Let’s recap a simple timeline of events. That will give us a baseline for considering the more technical aspects of the bailout, and some of the corruption going on behind the scenes. Put on your crash helmets. You’re going to need them.
The chronology of a collapse
The SVB collapse is, in some ways, the bitter fruit of eight years of zero interest rates (2008–2015) under Ben Bernanke and Janet Yellen. That zero-interest rate policy and the accompanying US$4 trillion of quantitative easing (QE1, QE2, QE3, and so on) created an age in which investors were forced to channel savings into riskier assets such as stocks, real estate, and emerging markets in a chase for yield.
Those asset bubbles were amplified with borrowed money in the form of carry trades and derivatives. No one cared about the potential for higher interest rates and monetary tightening. That seemed to be off the table. Investors were driven by TINA (There is No Alternative) and FOMO (Fear of Missing Out).
A narrower timeline would begin in November 2021. Two critical events happened that month. The first is that Fed Chair Jay Powell threw in the towel on his view that inflation was ‘transitory.’ Powell made it clear that inflation was a real threat, and that the Fed would soon be taking steps to stop it. A few months later, in March 2022, Powell began a series of nine interest rate hikes, which continue today.
The second event, perhaps not coincidentally coinciding with the first, is that Bitcoin [BTC] began to crash from an all-time high of US$68,990 to US$15,480 in November 2022 — a 78% crash in one year that started what crypto cultists call the Crypto Winter. This crypto crash has direct connections to the SVB collapse, which we explain below.
While December 2008 and November 2021 are both good starting points for our story, the day-by-day chronology specific to SVB really begins on 27 February 2023, when the SVB CEO dumped US$3.5 million of SVB stock. On the same day, the bank’s CFO dumped US$575,000 in the bank’s stock. Both executives claim these sales were pursuant to pre-announced programs allowed by the SEC.
Still, SVB’s unrealised losses (unknown to the public) date back years, so the programmed selling may itself have been a cover for what they both knew was coming. The SVB stock price at the time of those sales was about US$290 per share. Today it is worthless. The insiders got out in time.
Remember the debt ratings agencies?
On 1 March 2023, rating agency Moody’s called SVB management to tell them that Moody’s was considering downgrading the credit rating of the bank. This set off alarm bells inside SVB. Management knew that a credit downgrade might start a flood of deposit withdrawals and a crash in the stock price. The CEO, Greg Becker, immediately called Goldman Sachs to work out a financial rescue plan. The hope was that a credible plan might cause Moody’s to change their mind on the ratings downgrade.
In its simplest form, SVB’s problem was the classic banking blunder of borrowing short and lending long. In SVB’s case, this meant taking in short-term deposits from customers and investing them in long-term Treasury notes and bonds with maturities of up to 30 years. By December 2022, SVB had US$174 billion in customer deposits and held US$74 billion in loans as well as US$100 billion in securities.
The securities were divided into a held-to-maturity (HTM) account of US$74 billion and an Available for Sale account of US$26 billion. The available-for-sale securities must be mark-to-market to reflect any changes in market value. The HTM account did not have to be mark-to-market. SVB had 74% of its securities in the HTM account. The norm for large banks is 6%.
The idea of HTM was that if you hold securities to maturity, you will receive all your money back. Therefore, daily fluctuations in value can be safely ignored. SVB took the use of that rule to extremes in order to abandon responsibility for actively managing market risk.
Reckless risk management
Banks need to exercise some risk management over all their assets, including the HTM account. That’s just prudent banking. SVB had completely deficient risk management.
The risk management officer position at SVB was vacant for six months leading up to the fiasco. The UK risk management head spent more time on LGBTQ plus and other diversity issues (including a celebration of Pride Month) and seemed to spend no time on risk management. SVB was paying as much as 4.5% interest on deposits at a time when most Americans were lucky to get 1.0%, another example of reckless risk management.
As a result, SVB seemed not to realise that as the Fed raised interest rates beginning in March 2022, the value of its bonds would decline.
A run begins and a rescue plan ends
The plan fell apart when billions of dollars of deposits began to flee the bank. Whether large depositors had inside information or had heard about Moody’s downgrade threat is unknown. But some kind of leaked information seems likely. The deposit withdrawals were so large that SVB had to sell billions of dollars of bonds to meet the withdrawal obligations.
SVB, Moody’s, and Goldman worked frantically over the weekend of 3–5 March to devise a rescue plan. The plan would work as follows: SVB would sell US$20 billion of low-yielding bonds and reinvest the proceeds in newly issued higher-yielding bonds. When you sell the HTM bonds, the exception to mark-to-market rules no longer applies, and the bank must recognise the full loss immediately. The bond losses turned out to be US$1.8 billion. Since SVB is a public corporation, and a highly regulated bank, that US$1.8 billion loss had to be reported to the public. The public disclosure occurred on Wednesday, 8 March 2023.
SVB planned to plug that US$1.8 billion hole in its balance sheet with a new stock issue of US$2.25 billion. Goldman lined up private equity giant General Atlantic to commit to US$500 million of that amount. Other potential investors were in discussions to buy more. Moody’s announced the ratings downgrade on 8 March, but the downgrade was mild because of the bond sale and reinvestment part of the Goldman plan. SVB and Goldman raced to complete the capital raise to mitigate the damage of the bond portfolio loss.
Then the capital raise plan blew up. The hope was to announce the capital raise completion before the market opened on Thursday, 9 March. But SVB was incompetent at getting NDA agreements signed so that investors could examine the books. Investors said they needed more time to do due diligence given the size of the Wednesday losses.
Meanwhile, the Wednesday loss announcement caused SVB’s stock to plunge from US$268 per share to US$172 per share in after-hours trading. When the market opened Thursday, the shares fell to US$106 per share — a stunning 60% crash from the Wednesday close. Goldman still hoped to close a deal at US$95 per share, but it was too late. Trading in the stock was halted on Nasdaq. General Atlantic walked away from the deal and the stock offering collapsed.
Venture capital firms and others urged their startups to get all their money out of SVB as soon as possible. US$42 billion of deposits were withdrawn on Thursday alone. On Friday, 10 March 2023, California bank regulators closed SVB and appointed the FDIC receiver.
The FDIC issued a press release that day stating that only accounts of US$250,000 or less would be protected. All other deposits would be eliminated, and depositors would get a ‘receivership certificate’. Distributions on the certificates would depend on future sales of assets by the FDIC. That process could take weeks or months. In the meantime, the certificates were illiquid and of uncertain value. The uninsured deposits were simply gone.
But like Dracula, the deposits rose from the dead. An explanation for that requires knowing the difference between a ‘bailout’ and a ‘bail-in’ of depositors in a bank panic situation. That distinction will be discussed next week.
All the best,
Strategist, The Daily Reckoning Australia