I’ve been trying to understand how everything went so south, so fast, for Silicon Valley Bank. The b͏‌  ͏‌  ͏‌  ͏‌  ͏‌  ͏‌ 
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I’ve been trying to understand how everything went so south, so fast, for Silicon Valley Bank. The basic math is easy enough to understand: deposits went away, slowly and then all at once.

But there was a full week between when SVB executives flew to New York to meet with Moody’s, the credit-rating firm, to try to forestall a downgrade, and when the FDIC took it over. That’s a long time on Wall Street, and there’s a lot of money out there.

Below is my reporting on a costly delay inside SVB’s boardroom that ate up precious time. Plus my colleague at Semafor Principals, Kadia Goba, talks to a House Republican on the long odds for any changes to the $250,000-per-customer FDIC insurance cap, and the Fed’s bank backstop in historical context.

Evidence

After the Fed’s emergency actions last weekend — which has been essentially funding a massive bank run — its loans to the system are now higher than at any point during the 2008 crisis.

Liz Hoffman

How SVB lost crucial time to save itself before its collapse

THE SCOOP

Reuters/Kori Suzuki

Silicon Valley Bank lost a crucial day to raise money from investors after its board rejected executives’ financial projections, leading to a chaotic and ultimately doomed scramble that pushed the company into insolvency, people familiar with the matter said.

Coming into the weekend of March 4, SVB was facing a steep downgrade to its debt from Moody’s, the credit-rating agency, and had hired Goldman Sachs to advise on its options. The plan had been to sell a portfolio of underwater bonds and crystallize losses, and raise $2.25 billion in additional cash to shore up the lender’s finances.

Bankers were aiming to begin feeling out investors the following Tuesday, March 7, to gauge interest before a broader share sale was launched to the public. But before that could happen, SVB needed fresh financial projections, because circumstances had changed since CFO Dan Beck had reaffirmed rosy earnings guidance at a conference in mid-February.

On Monday, March 6, Beck’s team presented new numbers to SVB’s board, which believed they were too pessimistic — particularly on when venture fundraising, which was a key driver of SVB’s deposits and had cooled in recent months, would pick back up, people familiar with the matter said.

SVB’s executives had assumed it would be awhile, which meant that the firm’s startup clients would continue to spend down their deposits at the bank. Board members pushed for rosier forecasts, believing that venture firms sitting on record amounts of money would have to start investing it sooner.

Executives returned with revised projections that were approved March 7, leaving only one day to begin the process of sounding out investors. The deal was announced just after the market closed on March 8 but even then, final materials weren’t ready. The legal document outlining terms of the deal wasn’t released until the following morning.

By then it was too late. Investors’ mood had soured quickly after Moody’s downgraded the company and Silvergate Bank failed. The share sale was scrapped and by the end of the day on March 9, depositors had yanked $42 billion out of SVB, which was seized by regulators the following day.

LIZ’S VIEW

Hindsight is always 20/20 but from this side of the collapse, dithering over financial projections looks particularly foolish.

It would be one thing if the board’s pushback was over financial inputs like interest rates or credit losses, but nobody had a crystal ball into when venture capitalists’ mood would turn around or the IPO window would reopen.

This will only further scrutiny on SVB’s board, which included people with serious financial experience like Mary Miller, a former Treasury official under Barack Obama’s administration, and Tom King, who ran Barclays’ investment bank.

Goldman still doesn’t look great here, having misjudged whether they could still convince investors that SVB was worth putting money into (and making an expected $50 million on the purchase and resale of SVB’s bond portfolio). But it helps explain why one of Wall Street’s top investment banks appeared so boxed in so quickly.

NOTABLE

  • The Wall Street Journal’s tick-tock on the deal with some juicy details, including Warburg Pincus passing on an investment and a planned $95-a-share price tag.
  • Byrne Hobart in his widely read Silicon Valley newsletter pointed out on Feb. 23 that SVB was technically insolvent. “I don't expect a bank run,” he wrote. “On the other hand, pretty weird situation.”
Watchdogs

One way to end the panic would be for the FDIC to explicitly insure all bank deposits as a general rule, but its legal authority is murky. The current limit was a temporary measure put in place in 2008 to calm panic, but later made permanent in the 2010 Dodd-Frank law, so it would take an act of Congress to change it, two law professors wrote in The Washington Post this week.

On one hand, every member of Congress has a local bank they’d like to save. On the other, handing over power to unelected regulators isn’t popular on or off the Hill. My colleague, Kadia Goba, put the question to a Republican member of the House Financial Services Committee today.

“At this time there’s no appetite to either raise the FDIC limit or give the FDIC authority to do so,” this member told her. “But we’re having hearings in the next couple of weeks” — FDIC Chair Martin Gruenberg and the Fed's Michael Barr are both set to testify March 29 — “and will see if that changes.”

The sentiment among some Republicans, he said, is “why have a cap if you’re just not going to follow it?”