Silicon Valley Bank executives sought advice from Goldman Sachs Group Inc. in late February. GS -3.09%: They needed to raise money but weren’t quite sure how to go about it.
Rising 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 prepared for a downgrade. The bank had to reorganize its finances to avoid a funding crunch that would severely squeeze profits.
The talks, held over a period of about 10 days, culminated in a March 8 announcement of a nearly $2 billion loss and a proposed stock sale that severely spooked investors. SVB Financial Group SIVB -60.41% shares fell the next morning. Startup and venture capital clients with large uninsured balances panicked, attempting to pull $42 billion out of the bank in a single day.
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While few could have predicted the market’s violent reaction to the SVB disclosures, Goldman’s plan for the bank suffered from a fatal flaw. She underestimated the danger that a barrage of bad news could trigger a crisis of confidence, a development that can quickly bring down a bank.
Goldman is the advisor to the rich and powerful. It arranges mergers, helps companies raise money, and devises creative solutions to tough financial situations—a talent that has brought the company billions.
But for the SVB, Goldman’s gold-coated advice came with the highest price possible. The SVB collapsed at warp speed in the second largest bank failure in US history, sparking a transatlantic banking crisis that regulators are working flat out to contain.
This account of SVB’s final days is based on interviews with bankers, lawyers and investors who almost participated in the doomed deal.
The SVB’s problem was mechanical: the banks make profits by making more money than they pay depositors to keep. But the SVB paid to keep depositors from fleeing and had to earn a pittance on low-risk bonds bought when interest rates were low.
Selling some of these bonds would ease the pressure: SVB would have extra cash on hand and could use at least some of that cash to buy new bonds that are performing better. But the transaction was marked with a big asterisk: the SVB would have to realize a high loss.
SVB executives came to Goldman with the broad outlines of a capital raising plan. Two private equity firms, General Atlantic and Warburg Pincus LLC, were on the bank’s list of potential investors.
The executives wanted to conduct a private stock placement — a deal in which they would quietly get investors to buy a set number of shares at a set price — and they wanted to do it quickly. Moody’s was preparing to downgrade the bank, a move executives feared would alarm investors.
Bankers at Goldman’s equity capital markets business, led by David Ludwig and the financial institutions group led by Pete Lyon, began putting together a stock sale in the first week of March and approached the two private equity firms.
Goldman proposed a hybrid public-private stock sale: The company would find enough investors to fully fund a $2.25 billion deal, but also allow the public to buy shares at the same price.
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By March 5, Warburg had dropped out. She needed more time to evaluate the deal than SVB was willing to give and she didn’t want to participate in a bid with a public component.
Another deal materialized on Goldman’s trading table. SVB was seeking a buyer for its $21 billion portfolio of available-for-sale debt. Buyer would be Goldman.
General Atlantic, meanwhile, agreed to raise $500 million for the stock sale. But time was running out to line up more investors to provide the remaining $1.75 billion that SVB wanted to raise. SVB executives were unwilling to give investors the information they needed to get everyone on board.
Goldman decided the only option was a public offering anchored by General Atlantic. SVB executives have approved the plan.
Mr. Ludwig and others at Goldman thought SVB needed to act quickly. Moody’s downgrade was imminent 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 it realized a $1.8 billion loss from the sale without disclosing the buyer and said it would sell shares to raise capital.
At this point, the SVB management team was already bracing themselves for the bad news. Just before the bank launched its doomed stock sale, it hired deal advisory firm Centerview Partners to explore a plan B.
Goldman bankers were still confident that the stock sale would go through. Shares in SVB initially fell about 8% during the session, not as much as feared, and Goldman bankers received many orders to buy shares.
The mood changed less than an hour later when another bank, Silvergate Capital Corp., announced it was closing after a rush that emptied its deposits. A one-notch downgrade from Moody’s, less severe than feared by SVB executives, landed around 8pm
SVB shares plummeted when the market opened on March 9, prompting customers to withdraw their deposits. It was the start of a downward spiral: As news of the deposit run spread, shares continued to fall, causing more customers to withdraw their money. The stock closed up more than 60%.
Still, the deal wasn’t dead. Goldman had lined up a number of investors at $95 a share, about $11 less than the day’s closing price.
At around 5:00 p.m., Goldman bankers received a report on SVB deposit outflows.
SVB’s attorneys at Sullivan & Cromwell LLP said the deal could not proceed without disclosing the deposit losses. Goldman abandoned the deal. The Federal Deposit Insurance Corp. confiscated the SVB before it could open the next morning.
Write to AnnaMaria Andriotis at [email protected], Corrie Driebusch at [email protected] and Miriam Gottfried at [email protected]
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