 and I sold it at USD287. There is a PLAN in place. The plan states that once I receive the options, I sell them in the market immediately at the current market value, whatever it is. I have been following this plan for the previous years as well. No insider trading here Hamed. Interestingly, there is a new requirement by the SEC in the USA that obliges any executive to keep shares bought from an option scheme for 90 days before they are able to sell it. However, this requirment will start on April 1.

H: Do you think a new accounting rule will come about the held-to-maturity securities to be recorded at FMV?

G: I think so. You know it, in the US we wait for a disaster to start acting. Remember the Sarbanes-Oxley act that only came after the collapse of Enron. We have many examples like this. Also for the Fed, we have a very popular saying in the financial market “ They will carry on tightening until something breaks”.

H: Anyone took advantage?

G: Yes, HSBC bought our UK operations for 1 sterling. It is not 1 million or billion. HSBC shares went down 3% after announcing the deal. They assured all deposits to the former clients of SVB in UK. It would have been a great opportunity for one of the sovereign funds to buy SVB and get a rare opportunity to understand the silicon valley dynamics from within.

H: Thanks Greg for your time in answering my questions. Maybe you will serve some time in jail based on the discoveries during the coming period. However, regadless of this, you will be known for being the CEO of the second biggest bank failure in history.

We may interview Greg again if material insights are discovered. Whatever news you read from now on will start making sense based on this interview.

Note: this interview never happened. Sorry! ??

Comments/Impressions/Thoughts are all welcome.

Hamed Behairy, CFA

Learning and re-learning